Five Important Controls to Mitigate Employee Fraud · Opened “RSCDA – Reserve Fund” bank ......

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5 Important Controls to Mitigate Employee Fraud

LMCIT WEBINAR : FEBRUARY 10, 2015

IN PARTNERSHIP WITH EIDE BAILLY

Presenter:Jason Olson, MBA, CPA/CFF, CFE, CFI


These seminar materials are intended to provide the seminar participants with guidance in fraud and internal control matters. The materials do not constitute, and should not be treated as professional advice regarding the use of any particular forensic technique or related consequences associated with any forensic technique.

Every effort has been made to assure the accuracy of these materials. Eide Bailly LLP and the author do not assume responsibility for any individual's reliance upon the written or oral information provided during the seminar.

Seminar participants should independently verify all statements made before applying them to a particular fact situation, and should independently determine the consequences of any particular forensic technique before recommending the technique to a client or implementing it on the client's behalf.

Presentation Disclaimer


Why Discuss Fraud and Internal Controls?

1. Financial loss.2. Loss of public confidence.3. Significant disruption of government function

due to budget cuts.Source: www.justice.gov


City of Dixon Fraud Case

• Opened “RSCDA – Reserve Fund” bank account referred to as in which the Comptroller solely controlled.

• Transferred monies from other city accounts to the RSCDA – Reserve Fund bank account.

• Used funds from the RSCDA – Reserve Fund account for personal use.



• Concealed the RSCDA – Reserve Fund bank account by picking up the City’s mail, which included the statements.

• When the Comptroller was away, other employees would pick up the mail and separate out the mail for her, which included the bank statements.

• Created 159 fictitious invoices to show the City’s auditors that funds being transferred to the account were being used legitimately.



• The Comptroller took an average of more than $2.5 million per year over 20 years.

• In one year, the Comptroller took $5.8 million.

• The Comptroller would participate in budget meetings with city council members and state the City’s lack of funds was due to the economy and because the State of Illinois was behind in its tax payments.



• The Comptroller’s annual salary was $80,000 as of 2011.

• The Comptroller used the funds to “finance her quarter horse farming business and life of luxury.”

• Proceeds from the liquidation of assets totaled $12.38 million as of Feb. 2013.


City of Dixon Timeline

201320111990

Dec. 18th, 1990 –Comptroller opens a “secret” bank account

Fall of 2011–Anomalies discovered by another employee while the Comptroller was on vacation

Feb. 2013 – Sentenced to 19 years and 7 months for stealing $53.7 million



Cory B. Nelson, SA with the FBI said it best…

“The law is clear. Those who hold positions of trust must not abuse that trust.”


Background

• Eide Bailly LLP• Top 25 CPA firm in the Nation• 26 service centers in 12 states• 44,000 clients

• Myself• Over a decade of forensic accounting experience• Certified Public Accountant• Certified Fraud Examiner• Certified in Financial Forensics• Certified Forensic Interviewer• MBA in Fraud Management and Economic Crime


Background - Forensic Services

• Fraud prevention

• Fraud detection

• Fraud investigation

• Economic damages

• Computer forensics


If Fraud Was Always this Easy to Spot…


Agenda

• Fraud Schemes

• Internal Controls

• 5 Easy to Implement Internal Controls

• Case Examples

• Questions?


Fraud Research Study

• Association of Certified Fraud Examiners

• Report to the Nations on Occupational Fraud and Abuse (2014 Global Fraud Study)

• Based on 1,483 cases of occupational fraud.

• Analysis of these cases provides valuable lessons about how fraud is committed, how it is detected and how organizations can reduce their risk.


Fraud Schemes


Frequency of Fraud Schemes – Gov’t.

Source: 2014 RTTN

Schemes FrequencyCorruption 36.2%Billing 19.1%Non-Cash 17.7%Payroll 15.6%Expense Reimbursements 12.8%Cash on Hand 12.1%Skimming 11.3%Cash Larceny 10.6%Register Disbursements 7.0%Check Tampering 5.7%Financial Statement Fraud 5.0%

Note: Certain cases reported more than 1 scheme utilized.


Detection of Fraud Schemes


Anti-Fraud Controls


• Internal Controls (a/k/a checks and balances) are designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

• reliability of financial reporting,

• effectiveness and efficiency of operations, and

• compliance with applicable laws and regulations.

• Should also include “Safeguarding Assets.”

Internal Controls Defined


Internal Controls and Fraud Risk

• All organizations are exposed to a degree of fraud risk in any process where human input is required

• The degree of risk is measured by:

• Business/Industry

• Effectiveness of internal controls to prevent or detect fraud

• Honesty and integrity of people involved in the process



• No. 1 Opportunity for Fraud:

• Weak or non-existent internal controls including an ineffective internal audit staff and a lack of external audits.



Probability of fraudulent activity is typically based on the following factors:

• How easy it is to commit fraud.

• Organization’s fraud history.

• Motivational factors leading to fraud.



• Basic principle:• People rarely commit fraud if they think they will

be caught.

• Perception of detection:• Most effective deterrent to fraud.


5 Easy to Implement Internal Controls

1. Independent review of bank statements.

2. Independent review of canceled/processed

checks.

3. Independent review of cash receipts.

4. Anonymous reporting system (fraud hotline).

5. Surprise examinations.


Case 1 Details

Victim Public Utilities

Perpetrator Bookkeeper (23 year employee)

Type of scheme Theft of customer receipts

About the fraud 3 year scheme; Physically handled payments and had the ability to make adjustments

Total losses $243,000

Prevention tool Segregate cash handling and recordationfunctions

Case Example


Public Utilities Commission Timeline

201020092008

October 2008 – Auditors asked us to perform haphazard test on cash receipts

January 2009 –Report identifying $244,618 in missing deposits

May 2010 –Individual pleads guilty to theft

August 2010 –Sentenced to 2 years of probation, 10 months home detention and $35,000 in restitution


Case 2 Details

Victim Fair (Subsidized by local County)

Perpetrator Office Manager

Type of scheme Cash larceny

About the fraud 5+ year scheme; Deposit tickets were a clue


Prevention tool Independent examination of cash reflected on source documents to bank deposits

Case Example


Fair Timeline

July 2009May 2009Feb./Mar. 2009

Feb./Mar. 2009 – County Commissioners asked us to perform an examination of A/P

Pled guilty to embezzlement

Sentenced to 15 years


Case 3 Details

Victim City

Perpetrator City Clerk

Type of scheme Unauthorized disbursements (altered payees)

About the fraud 3 + years


Prevention tool Examination of cancelled checks

Case Example


City Timeline

August 2013

March 2013Dec. 2012

City requested us to assist with the investigation of unauthorized disbursements

Charged with felony theft by swindle

Sentenced to 21 months (stayed)


Case 4 Details

Victim Municipal Liquor Store

Perpetrator Store Manager

Type of scheme Cash register theft

About the fraud <2 year scheme


Prevention tool Independent review of cash register tapes to bank deposits

Case Example


Municipal Liquor Store Timeline

April 2005April 2004Oct. 2002

Store Manager promoted

Asked to assist City in investigation due to purchases/sales concerns

Store Manager pled guilty to theft


Conclusion

• Segregate duties (ARC) if possible.

• If segregating duties is not possible, utilize independent checks.

• Increase perception of detection.

• Implement an anonymous reporting system.

• Do NOT overlook suspicious (or unexplainable) activity.

• Ask questions!


Jason Olson612.253.6554

[email protected]

Contact Information

For a recording of this webinar go to: http://www.lmc.org/fraud15

Five Important Controls to Mitigate Employee Fraud · Opened “RSCDA – Reserve Fund” bank ......

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