Transcript Slide 1

WEATHERING THE
FINANCIAL STORM
APIPA 2009
Jeanne H. Yamamura,
CPA, MIM, PHD
1
INTRODUCTION
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Our world at a glance
Bolstering the economy
Top Ten Tips for Tough Times
Resources
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OUR WORLD AT A GLANCE
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Global economic challenges and issues
U.S. economic growth slowed – recession
Changing regulatory environment
Financial markets turmoil
Scandals: Madoff, Satyam, etc.
Social Security questions
Public pensions at risk
Shrinking workforce and massive layoffs
Sustainability and environmental issues
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BOLSTERING THE ECONOMY
• The Economy
–
–
–
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Stock Market Loss
GDP Loss
Unemployment
Retirement Savings
• Recovery
– Financial Stability
Plans
– ARRA 2009
– Regulatory
Restructuring
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American Recovery and
Reinvestment Act of 2009
Where the money is going:
Education &
Training
Health Care
7%
8%
Energy
5%
Other
1%
Tax Relief
37%
Protecting the
Vulnerable
10%
Infrastructure &
Science
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State & Fiscal
Relief
18%
5
Overview of Financial
Stability Plan
Troubled Assets Relief
Program
Homeowner Affordability and
Stability Plan
• 10/3/2008 - $700 billion
• 3/4/2009 - $75 billion
Capital Assistance Program
• 2/25/2009 –“Stress Test”
Term Asset-Backed Lending
Facility
• 3/3/2009 - $1 trillion
American Recovery and
Reinvestment Act
Small Business and
Community Lending Initiative
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• 2/17/2009 - $787 billion
• 3/16/2009 - $15 billion
6
LOCAL GOVERNMENTS
IN FISCAL DISTRESS
• Declining revenues
• Property taxes no longer stable
source
• State governments unable to
assist
• Increasing demand for services
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WHAT IS HAPPENING IN YOUR
GOVERNMENT?
• Table discussion topic
– Economic problems occurring in your
government
– Actions taken
– Actions planned
– Outlook?
• Report back to the class on the actions
taken and/or proposed in response to
the economic downturn.
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TOP TEN TIPS FOR TOUGH
TIMES!
1. Understand and manage your revenue
sources
2. Do all you can to control costs.
3. Effectively manage employee costs – for
the short term and the long term.
4. Understand your cash position.
5. Pay attention to financing sources and
developments.
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TOP TEN TIPS
6. Look at long-term opportunities for better
asset utilization.
7. Strengthen controls.
8. Beware of ill-advised actions.
9. Focus on fraud prevention.
10. Keep lines of communication open.
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TIP NO. 1 – UNDERSTAND AND
MANAGE REVENUES
•
•
Understand your revenue sources.
Be realistic!
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REVENUE ESTIMATION
• Plan scenarios and look at your risk
management philosophies, risk tolerance
and mitigation plans
• Make conservative estimates of revenues
– Harder to deal with shortfalls later in the year
– How far off are we usually?
• Budgeting less than 100% of a grant
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REVENUE SOURCES
•
Consider every revenue source
– Will it continue? Will it decrease? By how
much?
– Can it be increased?
– What do others charge for the same
services?
•
•
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Evaluate reasonableness of fees.
Consider if higher fees are driving customers to
other providers.
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EXPLORE NEW REVENUE
SOURCES
•
•
Be innovative. Are there opportunities
for new revenue sources?
Establish clear cost-recovery goals
– How are “costs” defined? Direct costs only?
Fully allocated costs?
•
Verify fees are meeting cost-recovery
goals
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AUDIT REVENUES
• Many revenues based on self-reporting
• Liability may be understated or
misreported
• Auditing can increase revenues
• Benefits
– Fair, payment of rightful share
– Ensures accuracy and consistency
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EVALUATE FEES CHARGED - COMMON
AREAS FOR UNDERCHARGING
• Fees to auto and homeowner insurance
companies for
– Fire calls, especially false alarm, “jaws of life,”
cleanup of hazardous materials, and nonemergency calls
• Fees for services rendered to non-residents
or businesses
– Title searches, permit records, voter information,
research, “extras” on road construction, tree
planting
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EVALUATE FEES CHARGED
• Have departments regularly review their
fees to ensure they are kept updated
– May need to tie operating budgets to program
revenues to ensure attention paid to fees
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IMPROVE BILLING AND
COLLECTION PROCEDURES
• Standardize billing procedures for all
receivables
– Insurance claims, damage claims, rebates,
fees for service
• Ensure nothing “falls through the cracks”
due to lack of communication between
departments and staff
• Diagram exceptions procedures
– Who has authority to approve exceptions and
under what circumstances?
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IMPROVE BILLING AND
COLLECTION PROCEDURES
• Establish consistent and fair collections
efforts
– Cannot ignore debt one year and expect
collection success in the following year
• Collections procedures
– Clearly stated
– Publicly available
– Consistently applied
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IMPROVE BILLING AND
COLLECTION PROCEDURES
• Coordinate collections efforts between
agencies
– Different levels of government have overlapping
revenue streams, e.g., property and income taxes
• Reconcile filings with related agencies
• Local income tax records to state records and IRS
filings
• Property tax records to utility bills, other agency
property tax records, and court records
• Consider amnesty program
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TIP NO. 2 – CONTROL COSTS
• Look at incremental cost reductions
– Small things can add up!
– For example – electronic distribution instead
of paper?
– Also more environmentally sound!
• Explore opportunities to consolidate back
office operations at smaller agencies
– With larger agency in same functional area,or
– In a central service agency
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REDUCE COSTS
• Evaluate the possibility of partnering with
other governments
– Buying collaboratives
– Systems
– Functions
• Consider contingent-fee based cost
avoidance audits
– Vendors find ways to cut costs
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OTHER COST REDUCTION
STRATEGIES
• Consider revenue maximization
– Vendors find new sources of revenue
• Publicize what you are doing for savings
– Solicit creative ideas
• Remember public perception is important
– Be conservative with travel and meeting
arrangements
– NO PRIVATE PLANES!!!
– Look at travel reimbursement policies
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ENHANCE PURCHASING
PRACTICES
• Identify bulk purchases
– Identify items that make up bulk of purchasing
– See if new quotes or suppliers can lower
costs
– Encourage or require joint purchasing of
similar items by departments (e.g., office,
janitorial, communications supplies)
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ENHANCE PURCHASING
PRACTICES
• Standardize
– Develop standard specifications for
commodity items
– Will aid in obtaining better terms from vendors
– For example: standardizing desktop personal
computers
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ENHANCE PURCHASING
PRACTICES
• Investigate prompt payment discounts
– Find out if available
– Take advantage!!
– May require contacting suppliers and
apologizing for past behavior!
– Institute practices to ensure late payment
penalties avoided
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ENHANCE PURCHASING
PRACTICES
• Inspect incoming purchases
– Hold suppliers accountable for delivering the
right goods in the right quantity and in good
quality
• Long-term contracts
– Develop multiyear contracts with vendors if
they will offer and/or guarantee lower prices
– For example: Construction-related activities,
landscape, printing, mid and heavy equipment
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ENHANCE PURCHASING
PRACTICES
• Just-in-time purchasing
– Use JIT purchasing for readily available
products to reduce or eliminate warehousing
and inventory costs
– May be possible to obtain vendor-supplied
ordering software
• Maintain competition
– Evaluate vendors frequently to verify value
and accuracy
– Professional services as well as commodities
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ENHANCE PURCHASING
PRACTICES
• P-cards
– Significant advancements in individualized
controls for purchases
– Will support JIT purchasing environment as
well as reduce purchasing costs
– IF PROPERLY CONTROLLED
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ENHANCE PURCHASING
PRACTICES
• Adopt “Winning Compliance” strategies
– Reduce purchasing costs by
• Simplifying processes
• Posting simplified procedure manuals on an intranet
• Using technology to speed up the procurement
process
– Enables purchasing staff to focus on
• Honing negotiating skills
• Working with departments to narrow bid
specifications
• Looking for ways to save money and to make it
easier and faster for departments to get what they
need
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TIP NO. 3 – MANAGE EMPLOYEE
COSTS
• Effectively manage
employee costs –
for the short and
long term
• One of, if not THE,
major costs for any
government
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BOTTOM-UP APPROACH
• Take bottom-up approach to your budget
– Why are you in a particular program?
– Is it necessary to the core mission of your
entity?
• Careful analysis will enable better FTE
management
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NEEDED REFORMS
• Use crisis as opportunity to propose and
pursue needed reforms
– For example: Restructuring pensions and
retirement benefits
• Important to long-term financial health and
viability
• May be best chance for sustainable
benefit levels going forward
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UNION AGREEMENTS AND
LABOR LAWS
• Review all union agreements and labor
laws
– What is in negotiated agreements?
– What is practiced with regard to employee
benefits?
• Seek opportunities to make adjustments
that will benefit present and future
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VACANT POSITIONS
• Examine every vacant position before
refilling
– Is it necessary?
– Can you reorganize to distribute duties
differently and eliminate any positions?
• Consider impact on internal control
– How do layoffs and vacancies affect internal
controls, especially in areas over assets
susceptible to misappropriation and fraud?
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OVERTIME
• Evaluate overtime use
– What is the ratio of overtime to regular wages
or wages and benefits?
– Can overtime be reduced by different patterns
for scheduling or expanded use of PT
personnel?
• Make managers manage overtime
– For example: In one county, all OT drawn
from a central account, shared by all
departments. Withdrawals require
justification.
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ADDRESS HEALTH CARE COSTS
• Health care costs – large and rapidly
growing
• Reduction tactics
– Identify cost drivers, especially for health care
and disability claims
• Prescriptions? Increase co-pays, switch to generic
brands
• Common on-the-job (OTJ) injuries? Increase
preventive training
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ADDRESS HEALTH CARE COSTS
• Seriously consider wellness options
– Health system promotions
– Health club memberships at a discount
• Verify participants
– Conduct eligibility audit
• Dependents who no longer qualify?
• Former employees?
• Spouses with coverage from another employer
plan designate other plan as primary
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TIP NO. 4 – UNDERSTAND CASH
POSITION
• Cash is king!!
• Local governments cannot “print” money
like the federal government
• Borrowing ability may be reduced or very
expensive
• Bank reconciliations need to be current!!!
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FORECAST YOUR CASH
• Cash flow reporting essential in financial
crisis.
• Prepare daily, weekly, monthly, and
quarterly forecasts
– Review forecasts annually
– Compare to actual on day-to-day basis
• Evaluate risks that might affect your cash
forecast
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REVIEW TRUSTS AND OTHER
DORMANT ACCOUNTS
• Consider sweeping cash into the general
fund
• If possible, do it!
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INTERCEPT CASH
• For example – offset tax refund against
amount owed on student loan
• See if possible to join state refund setoff
programs that allow local government to
collect on unpaid utility bills or other
customer AR by filing claims with state tax
refund departments
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ABANDONED PROPERTY AND
CREDIT MEMOS
• Search abandoned property (unclaimed
property) at least monthly to see what can
be reclaimed with state tax refund
departments
• Perform vendor credit memo searches. Do
not pay vendors with whom you have
credit until the situation is resolved.
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TIP NO. 5 – FINANCING
SOURCES
• Pay attention to financing sources and
developments
• Keep abreast of developments in the
various stimulus packages
• Pay special attention to expected federal
funding for infrastructure projects
• Maximize opportunities to make lasting
infrastructure improvements
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CAPITAL MARKETS
• Be aware of capital market developments
and structure (or re-structure) major
financings
– To increase access
– To reduce borrowing costs
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INVESTMENT MANAGERS AND
CUSTODIANS
• Perform due diligence on financial
institutions and other fiduciaries that hold
your investment portfolio
– If it sounds too good to be true, BEWARE!!
– Remember Madoff
– Ponzi schemes are rampant!
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EARN HIGHER YIELDS SAFELY
• Look for opportunities to earn higher yields
on excess cash with relatively low risk
investments
– Governments are usually allowed to invest in
variable rate municipal securities, issued by
credit-worthy governments
– In most cases, these remain safe investments
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TIP NO. 6 – ASSET UTILIZATION
• Look at long-term opportunities for better
asset utilization
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ASSET UTILIZATION
STRATEGIES
• Consider leasing or renting assets like cars and
trucks for motor pool
• Look at stranded or little-used assets that could
be leased to someone else
– Don’t sell!!!
• Review tax abatement and economic
development incentives for updating or
modification
– For example: Payment In Lieu of Taxes (PILOT)
agreements
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TIP NO. 7 – STRENGTHEN
INTERNAL CONTROLS
• Internal controls key to effective
operations
• Strong role in preventing fraud
• Increased risk
– Employee layoffs increase vulnerability
– Staff morale low
• 20 question diagnostic over payment
controls – answer each question YES or
NO
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
1. Do you require all employees who
have anything to do with the
payment process to take at least 5
consecutive days of vacation?
2. Do you prohibit the ability to both
approve invoices and enter invoice
data?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
3. Do you prevent one or more of your
managers/executives from having
access to all phases of the payment
process, even though it might make
training and managing more difficult?
4. Do you have a strong policy prohibiting
the return of checks to requisitioners?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
5. Are all changes made to the master
vendor file periodically checked, no
less frequently than once a month, but
ideally every week?
6. Do you periodically (at least once a
year) deactivate inactive accounts in
your master vendor file?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
7. Do you have an anonymous tip
hotline?
8. Do you periodically check that your
processors are not writing their
passwords down where anyone can
see them?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
9. If you have a petty cash box, do you
make sure that the location of the
key is not common knowledge?
10.Do you wait until the end of the day
to deliver checks to the mailroom for
mailing?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
11.Are unsigned checks always left in a
secure location while waiting for
signature – and not on someone’s
desk in an empty office?
12.Is the positive pay file uploaded only
when checks are mailed?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
13.Are checks only printed only when
they are going to be mailed – not
earlier so they will reflect a date that
matches your payment terms?
14.Are open receivers and POs always
extinguished when an invoice is paid
even if the invoice is paid outside
accounts payable?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
15. Is access to the master vendor file for
entering vendor changes or changing
vendor information severely limited?
16. When an employee making electronic
payment transfers is terminated or
leaves voluntarily, is the bank and
procurement card administrator
immediately notified and passwords
changed?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
17. When a new vendor is to be entered into
the master vendor file, do you require at
least two signatures or approvals before
adding them?
18. When a new vendor is to be entered into
the master vendor file, do you do some
checking to make sure the vendor is
legitimate before adding them?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
19.If you have a petty cash box, do you
hold surprise audits and does
everyone know you do that?
20.Do you have a written fraud policy,
signed by a top-level executive,
indicating zero tolerance for employee
fraud?
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ARE YOUR INTERNAL
CONTROLS GOOD ENOUGH?
•
•
•
•
Preferred response – YES!
No perfect organization
NO indicates vulnerability
Look into NOs and determine if possible to
tighten controls
• If cannot tighten, plan to regularly audit
problem areas
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TIP NO. 8 – ILL-ADVISED ACTIONS
Beware of taking ill-advised actions in a
rush to just do something!
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UNDERFUNDING
• Don’t underfund accrued liabilities like
pensions
– Sticks tomorrow’s generations with today’s
bills
– Can negatively impact bond ratings, public
perception, and employee relations
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COST-SHIFTING
• Don’t shift operational costs into capital
budgets.
– Distorts true cost of capital investments
– Usually not allowable!
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ACCOUNTING MANIPULATIONS
• Don’t be tempted to use accounting
manipulations to improve your results
– For example:
• Delaying deliveries, payrolls, and payments to next
fiscal year
• Manipulating or distorting estimations or forecasts
• Recognizing anticipated (or worse, speculative)
savings or revenues
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TIP NO. 9 – FRAUD PREVENTION
• In best of times, fraud expensive
• In worst of times, fraud could be
disastrous!
• A few questions to check your knowledge
of fraud prevention, detection, and
investigation
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WHAT’S YOUR FRAUD IQ?
1. Under the concept of ______________,
corporations can be held criminally
responsible for the acts of their
employees if those acts were done in the
course and scope of their employment
and for the apparent benefit of the
corporation.
A. Connected accountability
B. Civil responsibility
C. Imputed liability
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WHAT’S YOUR FRAUD IQ?
C. Imputed liability
•
Corporations can be held legally responsible
for the criminal acts of their employees in
certain circumstances
For example – company could be criminally
liable for controller committing financial
statement fraud
•
•
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Even if supervisors unaware of his actions!
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WHAT’S YOUR FRAUD IQ?
2. Stephen Latimer is the lead auditor for
Island Power, a component unit providing
energy. With the economic downturn,
company management has been under
increased pressure for profitable
operations, and the company is in
danger of violating its loan covenants.
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WHAT’S YOUR FRAUD IQ?
2. Stephen is concerned that management
may be fraudulently concealing liabilities
and expenses to improve the company’s
financial statements. He performs his
preliminary analytical procedures with
these factors in mind. Which of the
following is a red flag that might reaffirm
Stephen’s suspicions?
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WHAT’S YOUR FRAUD IQ?
A. The company’s gross margin is significantly
lower than industry average.
B. The company has experienced an unusual
increase in the number of days’ purchases in
accounts payable.
C. The financial statements reflect an unusual
change in the relationship between fixed
assets and depreciation.
D. The company shows a significant reduction in
accounts payable, even though its competitors
are stretching out payments to vendors.
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WHAT’S YOUR FRAUD IQ?
D. Concealing operating expenses and
related payables reduces AP
- Unusual given other companies in
industry
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WHAT’S YOUR FRAUD IQ?
3. Which of the following is considered
a fraud preventive control?
A.
B.
C.
D.
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Employee support programs
Segregation of duties
Employee background checks
All of the above
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WHAT’S YOUR FRAUD IQ?
D. ALL, if properly implemented, will help prevent
fraud
- Employee support programs
- Financial, drug, and family counseling
- Assist employees in dealing with
pressures
- Segregating incompatible duties
- Eliminates opportunity
- Background checks
- Prevents hiring mistakes
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WHAT’S YOUR FRAUD IQ?
4. The concept of the fraud triangle states
that, for a fraud to occur, three factors
generally are present. Which of the
following is NOT one of the three sides of
the fraud triangle?
A.
B.
C.
D.
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Criminal predisposition
Incentive or pressure
Perceived opportunity
Rationalization
76
FRAUD TRIANGLE
Correct answer = A
Pressure (Motive)
Opportunity
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FRAUD
TRIANGLE
Rationalization
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WHAT’S YOUR FRAUD IQ?
5. In general, the best way to prevent
fraud is to:
A. Implement harsh penalties for
perpetrators.
B. Outsource all possible functions.
C. Increase the perception of detection.
D. Conduct covert audits.
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WHAT’S YOUR FRAUD IQ?
C. Most fraud perpetrators commit fraud
ONLY when they perceive an opportunity
to be present.
So increasing in employees’ minds the
perception that illegal acts will be
detected can significantly deter fraud
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WHAT’S YOUR FRAUD IQ?
6. __________ is defined as “the totality of
circumstances that would lead a
reasonable, professionally trained, and
prudent individual to believe a fraud has
occurred, is occurring, and/or will occur.”
A.
B.
C.
D.
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Proof
Evidence
Suspicion
Predication
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WHAT’S YOUR FRAUD IQ?
D. Predication is the basis for a fraud
examination. It is the set of circumstances
that leads a reasonable professional to
believe that a fraud has, is or will occur.
Example: While conducting an audit, an
auditor overhears purchasing agent
bragging about substantial discount on new
car from company’s supplier of fleet cars.
Predication for fraud examination.
If auditor only witnessed purchasing agent
in expensive car, would only have suspicion
(insufficient for fraud examination)
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WHAT’S YOUR FRAUD IQ?
7. Which of the following is NOT an
element generally included as part of a
fraud risk assessment?
A. Risk identification
B. Formal fraud policy development
C. Assessment of likelihood and significance of
risks
D. Risk response
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WHAT’S YOUR FRAUD IQ?
B. Formal fraud policy not one of steps in fraud
risk assessment
Fraud risk assessment involves
•
•
•
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Identifying fraud risks inherent to the
organization
Assessing the likelihood and significance of the
fraud risks identified
Deciding on the appropriate responses to the
identified risks
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WHAT’S YOUR FRAUD IQ?
8. The three primary categories of
occupational fraud are:
A. Corruption, financial statement fraud, and
asset misappropriation
B. Skimming, money laundering, and bid
rigging
C. Asset misappropriation, identity theft, and
fictitious revenues
D. Financial statement fraud, inventory theft,
and cash larceny
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WHAT’S YOUR FRAUD IQ?
A. Occupational fraud = fraud committed by an
employee against an employer
Three primary categories of occupational
fraud
•
•
•
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Corruption = Use of influence for self-benefit,
e.g., bribes
Financial statement fraud = Intentional
misstatement or omission of material
information from FS
Asset misappropriation = Theft or misuse of
company resources
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WHAT’S YOUR FRAUD IQ?
9. Jason Aubuchon is conducting an
investigation into a possible accounts
receivable lapping scheme at
Micronesian Visitors Bureau. If Jason
plans to interview all of the following
parties, whom should he interview first?
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WHAT’S YOUR FRAUD IQ?
A. Frank, the primary suspect.
B. Martha, an accounts payable clerk who
filled in for Frank when he was on vacation
C. Evan, a regular customer of the company
whose complaint about his account balance
prompted the investigation
D. Sarah, Frank’s supervisor, who is
suspected of helping Frank cover the fraud
in exchange for a portion of the proceeds
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WHAT’S YOUR FRAUD IQ?
C. Collection of evidence should progress from
general to specific
Investigator proceeds in order from
witnesses least likely to be involved to
those most culpable
1.
2.
3.
4.
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Neutral third-party witnesses (Evan)
Corroborative witnesses (Martha)
Co-conspirators (Sarah)
Suspect (Frank)
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WHAT’S YOUR FRAUD IQ?
10.Most employees who commit fraud
have a history of fraudulent
misconduct.
A. True
B. False
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WHAT’S YOUR FRAUD IQ?
FALSE
2008 Report to the Nation on
Occupational Fraud and Abuse
87% first-time fraud offenders
83% never punished or terminated for
fraudulent behavior
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TIP NO. 10 – OPEN
COMMUNICATION LINES
• A difficult problem in the best of times
• Solution will be a group effort
– Employees
– Constituencies
– Managers
– Vendors
– All affected parties
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COMMUNICATION
• Build credibility with frequent, clear, and
honest communication
• Manage perceptions
– Speak up – frame the situation for others
– Be honest about what is achievable
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COMMUNICATION
• Sharing information can help
– To avoid rigid reactions
– May keep everyone open to different options
for solutions
• Employees take their cues from the
leaders
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CULTURE OF THRIFT
• Establish a culture of thrift
– Every dollar counts!
– Terminate temporary help and redeploy existing staff
to fill gaps
– Cutback sharply on office equipment
– Delay replacement of vehicles
– Control travel and expenses
– Engage employees in auditing small expenditures
– Take action on very big items or very visible issues
such as management vehicles and other perks
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CULTURE OF THRIFT
• Management must set an example for
everyone to follow. Remember the “tone
at the top.”
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OPPORTUNITIES
• Recognize opportunities within crisis
– Organizations often do not change until a
major event occurs
– This may be a “game-changing” time that can
be used to break free of constraining past
practices and habits
– May have to spend money to save money
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EMPLOYEES’ ASSISTANCE
• Employees will respond with creativity and
ingenuity IF
– They believe that their suggestions will be
heard and valued
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RESOURCES
• AICPA
– Government Accountability Brief – January 2009 &
March 2009
– Navigating the Current Economic Crisis: What It
Means for Businesses – March 2009
• GFOA
– Fiscal First Aid
• Andi McNeal, What’s Your Fraud IQ?
• Mary Schaeffer, Are Your Internal Controls Good
Enough?
APIPA 2009
98
QUESTIONS?
APIPA 2009
99