Fraud Awareness Training Beach Cities Chapter Institute of Internal Auditors PRESENTED BY J’on Dennis March 16, 2017

Presenter J’on Dennis, CPA Director, MGO State and Local Government Assurance Services

Fraud Awareness Training OBJECTIVES Understanding Profile of a Fraudster Identifying Indicators of Fraud Implementing Controls to Prevent Fraud

What is Fraud? FRAUD DEFINITIONS Legal: ”A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” Black’s Law Dictionary, 3rd Ed. Criminal or civil fraud (tort)

What is Fraud? FRAUD DEFINITIONS Working: A form of employee misconduct where an employee uses deceit to take (steal) or misuse an employer’s resources.

Who Commits Fraud? PEOPLE – 3 KINDS Always Steal Never Steal Steal Under Perceived Pressure Donald Cressey Sociology Professor Subgroup of embezzlement felons in prison (exemplary lives before – no prior criminal history)

Fraud Diamond Pressure Capability Opportunity Rationalization Pressure DAVID WOLFE AND DANA HERMANSON (Developers/Authors)

Fraud Diamond (continued)

Fraudster Profile 55.7% 44.3%

Fraudster Profile (continued) AGE Born: 1971 – 1980 Age: 36 – 45 39.4% of Cases

Fraudster Profile (continued) DEPARTMENT

Fraudster Profile (continued) SUMMARY Dimensions Highest Frequency Gender Age Position Tenure Department Male 36 – 45 Years Employee 1 – 5 Years Accounting

Red Flags BEHAVIORAL RED FLAGS

Living Beyond Means Red Flags (continued) LIFESTYLE CHANGES Expensive/multiple vacations Upgraded/expensive vehicles Upgraded clothing or style New level of donations or gifts

Living Beyond Means Red Flags (continued) LIFESTYLE CHANGES Multiple homes or renovations Upgraded personal grooming New business/investment Recreational activities

Red Flags (continued) PERSONALITY TRAITS COMMON PERSONALITY TRAITS Controlling/unwilling to share duties Do not like their work being reviewed Strong desire for personal gain

Red Flags (continued) Controlling/unwilling to share duties COMMON PERSONALITY TRAITS PERSONALITY TRAITS Controlling/unwilling to share duties Unable to relax "Beat the system" attitude

BEHAVIOR CHANGES Red Flags (continued) Brags about purchases COMMON BEHAVIOR CHANGES BEHAVIOR CHANGES Brags about purchases Unusual amounts of cash in possession Borrows money from coworkers

BEHAVIOR CHANGES Red Flags (continued) Collection calls at work COMMON BEHAVIOR CHANGES BEHAVIOR CHANGES Collection calls at work Outside business calls at work Becomes irritable or moody

BEHAVIOR CHANGES Red Flags (continued) COMMON BEHAVIOR CHANGES Territorial over responsibility area Takes PTO in small increments Redoes or rewrites work to "make it neat"

BEHAVIOR CHANGES Red Flags (continued) COMMON BEHAVIOR CHANGES BEHAVIOR CHANGES Unreasonably upset when questioned about work Starts coming in early or staying late Discusses/mentions family or financial problems

ADDICTION FLAGS Red Flags (continued) Absenteeism COMMON BEHAVIOR CHANGES ADDICTION FLAGS Absenteeism Manipulative behavior Looks/acts ill

Red Flags (continued) Illogical/inconsistent decisions and actions COMMON BEHAVIOR CHANGES ADDICTION FLAGS Illogical/inconsistent decisions and actions Loss of sleep Loss of appetite

Red Flags (continued) COMMON BEHAVIOR CHANGES DISSATISFACTION Frequent work issue complaints Decreased productivity Change in attire/grooming Irregular schedules

Red Flags (continued) CHANGE CHANGE Operations Objectives Financial Reporting Objectives Non-Financial Reporting Objectives Internal Reporting Objectives Directional Change CHANGE

Prevention TONE AT THE TOP Transparency Openness Supportive Deeds Match Words

Prevention (continued) Authority Responsibility DECISION RIGHTS COMPETENCY

Prevention (continued) SEPARATION OF DUTIES (Basic) – ROLES|1 Approval Recording Access/ Custody Reconciliation

Prevention (continued) SEPARATION OF DUTIES (Complex) – ROLES|2 Authorization Approval Execution Access Recording Reconciling Supervisory Review

Prevention (continued) SEPARATION OF DUTIES (Minimum) – ROLES|3 Custody / Access Recording Reconciliation** **With separate/extra management review

Prevention (continued) ESCALATION POLICY Assists employees with their reporting of incidents, events, conditions Ensures proper evaluation and escalation Identifies incidents, events or conditions external or internal not contemplated by existing policy, procedure, or guidance

Prevention (continued) ACCOUNTABILITY Enforces Structures, Authorities, Responsibilities Establishes Performance Measures Evaluates Considers Excessive Pressure Evaluates Performance Rewards or Disciplines

Questions? Let’s Talk.

J’on R. Dennis, CPA (213) 408-8679 jdennis@mgocpa.com Twitter: @jrdennis_CPA Linkedin: jondennisCPA