Fraud & Abuse Dr. Raymond S. Kulzick, CPA, CFE St. Thomas University Miami, Florida Copyright 2004 R. S. Kulzick

Overview What is Occupational Fraud and Abuse What is Occupational Fraud and Abuse Some Facts Some Facts Accounting & Auditing Accounting & Auditing Fraud Theories Fraud Theories Internal Control Internal Control Common Schemes & Prevention Common Schemes & Prevention Concluding Comments Concluding Comments

What is Fraud ? Deception including Deception including A representationA representation About a material pointAbout a material point Which is falseWhich is false And intentionally or recklessly soAnd intentionally or recklessly so Which is believedWhich is believed And acted upon by the victimAnd acted upon by the victim To the Victim’s damageTo the Victim’s damage

Occupational Fraud The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

What is Abuse ? Abuse describes employee practices that, directly or indirectly, increase an employer’s costs. Abuse describes employee practices that, directly or indirectly, increase an employer’s costs. Examples: Examples: –Take sick time when not sick –Come in late, take a long lunch –Do slow or sloppy work –Take products belonging to the organization –Collect more money than due on expenses

Facts About Occupational Fraud and Abuse Association of Certified Fraud Examiners 2002 Report to the Nation – Occupational Fraud and Abuse Association of Certified Fraud Examiners 2002 Report to the Nation – Occupational Fraud and Abuse –971 actual completed cases from CFEs – U.S. KPMG Fraud Survey 2003 KPMG Fraud Survey 2003 –450 U.S. execs in companies & government PWC Global Economic Crime Survey 2003 PWC Global Economic Crime Survey 2003 –Senior execs 3,600 companies in 50 countries

ACFE 2002 Report $600 billion cost in U.S. $600 billion cost in U.S. About $4,500 per employee About $4,500 per employee 50% of frauds exceeded $100,000 50% of frauds exceeded $100,000 16% of frauds exceeded $1,000,000 16% of frauds exceeded $1,000,000 80% involve asset misappropriations, corruption, or fraudulent statements 80% involve asset misappropriations, corruption, or fraudulent statements

ACFE 2002 Report Average scheme lasted 18 months Average scheme lasted 18 months Most common discovery is a tip Most common discovery is a tip 2 nd most common is by accident 2 nd most common is by accident Hot lines reduce losses by 50% Hot lines reduce losses by 50% Internal audits, external audits, & background checks also reduced loss Internal audits, external audits, & background checks also reduced loss Small businesses avg. loss $127,500 Small businesses avg. loss $127,500

KPMG 2003 Survey 75% of organizations fraud in last year 75% of organizations fraud in last year 60% of the frauds were employees 60% of the frauds were employees Theft of assets, check fraud & expense account abuse were most common Theft of assets, check fraud & expense account abuse were most common Leading discovery was internal controls, followed by internal audit Leading discovery was internal controls, followed by internal audit Other top 5 were employees, accident & anonymous tip Other top 5 were employees, accident & anonymous tip

PWC 2003 Global Survey 41% North American Companies had loss in last two years 41% North American Companies had loss in last two years 52% for companies with 1,000+ employees 52% for companies with 1,000+ employees Average loss was $2,200,000 Average loss was $2,200,000 All industries All industries Impact on brand image, reputation & morale were important Impact on brand image, reputation & morale were important

PWC 2003 Global Survey 60% of companies with a loss reported asset misappropriation 60% of companies with a loss reported asset misappropriation 75% of victims recovered less than 20% of loss 75% of victims recovered less than 20% of loss Only half of victims had insurance Only half of victims had insurance

2004 Report to the Nation On Occupational Fraud & Abuse Largest fraud study ever Largest fraud study ever Study of 2,608 fraud cases Study of 2,608 fraud cases Reported by CFEs Reported by CFEs Total: $15 billion in losses Total: $15 billion in losses $22 to $2.5 billion $22 to $2.5 billion

Costs How to measure? How to measure? Orgs don’t know what they lose Orgs don’t know what they lose Opinions of CFEs Opinions of CFEs Six percent of gross revenues Six percent of gross revenues $400 billion per year $400 billion per year Twice the U.S. defense budget Twice the U.S. defense budget

Position in the Organization - Cases

Position in the Organization – Median Loss

Median Loss by Gender

Median Loss by Age Direct and linear correlation between age and median loss Direct and linear correlation between age and median loss Older tend to occupy higher ranking positions Older tend to occupy higher ranking positions Greater access to revenues, assets, resources Greater access to revenues, assets, resources 5

Median Loss by Age

Median Loss by Marital Status

Median Loss by Education

Median Loss Per Number of Employees

Classifying Occupational Fraud and Abuse

Number of Cases by Scheme Type

*Represents size of misstatement rather than actual cash loss Median Loss by Scheme Type