What is Fraud? MRWA 35 th Annual Conference December 9, 2015

Nick Henry, CPA Horton, McFarland & Veysey, LLC PO Box 543 Ellsworth, ME

Presentation Outline  Fraud Definition  Abuse  Fraud Triangle  Types and Examples of Fraud  Fraud in Maine  ACFE Report

Presentation Outline - Continued  Preventing Fraud  Comprehensive Control System  Internal Controls – General  Internal Controls – Specific  Trustee Involvement  Audit Process

Fraud Definition  The act of obtaining something of value through willful misrepresentation.  Abuse = Behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable.

Abuse - Examples  Indian Tribe Casino  Creating Unneeded Overtime  Requesting Staff Perform Personal Errands  Extravagant or Expensive Travel Choices  Extravagant or Expensive Vendor Selections  Superintendent / Board Chair Weekly Lunches

Fraud Triangle  Factors that Cause Someone to Commit Fraud

Types and Examples of Fraud  Larceny / Embezzlement  Stealing money after it has been recorded on the books.  Skimming  Stealing money before it has been recorded on the books.  Shell Companies  Checks issued to a fake company with a valid sounding name.  Personal Purchases

Types and Examples of Fraud  Payroll Schemes:  Issuing Fake Paychecks / Bonuses  Inflated or Unauthorized Pay Increases  Inflated Hours Worked  Not Contributing To Health Insurance  Employee Reimbursements  Check Tampering:  Preparing Check for Own Benefit  Intercepting Check for Third-Party

Types and Examples of Fraud  Inventory & Equipment Theft  Credit Card Personal Purchases  Gas Card Personal Purchases  Fraudulent Financial Statements  Asset & Revenue Overstatements  Fictitious Revenues  Fraudulent Nonfinancial Statements

Fraud in Maine  Veterans of Foreign Wars Post 8835 & Ladies Auxiliary  Winslow$9,000  Travel Soccer Club  Winslow$15,000  High School Wrestling Booster Club  Winslow$10,000  United Mid-Coast Charities  Camden$4,600,000

Fraud in Maine  Passamaquoddy Tribe  Pleasant Point$25,000  Brooklin Boat Yard  Brooklin$700,000  Winthrop United Methodist Church  Winthrop$10,000  Maine Tourism Association  Hallowell$116,000

ACFE Report  Association of Certified Fraud Examiners  2014 Global Fraud Study  Summary of Findings:  Typical organization losses 5% of revenue per year to fraud  Median detection time = 18 months  Men & women; all ages; managers & employees  Majority of fraudsters are first-time offenders  External audits are not an effective control

Fraud Detection  Tip42%  Management Review16%  Internal Audit14%  By Accident7%  Account Reconciliation7%  Document Examination4%  External Audit3%  Surveillance / Monitoring2%  Notified by Law Enforcement2%  IT Controls1%  Confession1%  Other1%

Behavioral Red Flags  Living Beyond Means44%  Financial Difficulties33%  Unusually Close Association with Vendor / Customer22%  Control Issues, Unwillingness to Share Duties21%  “Wheeler-Dealer” Attitude18%  Divorce / Family Problems17%  Irritability, Suspiciousness or Defensiveness15%  Addiction Problems12%  Complained About Inadequate Pay9%  Past Employment-Related Problems9%  Refusal to Take Vacations9%

Control Weaknesses  Primary Internal Control Weaknesses Observed By CFEs  Lack of Internal Controls32%  Lack of Management Review20%  Override of Existing Controls19%  Poor Tone at the Top8%  Lack of Competent Personnel in Oversight Roles7%  Other5%  Lack of Independent Checks4%  Lack of Employee Fraud Education3%  Lack of Clear Line of Authority1%  Lack of Reporting Mechanism1%

Preventing Fraud  Ethics Policy  Policy Communication & Training  Hotline  Whistle-Blower Protection  Employee Screening  Risk Assessment – “what could go wrong?”  Implement Controls

Comprehensive Control System  Financial Controls  Management Oversight & Behavior  Nonfinancial Systems

Internal Controls - General  Authorize  Reconcile  Segregate Duties  Safeguard  Support Documentation

Internal Controls - Specific  Mail Opening – Not The Bookkeeper  Receipts Listing When Mail Is Opened  Invoices Approved Before Payment  Dual Signatures on Checks  Bank Transfer Approval  Capital Asset Purchase Approval  Opening Bank Statement  Bank Reconciliations  Bank Statement & Reconciliation Review

Internal Controls - Specific  Time Card Review & Approval  Benefit Time Tracking & Approval Forms  Employee Handbook / Personnel Policies  Pay Rate Change Approval  Accounts Receivable Adjustment Approval  Accounts Receivable Reconciliations  Establish Policies & Procedures  Follow Policies & Procedures  Accounting Manual

Internal Controls - Specific  Lock Up Assets  Use Passwords  Bonding Employees  Contract Approval  Year End Review Procedures  Budget  Inventory Usage Sheets  Credit Cards  Detailed Meeting Minutes  Review & Approve Financial Statements

Trustee Involvement  Regular Meetings  Review of Financial Reports  Approve Warrants  Sign Checks  Approve Budget  Review Bank Statements  Approve Pay Increases  Approve Accounts Receivable Adjustments

Audit Process  Assess Internal Controls & Fraud Risk  Internal Control Testing  Balance Sheet Testing  Income Statement Testing  Other Procedures & Testing  Draft Financial Statements & Notes

THANK YOU GOD BLESS QUESTIONS?