1. Fraud Presentation By
Tim Stepp

2. Introduction
Asset misappropriation schemes are the most common type of occupational fraud, comprising 83% of the cases reported; they have a median loss of $125,000.
Occupational fraud is a significant threat to small businesses. These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.
The most common factor of not reporting fraud is fear of bad publicity.

3. Statistics
Billing Schemes and Check Tampering Schemes posed the greatest risk based on frequency and median loss. These two account for 50% of fraud schemes
Median Loss for all cases was $150,000.
94.8% of occupational fraudsters are first-time offenders
Most occupational fraud originates in the Accounting Department 16.6%

4. Occupational Fraud Duration
The median duration — the amount of time from when the fraud first occurs to when it is discovered — is 18 months.
However, the duration of cases in each category of fraud range from 12 months (for register disbursement schemes and non-cash schemes) to 36 months (for payroll schemes).

5. Anti-Fraud Measures
Anti-fraud measures can be implemented at a marginal cost in many small organizations and can greatly increase the ability to prevent and detect fraud.
A Code of Conduct
Anti-fraud training programs
Formal management review of controls and processes
Job rotation
Mandatory vacation policies
Rewards for whistleblowers
Surprise audits

6. Types of Billing Schemes
Shell company schemes – a fake entity is established by a dishonest employee to bill a company for goods or services it does not receive. The employee converts the payment to his or her own benefit.
Pass-through schemes – a shell company is established by an employee to purchase goods or services for the employer. The goods or services purchased by the employee’s shell company are then marked up and sold to the employer and the employee converts the mark-up to his or her own benefit. 
Pay-and-return schemes – an employee purposely causes an overpayment to a vendor to occur, and when the vendor returns the overpayment to the company, the employee embezzles the refund. 
Personal-purchase schemes – an employee orders personal merchandise and charges it to the company. The employee will then either keep the merchandise, or return it for a cash refund.

7. Red Flags of Billing Schemes
Invoices for unspecified consulting or other poorly defined services 
Unfamiliar vendors 
Vendors that have only a post-office box address 
Vendors with company names consisting only of initials  
Rapidly increasing purchases from one vendor 
Vendor billings more than once a month 
Vendor addresses that match employee addresses 
Internal control deficiencies such as allowing a person who processes payments to approve new vendors 

8. Controls for Billing Schemes
False billing schemes can be prevented by establishing good controls over the vendor-approval process: 
Segregation of duties – ensure those involved in purchasing cannot approve vendors also 
Before approving a new vendor, its legitimacy should be evaluated by:  o Obtaining a W-9 o Checking its credit rating  o Contacting its references from clients and others  o Being particularly cautious about a vendor with a post-office box address or a name composed entirely of initials. 
Determining whether its business address matches any employee’s home address 
Once the company approves a new vendor, the account should be closely monitored by:  o Watching for increases in the amount or frequency of billings  o Observing variances from budgets or projections  o Comparing its prices with those charged by other sources 

9. Check Tampering
Check tampering – a scheme in which an employee steals company funds by intercepting, forging or altering a check drawn on one of the organization’s bank accounts – is one of the most frequently committed crimes in American companies.
An employee regularly steals blank checks from his company and makes them out to himself or an accomplice.
An employee steals outgoing checks to a vendor and deposits them in her own bank account.

10. Check Tampering Controls
To prevent altered company checks created by the check preparer:
Separate the duties of check preparation, signing and delivery.
Separate the duties of check preparation and check reconciliation.
Check canceled checks against the entry in the books.
Maintain up-to-date vendor lists and confirm all disbursements.

11. Check Tampering Controls
Maintain checks under lock and key.
Limit access to those employees with check preparation duties.
Seal boxes of blank checks with security tape.
Periodically check the security of unused checks.
Promptly destroy voided checks.
Print checks on watermark paper with security threads and distinctly marked paper.
Investigate out-of-sequence canceled checks and duplicate check numbers.
Reconcile each day the first check of the day to the last check written the previous day.
Order checks and deposit slips through an established source, making sure they arrive in a timely manner. Report any missing check orders immediately.

12. To Prevent Theft of Checks
Separate the functions of check preparation, signing and delivery.
Train employees to look for schemes involving check theft.
Investigate vendor and customer complaints.
Identify duplicate payments.
Restrict authority to make changes to vendor records.

13. To Prevent Theft of Checks
Require periodic reports listing all changes to vendor records.
Investigate canceled checks with dual endorsements and non-payroll checks signed by an employee.
Do background checks on employees before hiring them to avoid hiring someone with a history of fraud.

14. Anti-Fraud Measures – Compensating Controls
Accounts Payable
No blank checks are signed
Checks must be supported by cancelled documentation
Sr. Mgmt reviews A/P aging report for old balances
Sr. Mgmt reviews change report to the master A/P file
Accounts Receivable
Segregate A/R posting and bank deposit
Send statements to customers
Sr. Mgmt reviews bank statement prior to anyone else in the organization
Sr. Mgmt reviews A/R aging – look for partial payments and verify accuracy

15. Anti-Fraud Measures – Compensating Controls
Payroll
Sr. Mgmt reviews monthly change report to payroll files
Sr. Mgmt reviews tax payments for validity
Sr. Mgmt reviews periodic payroll reconciliations
Payroll complaints go to someone other than payroll processor
Journal Entries
Sr. Mgmt reviews all journal entries posted (weekly or monthly basis)
Sr. Mgmt reviews reconciliations between the general ledger and:
Bank statements
A/R aging/subledger
A/P aging/subledger
Payroll reports

16. Fraud Prevention Checklist
The most cost-effective way to limit fraud losses is to prevent fraud from occurring. This checklist is designed to help organizations test the effectiveness of their fraud prevention measures.

17. Fraud Prevention Checklist
Is ongoing anti-fraud training provided to all employees of the organization?
❑ Do employees understand what constitutes fraud?
❑ Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe that they can speak freely?
❑ Has a policy of zero-tolerance for fraud been communicated to employees through words and actions?

18. Fraud Prevention Checklist
2. Is an effective fraud reporting mechanism in place?
❑ Have employees been taught how to communicate concerns about known or potential wrongdoing?
❑ Do employees trust that they can report suspicious activity anonymously and/or confidentially and without fear of reprisal?
❑ Has it been made clear to employees that reports of suspicious activity will be promptly and thoroughly evaluated?
❑ Do reporting policies and mechanisms extend to vendors, customers and other outside parties?

19. Fraud Prevention Checklist
3. To increase employees’ perception of detection, are the following proactive measures taken and publicized to employees?
❑ Is possible fraudulent conduct aggressively sought out, rather than dealt with passively?
❑ Does the organization send the message that it actively seeks out fraudulent conduct through fraud assessment questioning by auditors?

20. Fraud Prevention Checklist
4. Is the management climate/tone at the top one of honesty and integrity?
❑ Are performance goals realistic?
❑ Have fraud prevention goals been incorporated into the performance measures against which managers are evaluated and which are used to determine performance-related compensation?
❑ Has the organization established, implemented and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)?

21. Fraud Prevention Checklist
5. Are fraud risk assessments performed to proactively identify and mitigate the company’s vulnerabilities to internal and external fraud?
6. Are strong anti-fraud controls in place and operating effectively, including the following?
❑ Proper separation of duties
❑ Use of authorizations
❑ Physical safeguards
❑ Job rotations
❑ Mandatory vacations

22. Fraud Prevention Checklist
7. Does the hiring policy include the following (where permitted by law)?
❑ Past employment verification
❑ Criminal and civil background checks
❑ Credit checks
❑ Drug screening
❑ Education verification
❑ References check

23. Fraud Prevention Checklist
8. Are employee support programs in place to assist employees struggling with addictions, mental/emotional health, family or financial problems? 9. Is an open-door policy in place that allows employees to speak freely about pressures, providing management the opportunity to alleviate such pressures before they become acute? 10. Are anonymous surveys conducted to assess employee morale?

24. About the ACFE
Copies of the 2016 Report to the Nations on Occupational Fraud and Abuse are available from: Association of Certified Fraud Examiners World Headquarters • The Gregor Building 716 West Avenue • Austin, TX • USA (800) (USA & Canada) (0800) (United Kingdom) +1 (512) (International) Fax: +1 (512) ACFE.com
©2012 Association of Certified Fraud Examiners, Inc.