Fraud Detection Presented by: Nancy Young, CPA, CISA, CFE

Learning Objectives Understand the top 5 fraud schemes perpetrated in governments How to use “red flags” to identify potential weaknesses and use in interviews 2

Impact of Fraud in Government Fraud: Multi-trillion dollar business 5% of annual revenue to fraud Govt: 15.1% $90k 18 months to detect asset misappropriation 24 month to detect financial statement fraud 3

Top 5 Schemes in Government Corruption – 36.2% Billing – 19. 1% Non-Cash – 17.7% Payroll – 15.6% Expense Reimbursements – 12.8% 4

Corruption Defined: Dishonest/fraudulent conduct by those in power, typically involving bribery. Why corruption is the choice scheme and why they are so hard to detect Case example 5

Billing Defined: Billing/paying for goods or services not provided/received. Why billing schemes go undetected Case example 6

Non-Cash Defined: Personal use or misuse of an organizations resources. Why non-cash schemes go undetected Case example 7

Payroll Defined: Theft of cash from a business via the payroll processing system. Why payroll schemes go undetected Case example 8

Expense Reimbursements Defined: Any scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses. Why expense reimbursement schemes go undetected Case example 9

How to use red-flags for detection and in interviewing 10

Red Flags – Your road map to weaknesses Overall lack of internal controls37.8% Override of internal controls19.2% Lack of management review17.9% Poor tone at the top8.4% Lack of competent personnel6.9% Lack of independent checks/audit5.6% Lack of fraud education1.9% Lack of clear lines of authority1.8% Lack of reporting mechanism.6% 11

ACFE: Behavioral Red Flags Displayed by Perpetrators ~ Lifestyle Probes Living beyond their means: 43.8% Financial difficulties: 33.0% Unusually close with vendors/customers: 21.8% Control issues: 21.1% Divorce or family problems: 16.8% Irritability, suspiciousness/defensiveness: 15.0% Addiction problems: 11.6% Complained about inadequate pay: 9.4% Refusal to take vacations: 8.6% 12

Characteristics of Fraudsters – Who Commits More Fraud? 13

ACFE Report to the Nations Gender – Median Loss – 06/08/10/12/14 Male: 61.0% - $250k 59.1% - $250k 66.7% - $232k 65.0% - $200k 66.8% - $185k Female: 39.0% - $102k 40.9% - $110k 33.3% - $100k 35.0% - $91k 33.2% - $83k 14

By Age: Who Commits More Fraud? Demographic >602.8%3.9%2.2%3.1%3.4% %18.9%14.6%14.2%13.5% %35.5%33%33.1%32.7% %29%35.4%34.1%33.5% %8.1%9.6%9.8%11.3% <266.1%4.6%5.2%5.6%3.9%

Position of Perpetrator PositionFrequency Medium Loss Months to Detection Employee42.0%$75,00012 Manager36.2%$130,00018 Executive18.6%$500,00024 Other3.2%$250,00016

Department % of Cases Accounting17.4% Operations15.3% Sales12.5% Executive/Upper management11.8% Customer Service7.7% Purchasing7.2% Finance5.2% Inventory/Warehousing3.9% Information Technology3.0% Human Resources1.2% Board of Directors1.% Legal.6% 17

Questions Nancy Young, CPA, CISA, CFE, MBA