The “F” Word: Fraud Presented by: Donna Mayes, CPA

Course Objective Understand different fraud schemes and how they impact businesses Identify “red flags” that can be indicators of fraud Learn methods and internal controls to help reduce fraud risk

Statistics 5% of annual revenue is lost to fraud 90% of the cases involve asset misappropriation Typically takes 2 years to detect Average loss was $145,000 Small organizations are hit harder 77% of frauds committed by accounting, operations, sales, upper mgmt, customer service, purchasing and finance.

Fraud Nightmares Internal frauds Forged invoices Remote locations External frauds Check washing Ransoms

Fraud Triangle Incentive/Pressure Opportunity Rationalization/ Attitude FRAUD

Fraud Triangle Incentive/Pressure Be alert Rationalization/Attitude Pay employees well Be fair Be alert Opportunity

Prevention/Detection Prevention is better option Segregated bank accounts Detection is final defense Documentation

Tips for Assessing Risk of Fraud Fraud assessment should be done at least annually (or when circumstances merit) Red flags Evaluate each transaction cycle

Evaluate Each Transaction Cycle Cash receipts, cash disbursements, investment transactions, payroll, purchases of property and equipment Review policies and procedures Best prevention is segregation of duties

Designing Effective Internal Controls Custody – physical access to cash, checks, inventory, other assets Recordkeeping – data entry and other means to record the data into the accounting system Approval/review – authorization for transactions to occur

Designing Effective Internal Controls Receipts cycle Open mail, make a prelist of all checks received, copies of checks made, make deposit Receipts entered into accounting software from copies Validated deposit slip compared to prelist and to amounts recorded in general ledger Bank reconciliation completed

Designing Effective Internal Controls Disbursements cycle Check request/invoice is authorized Payable is recorded into accounting software and a check is generated Check is signed Bank reconciliation completed timely

Designing Effective Internal Controls Payroll cycle Approval of hiring, salary changes, time sheets New employees added to system; salary changes made in system; payroll processed; checks and/or direct deposit prepared Checks signed Direct deposit uploaded to bank Bank reconciliation completed

Tone at the Top Example is being set – good or bad Be above board & transparent If ever a gray area – err on the side of the business. Follow the rules – don’t ask for exceptions Don’t abuse company benefits Inform employees of expectations & consequences

Tone at the Top Tone at the Middle Steps to take Be more visible Conduct surprise audits Let employees know that you are watching Create perception of detection Ask questions about the procedures they are performing Review software access periodically

Remote Locations Be more visible Insist on internal controls Perform analytical procedures Review sign-in sheets/other reports Rotate staff and/or duties Keep log of errors Limit amount of receipts collected

Electronic Transactions Direct deposit Wire transfers Transfers between bank/investment accounts

Credit Cards Analyze the reason for using credit cards Do financial background checks Valid reason for employee to have card Insist on accountability Consequences for abuse

Credit Cards Internal controls Employee reconciles statement with receipts Original detailed receipts turned in Who, what, when, where, business purpose Approval of expenses Accounting dept. reviews expenses Corporate credit card

Chaotic Situations Change in personnel Expansion/contraction of services Loss of upper management/key personnel Move Downturn/upturn in economy

Questions