It’s Almost Midnight, Do You Know Where Your Assets Are? January 18, 2018 Association of Government Accountants – Boston Chapter 2018 Annual Winter Seminar

Session Objectives Identify and summarize fraud risks and control strengths and weaknesses through team brainstorming sessions Recognize how to evaluate fraud schemes and modify planned audit tests to determine if fraud is occurring

Session Agenda Fraud discussions (brainstorming) Let’s play “Protect Those Assets”

Fraud Brainstorming

Discussions Among Engagement Personnel During audit planning Interactive exchange of ideas … brainstorming Insights of more experienced team members How and where the financial statements might be susceptible to fraud within the framework Motive Opportunity Rationalization Emphasize importance of proper state of mind (professional skepticism) during the audit Include the risk of management override of controls Thoroughly probe the issues Consider audit responses to fraud susceptibility

Discussions Among Engagement Personnel Summarize known fraud risks and control strengths and weaknesses Brainstorm ways that fraud might be committed by someone within the entity (by management or employees) or on the entity (by an outsider) Evaluate fraud schemes deemed viable or possible React by modifying planned audit tests to ascertain if fraud is occurring

The purpose of brainstorming … …is to get as many ideas as possible from a group of people in the shortest possible time. Quantity and not quality is the order of the day. It does not matter if the ideas are thought to be unworkable, or crazy, or outlandish by anybody within the group. Sometimes these ideas are the very ones that are adapted into other forms that solve the problem adequately. --http://www.mindbloom.net/brain.html

The rules for effective brainstorming … There should be no criticism of any idea from any member of the group There should be no evaluation of the ideas generated The more ideas generated, the better Combination or modification of the ideas generated is encouraged --http://www.mindbloom.net/brain.html

Discussions Among Engagement Personnel Brainstorm the following:  Specific ways in which the entity’s financial statements might be susceptible to material misstatement due to fraud.   Focus on how management could perpetrate and conceal fraudulent financial reporting. For each potential fraud scheme discussed, identify Likely perpetrators  The likely perpetrators’ possible motives or pressures that might induce them to commit fraud  The opportunities that might exist to enable the scheme to occur  The likely perpetrators’ possible rationalizations 

Discussions Among Engagement Personnel Focus on misappropriation of assets. For each potential fraud scheme discussed, identify: Likely perpetrators  The likely perpetrators’ possible motives or pressures that might induce them to commit fraud  The opportunities that might exist to enable the scheme to occur  The likely perpetrators’ possible rationalizations

Let’s play “Protect Those Assets”

What are Assets?

What are assets? Cash Accounts Receivable Marketable Equity Securities Other Investments Plant, Property & Equipment Inventory

What are assets? Intellectual Property Human Resources Reputation Market Share Systems and Software Taxpayer Base Donor Base Contracts/Grants

Let’s Play “Protect Those Assets” Divide into teams of 5 to 10 players Select a scribe Teams on the debit side of the room will be the defenders Teams on the credit side of the room will be the attackers Teams may pick their assets, or I will assign the assets to be protected and defended

Let’s Play “Protect Those Assets” Defenders: you have 20 minutes to design and define as many control procedures as you deem cost-effective and necessary to protect your assigned assets Record your controls

Money is no object! Let’s Play “Protect Those Assets” Defenders: you have 20 minutes to design and define as many control procedures as you deem cost-effective and necessary to protect your assigned assets Record your controls Money is no object!

Let’s Play “Protect Those Assets” Attackers: you have 20 minutes to devise fraud schemes designed to obtain (or damage) some or all of the assets you are assigned to attack Record your fraud schemes

The purpose of brainstorming … …is to get as many ideas as possible from a group of people in the shortest possible time. Quantity and not quality is the order of the day. It does not matter if the ideas are thought to be unworkable, or crazy, or outlandish by anybody within the group. Sometimes these ideas are the very ones that are adapted into other forms that solve the problem adequately. --http://www.mindbloom.net/brain.html

The rules for effective brainstorming … There should be no criticism of any idea from any member of the group There should be no evaluation of the ideas generated The more ideas generated, the better Combination or modification of the ideas generated is encouraged --http://www.mindbloom.net/brain.html

Rules of Engagement The defender team will read the group its list of controls The attacker team will then read its list of fraud schemes Our panel of judges will decide who wins each encounter

Sample: Cash Controls: Cash receipts under dual control at all times Cash deposited into bank within 4 hours of receipt Persons who receive and deposit cash do not have access to accounting records Two signatures required on all checks Check signers do not have access to accounting records Bank statements go to reconciler who does not have routine access to checkbook or accounting records Reconciliations completed within 3 days of receipt of statements

Sample: Cash Schemes: Diversion of cash receipts (person who receives cash pockets some cash or alters/diverts checks for own use) Kiting (after diverting cash, move cash from account to account) Lapping (record follow-on receipts to cover up diversion) Forge signature on checks, records checks as “void” Set up dummy supply company; process payments to that company The two people assigned to record receipts collude to divert receipts for their own use

Consider this … Designing and maintaining internal controls to protect assets is ….boring Fraud perpetrators usually are more creative than asset protectors Maybe a better approach to protecting assets is to: Try thinking like the fraud perpetrators Devise ways to steal assets—use brainstorming Once you have identified the schemes, THEN design controls that would prevent or detect those schemes

Speaker Contact Information Melinda J. DeCorte CPA, CFE, CGFM, PMP Direct (703) 725-8559 melindadecorte@gmail.com