1. 7 Keys to Fraud Prevention and Detection
Ron Steinkamp, CPA, CIA, CFE, CRMA, CGMA
6 CityPlace Drive, Suite 900 │ St. Louis, Missouri │ │

2. Session Benefits What is Occupational Fraud
2014 ACFE Global Fraud Study
Red Flags
7 Keys
Fraud Self Assessment
Code of Conduct
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3. What is Occupational Fraud?
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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4. Definition
The use of one’s occupation for personal enrichment through the deliberate misuse or application of the employing organization’s resources or assets.
Three general categories:
Asset misappropriation
Corruption
Financial statement fraud
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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5. Asset Misappropriation
Employee steals or misuses an organization’s assets/resources.
Examples:
Skimming cash receipts.
Falsifying voids and refunds.
Tampering with company checks.
Overstating expenses.
Creating a ghost employee.
Creating a fictitious vendor and false invoice.
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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6. Corruption
Employee’s use of his/her influence in business transactions in a way that violates his/her duty to the employer for the purpose of obtaining benefit for him/herself or someone else.
Examples:
Conflicts of interest.
Illegal gratuities.
Bribery.
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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7. Financial Statement Fraud
Intentional misstatement or omission of material information in the organization’s financial reports with the intent to mislead.
Examples:
Inflating revenues on the financials to show greater profit.
Concealing liabilities.
Forcing actual expenditures to match budget by moving expenses between accounts.
Improperly accounting for revenues and expenditures.
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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8. 2014 ACFE Global Fraud Study Report to the Nations on Occupational Fraud and Abuse
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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9. Summary of Findings Violation of trust. Three general categories:
Typical organization loses 5% of annual revenue to fraud – applied to 2013 Gross World Product translates to potential fraud loss of more than $3.7 trillion annually.
Median loss in the study was $145,000 with more than 22% of the cases involving losses over $1 million.
Fraud lasted a median of 18 months.
Asset misappropriation schemes (fraudulent disbursements, theft of cash receipts, other asset misappropriations) were the most common form of fraud, representing 85% of the cases and least costly at a median loss of $130,000.
Financial statement fraud schemes were the least common form of fraud, representing 9% of the cases and most costly at a median loss at $1 million.
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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10. Summary of Findings Violation of trust. Three general categories:
Corruption schemes fell in the middle, comprising just over 37% of cases and causing a median loss of $200,000.
Occupational frauds are most likely to be detected by tips (40%) followed by management review (15%) and Internal Audit (14%).
Small organizations are disproportionately victimized by occupational fraud.
Government/public administration was one of the most commonly victimized industries.
Anti-fraud controls appear to help reduce the cost and duration of occupational fraud schemes.
High-level perpetrators cause the greatest damage to their organizations.
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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11. Summary of Findings Violation of trust. Three general categories:
77% of frauds were committed by individuals in one of six departments:
Accounting
Operations
Sales
Executive/upper management
Customer service
Purchasing
Finance
More than 85% of fraudsters had never been previously charged or convicted for a fraud-related offense.
Fraud perpetrators often display warning signs – most common behavioral red flag reported in the survey were perpetrators living beyond their means (36%) and experiencing financial difficulty (27%).
Nearly half of victim organizations do not recover any losses that they suffer due to fraud.
Violation of trust.
Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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12. How are Frauds Detected?
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13. Source of Tips
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14. Conclusions and Recommendations
Occupational fraud is a universal problem – trends in fraud schemes, perpetrator characteristics and anti-fraud controls are similar regardless of where the fraud occurred.
The longer frauds last, the more financial damage they cause. Proactive detection methods – hotlines, management review procedures, internal audits, employee monitoring mechanisms – are vital in catching frauds early and limiting losses.
Small businesses/organizations are disproportionately victimized by fraud and under protected by anti-fraud controls.
External financial audits are among the least effective controls in combating fraud – primary detection method of fraud in 3% of cases versus 7% of cases detected by accident.
Many of the most effective anti-fraud controls are being overlooked – data monitoring and analysis, surprise audits, fraud risk assessment.
Majority of fraudsters are first-time offenders – don’t over rely on background checks.
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15. Red Flags Violation of trust. Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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16. The Fraud Triangle
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17. Pressure “Red Flags” High personal debts. Living beyond their means.
Excessive investment speculation.
Excessive gambling.
Substance abuse.
Extra-marital affairs.
Job frustration.
Resentment of superiors.
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18. Opportunity “Red Flags”
Inadequate internal controls.
Too “cozy” with suppliers.
Annual vacation or sick days not taken.
Weak management or excessive turnover.
Ineffective or no internal audit.
No rotation of job duties among employees.
Procedures not well understood/always in crisis mode.
Large amounts of cash on hand or processed.
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19. Rationalization “Red Flags”
Not compensated fairly.
No recent raises/cost of living adjustments.
Everyone else does it.
Intended to pay it back.
Needed the money.
Felt cheated and wanted revenge.
Bribe/kickback to tempting.
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20. 7 Keys Violation of trust. Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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21. Fraud Awareness/Training
Anti-Fraud Culture
Fraud Policy
Fraud Awareness/Training
Hotline
Assess Fraud Risks
Review/Investigation
Improved Controls
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22. 1. Anti-Fraud Culture Set the tone at the top = Lead by Example
Responsibility of elected officials and City management
Behave ethically and openly communicate expectations to employees
Treat all employees equally
Zero tolerance
Create a positive workplace environment
Focus on employee morale
Empower employees
Communicate
Hire and promote appropriate employees
Conduct background investigations before hiring or promoting
Check candidate’s education, employment history, references
Continuous and objective evaluation of compliance with entity values
Violations addressed immediately
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23. 1. Anti-Fraud Culture Code of Conduct Discipline
Formalized and founded on integrity
Defines acceptable employee behavior
Communicated to all employees
All employees are held accountable for compliance
Discipline
Sends a strong message throughout the entity
Should be appropriate and consistent
Consequences of committing fraud clearly communicated throughout the entity
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24. 1. Anti-Fraud Culture Oversight Process Management
City Council/Elected Officials
Evaluate management’s “tone at the top”, identification of fraud risks and implementation of anti-fraud controls
Ensure that management implements anti-fraud measures
Consider the potential for management override of controls
Management
Directs, implements and monitors anti-fraud controls
Sets the ethical tone
Trains employees
Internal Auditor (if available)
Identifies fraud indicators
Assesses fraud risks
Evaluates anti-fraud controls
Recommends actions to mitigate risks
Investigates potential frauds
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25. 2. Fraud Policy Demonstrate commitment to combating fraud
Apply to all Elected officials, City management, employees, consultants, vendors, contractors, etc.
Should include:
Statement of organization’s position on fraud
Scope of the policy – who does it apply to
Management’s responsibility for prevention and detection of fraud
Definition of fraud
Actions constituting fraud
Fraud reporting process/procedures
Fraud investigation process/procedures
Unit responsible for administration of the policy and investigating fraud allegations
Statement on anonymity/confidentiality
Consequences
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26. 2. Fraud Policy Reviewed and updated regularly.
Signed off and agreed to by the City Council/Mayor.
See the ACFE for an example Fraud Policy
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27. 3. Fraud Awareness/Training
All new employees should be trained at time of hiring on the Code of Conduct and Fraud Policy.
Training should include:
Their duty to communicate certain matters
A list of the types of matters to be communicated along with examples
How to communicate those matters
Affirmation from senior management regarding employee expectations and communication responsibilities
Refresher training periodically
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28. 4. Hotline
Enable employees, vendors, customers and others to communicate concerns about known or suspected wrongdoing.
Telephone, , internet.
Anonymous.
Adequately publicized.
Internal or External.
Complaint monitoring and investigation/resolution.
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29. 5. Assess Fraud Risks Conduct an annual fraud risk assessment.
Assists management in systematically identifying where and how fraud may occur and who may be in a position to commit fraud
Focus on fraud schemes and scenarios to determine the presence of internal controls and whether or not the controls can be circumvented.
General steps:
Identify areas and processes to assess
Identify potential fraud schemes in each area/process
Assess likelihood and significant of each scheme
Map existing anti-fraud controls to potential fraud schemes
Test operating effectiveness of antifraud controls
Identify any control gaps and/or deficiencies = Residual risks
Document and report on the fraud risk assessment
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30. 5. Assess Fraud Risks Mitigate Fraud Risks Monitor Fraud Risks
Make changes to activities and/or processes = transfer or eliminate the risks
Improve anti-fraud controls
Monitor Fraud Risks
Develop data analytics for management to use to monitor fraud risks
Utilize Internal Audit to conduct audits of risk areas.
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31. 6. Fraud Review/Investigation
All concerns/suspicions of wrongdoing should be reviewed and determination made whether a fraud investigation is warranted.
Develop a policy for fraud reviews and investigations that specifies:
Who is responsible for the review/investigation
Roles of Legal Counsel, Human Resources, Internal Audit, others
Process for conducting the review/investigation
Documentation requirements
Reporting requirements
When to involve law enforcement
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32. 6. Fraud Review/Investigation
Gather sufficient information and perform procedures necessary to determine:
Whether fraud has occurred
Loss or exposure associated with the fraud
Who was involved and how it happened
Must prepare, document and preserve evidence sufficient for potential legal proceedings.
Include experts = Certified Fraud Examiner (CFE)
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33. 7. Improved Controls
Use lessons learned from any fraud reviews or investigations to improve anti-fraud controls.
All fraud review and investigations should include a report to management with recommendations for control improvement.
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34. Top 10 Governmental Internal Controls
To ensure proper stewardship of public funds:
Separation of duties
Documentation
Authorization and approval
Security of assets
Reconciliation and review
6. Policies and procedures
Fraud Policy and reporting
Access to systems
Physical control
Verification (i.e. pre- employment) 34
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35. Fraud Self Assessment Violation of trust. Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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36. Code of Conduct Violation of trust. Three general categories:
Asset misappropriations = employee steals or misuses an organizations resources.
Corruption = employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else.
Financial Statement Fraud = intentional misstatement or omission of material information in financial reports.
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37. Contact Information
Ron Steinkamp, CPA, CIA, CFE, CRMA, CGMA Principal, Risk Advisory Services Brown Smith Wallace LLC (Direct)
© 2014 All Rights Reserved Brown Smith Wallace LLC