The Detection and Prevention of Fraud ( Or The Company You Save

May Be Your Own)Dennis L. Thompson, CPA,CFE

www.dlthompsoncpa.com

Christine Sylvester

Windish RV - Colorado

•40 Year Old Billing Clerk•Embezzled $951k•Fraud Lasted Three Years•Created a Shell Company

– Wrote duplicate checks– Deposited into Shell Business Account

•Plead guilty to felony theft•Sentenced to 5 years

Desiree Herrera

Payless Hardware-California• 36 Year Accounts Receivable Clerk

– Worked from 2002 to 2009– Embezzled $1.43 Million

• Skimmed Receivables– Handled bank deposits– Laundered money

• Convicted on 58 Felony Counts– 1 count of grand theft– 3 counts of filing fraudulent tax returns– Sentenced to 10 years– Husband sentenced to 1 year for money

laundering

Victoria Monfore

IP Koki Printing, Oregon

• 48 Year Old Bookkeeper– Worked from 1992 to 2008– Embezzled $1.5 Million– Forged Checks

• Printing Company Closed– 74 lost jobs

• Convicted on 58 Felony Counts– Aggravated 1st degree theft– 18 Counts Identity Theft– Received 23.5 years

Fraud Triangle – Donald Cressey

• Opportunity

• Pressure

• Rationalization

Opportunity

• Trusted Employee

• Necessary Skills

• Weak Internal Controls

Pressure – Non-sharable Problems• Living beyond Means

• Gambling Losses

• Medical Expenses

Rationalizations

• Just Borrowing

• Employer is Unfair

• Unique Circumstances

Asset Misappropriations – Most Common• Cash

• Inventory/Other Assets

Cash Receipts

• On Book

– Larceny

• Off Book

– Skimming

Fraudulent Cash Disbursements

• Billing Schemes

• Payroll Schemes

• Expense Reimbursements

• Check Tampering

Billing Schemes

• Shell Company– Employee sets up fictitious Vendor– Service companies are harder to detect– Money deposited in Employee’s account– Starbucks Example

• How to Detect– Review Vendor lists, esp those with P.O.

Box– Compare Vendor address with Employee

address

Payroll Schemes

• Falsified Hours– Forge Supervisor’s Signature

• Ghost Employees– Employees that have quit or fictitious

• Detecting– Require Supervisor to monitor– Supervisor hands out paychecks– H/R monitor employee records

• Expense Reimbursements– Personal Expenses– Multiple Reimbursements– Fictitious Reimbursements

• Dectecting & Preventing– Supervisor Review– Only Original Documents

Expense Reimbursments

Check Tampering• Forged Maker

– Fraudster forges check signature– Use of check signing machine

• Forged Endorsement– Fraudster steals third party check

• Altered Payee• Authorized Maker

– Signs checks for personal expenses

• Deterrence & Detection – Review Returned check from Bank– Restrict access to check signature

machine– Look for signs of tampering on original

check– Restrict access to blank checks

Check Tampering

Detection of Fraud Schemes

• Initial Detection of Occupational Frauds

Prevention & Detection of Fraud

• Internal Control• Reconcile All GL Accounts • Accounting Software Controls• Ratio Analysis• Digital Analysis• Tip Lines• Other Considerations

Internal Control

• Segregation of Duties– Do Not Allow One Person To Have

Recorded Keeping Responsibility And Physical Custody of Asset

Account Reconciliation

• Bank– Segregation of Duties– Timely– Bank Statement Mailed to Owner

• Credit Card– Review for Charges

Accounting Software Controls

• Roles and Passwords to Limit Access

• Review Audit Log

• Lock Prior Periods

Ratio Analysis

• Look For Unreasonable Relationships– Income going up – Expenses going down

Digital Analysis – Benfords’ Law

Tip Lines

• Most Effective

• Confidential

• No Penalty For Good Faith Reporting

Other Considerations

• Be Suspicious of Employees

– First to Arrive, Last to Leave

– Never Want to Take a Vacation

– Changes in Lifestyle Not Supported by Salary

– Takes Work Home

I Think I am Being Ripped Off – Now What?• Proceed with Caution

– Review Employee Policies– Talk to Your Attorney– Do you have a Fraud Policy in place?– Open Confidential Investigation

• Investigation/Development– Document, Document, Document– Don’t try to detain employee-False

Imprisonment– Avoid Defamation & Slander

I Think I am Being Ripped Off – Now What?• Invasion of Privacy by Employer

– Ways to Reduce Liability• Employee Handbook• Written Company Policy

• Should Company Prosecute?– Does Fraudster have Resources?– Time, Money & Energy to Build Case– Convincing Law Enforcement

My Fraud Prevention Services

• Review of Company Internal Controls• Audit My Books

– Software that tests for Accounts Payable Errors & Fraud

• Analytical Procedures• Digital Analysis – Benford’s Law• Bill.com – Paperless Accounts Payable

Summary

• Fraud Increasing, Especially In This Economy

• Adversely Impacts Company’s Survival & Employee Jobs

• No Stereotypical Fraudster – Sometimes Someone You Would Never Suspect

• Much More Economical to Prevent Fraud

Dennis L. Thompson, CPA, CFE

206-390-9432 www.dlthompsoncpa.com

ResourcesAuditMyBooks Bloghttp://auditmybooks.com/blog

Fraud Info Blog/http://fraudinfo.com

Fraud Talkhttp://fraudtalk.blogspot.com/

White Collar Fraudhttp://whitecollarfraud.blogspot.com/