Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

In January, 2010, a Michigan man was sentenced to one year in prison after he and his wife (a bookkeeper for a McDonald’s franchise owner) admitted to stealing $441, from the business. Over a nine-month period she wrote 42 unauthorized checks to herself and her husband

In June, 2008, a payroll and benefits coordinator for Cavicchio Greenhouses, Inc. in Sudbury, MA pleaded guilty to stealing more that $290,000 from the firm She had created and “paid” two ghost employees The scheme went undetected for four years

In May, 2008, a bookkeeper at Maine’s Winslow Aluminum, Inc. pleaded guilty to stealing $900,000 from the company The bookkeeper was the company president’s daughter

A Florida magazine publisher’s CFO was recently found guilty of setting up bogus accounts that only he had access to, and depositing forged checks into those accounts After four years he had stolen $1,500,000 from the company

In August, 2009 a former bookkeeper for several Planet Fitness clubs in Texas and Oklahoma was sentenced to 41 months in prison and ordered to pay restitution 0f $600,000. Over a 30-month period she made out checks payable to cash, to herself, and to her then-husband

In May, 2009, an accounts payable clerk at Drytac, Corp., a small Virginia manufacturer, pleaded guilty to embezzling $151,000 from the firm She had been with the firm for ten years The theft was discovered only when she left a counterfeit check on the copier before she went on vacation

A bookkeeper for a California orchard grower recently pleaded guilty to writing additional payroll checks to herself Before the scheme was uncovered she had stolen $470,000 from the company over a five-year period

You’ll Lear n About …  the risks of employing a dishonest person  low-cost ways to mitigate that risk  how to deal with fraud after it’s been detected

Agenda  The human aspect of fraud  The statistics  Combating back-office fraud  Responding to fraud

The Perpetrators  Trusted employees  Financial responsibilities: bookkeepers, accountants, A/P clerks, A/R clerks, payroll managers, CFOs bookkeepers, accountants, A/P clerks, A/R clerks, payroll managers, CFOs  Familiar with the business’ financial controls

The Perpetrators  Typically female  Age:  Frequently living beyond their means or experiencing financial difficulties  First-time offender

The Fraud Recipe PRESSURERATIONALIZATIONOPPORTUNITY $ THEFT

Statistics (period from 2006 to 2007)  Average fraud loss: 7% of annual revenues *7% of annual revenues * $200,000 over 2 years$200,000 over 2 years  Average fraud scheme duration: over 2 years* over 2 years* *** Based on the “2008 Report to the Nation on Occupational Fraud and Abuse”, Association of Certified Fraud Examiners

Fraud Risk  Less-effective or non-existent fraud prevention and detection controls  Unwarranted reliance on external auditors to detect fraud Small businesses are high fraud risks

Red Flags  Financials do not adhere to norms  Employees living beyond expectations  Employees who refuse vacations  Lack of complete and timely reconciliation of assets

Mitigating Small Business Fraud Risk  Environmental Establish a culture of honesty and ethics Establish a culture of honesty and ethics Extend behavioral expectations to vendors, contractors, customers, volunteers, interns and others Extend behavioral expectations to vendors, contractors, customers, volunteers, interns and others  Specific Policies, procedures, controls to counter common schemes Policies, procedures, controls to counter common schemes

Common Small Business Fraud Schemes  Check Tampering  Fraudulent Billing  Payroll Fraud … many others

Check Tampering Intercepting, forging or altering a check drawn on one of the organization’s bank accounts

Mitigating the Risk  Keep checkbooks under lock and key (if practical)  Sign all checks, and only with proper documentation  Segregate check-writing and bank reconciliation duties (if practical)  Examine disbursements (check images and electronic transfer descriptions) in bank statements to determine actual payees

Fraudulent Billing Any scheme in which a person causes an employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for personal purchases

Mitigating the Risk  Vet every new vendor Segregate responsibilities of initiating and vetting new vendors (if practical) Segregate responsibilities of initiating and vetting new vendors (if practical)  Examine a vendor report from the accounting system annually Pay special attention to unfamiliar service providers Pay special attention to unfamiliar service providers  Examine credit card statements monthly Look for unauthorized, personal purchases Look for unauthorized, personal purchases

Payroll Fraud Any scheme in which an employee causes his/her employer to issue a payment by making false claims for compensation

Mitigating the Risk  Regularly examine payroll reports. Look for: Unexpectedly high salaries, wages commissions and bonuses Unexpectedly high salaries, wages commissions and bonuses Ghost employees Ghost employees Employees with few or no deductions Employees with few or no deductions

Establishing Financial Controls Accountants can provide excellent, independent advice on strengthening your business’ financial controls.

When Fraud Is Suspected  “Suspected” is different than “Proven”  The extent of the fraud may be unknown  The highest priority is protecting the innocent  Seek help Accounting Accounting Legal Legal Human Resources Human Resources

Parting Thoughts  Small business, back-office fraud is a problem that can significantly impact cash flow, profit and employee relations  Small business, back-office frauds are perpetrated by the least-suspected employees  Good preventive and deterrent controls don’t negate the need for vigilance. Trust but Verify.