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Fraud Overview—Trends, Rationales, Opportunities and What You Can Do to Prevent

Mike Parton, CPA, CFF, CFE, CGMA, FHFMAManaging PrincipalDawn Doucette, CPA, CFEAccounting & Assurance Senior ManagerTatiana Chambers, CPA, CFEAccounting & Assurance Senior Manager

Coulter & Justus, P.C.October 26, 2017

Today’s Agenda

Fraud costs: obvious and hidden

Types of fraud

Pressures, rationales and opportunities

Typical fraudster profile

Detection methods

Prevention tools

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Fraud Cost: Why Do Companies Care?

Loss of revenue (~5-7% of gross annual revenue)

Detriment to growth, competition and innovation

Damage to reputation

Personal embarrassment

Regulatory compliance, legal risks

Loss of company benefits and pay increases

Low morale, erosion of internal trust

Types of Fraud

Corruption

Fraudulent financial reporting

Asset misappropriation

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“Fraud Tree”

“Fraud Tree” (continued)

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Types of Fraud - Frequency

Types of Fraud – Median Loss

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Asset Misappropriation Sub-Schemes

What Causes People to Commit Fraud?

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Incentive / Pressure

Financial difficulties

Peer or family pressure to succeed

“Thrill-seeking”

Fear of losing the job

Opportunity

Lack of internal controls

Lack of management oversight

Unethical company culture

Trusted employee

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Attitude / Rationalization

I’m only borrowing the money and plan to repay it.

The company won’t even realize the loss, it’s not that much.

My boss is doing it all the time.

I’ve been working with the company for 15 years. They owe it to me.

I’m unfairly paid compared to others.

I’ll stop once I pay off my debts.

I deserve this after the way the company has treated me.

Behavioral Red Flags

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Typical Fraudster - Position

Typical Fraudster - Tenure

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Typical Fraudster - Department

Typical Fraudster - Gender

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Typical Fraudster – Gender (continued)

Typical Fraudster - Age

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Typical Fraudster - Education

Typical Fraudster – Criminal Background

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Typical Fraudster Profile

Employee or manager of 1-5 years

Accounting department

Male, age 31-45

University degree

No criminal record

Typical Fraudster

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Detection

Detection Methods

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Detection Methods – Sources of Tips

Prevention

Perception of detection / awareness of oversight

Visible and rigorous fraud governance process

Thorough periodic risk assessment

Transparent and sound anti-fraud culture, endorsed from the top

Prompt resolution of ethical issues and strict accountability

Strong recruitment due diligence process (background checks may not be effective)

Sound internal control structure

Fraud training

Encourage and nurture whistle-blowers (tips from employees)

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Control Weaknesses Contributing to Fraud

Key Takeaways

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Key Takeaways Chances are companies will spend less resources on fraud prevention and active

detection methods compared to actual losses due to fraud

Proactively looking for fraud saves the company money

Perception of detection is probably the most effective deterrence tool

Swift action shows zero-tolerance to fraud

Hotline is an inexpensive and effective detection tool

Employees are your front line of defense when it comes to fraud detection (tips are the most common detection method by a wide margin and more than half of the tips come from employees) – invest in fraud awareness training

Implement a robust anti-fraud culture that is proactively endorsed from the top

Thank you!Tatiana S. Chambers, CPA, CFEAccounting and Assurance Senior Managertchambers@cj-pc.comD: 865.684.2419

Dawn Doucette, CPA, CFEAccounting and Assurance Senior Managerddoucette@cj-pc.comD: 865.684.2428

Mike Parton, CPA, CFE, CFF, CGMA, FHFMAManaging Principalmparton@cj-pc.comD: 865.684.2418