Presented by:Michael W. Ammermon, CPA, CFE

Audits, Fraud, and Internal Controls

Audits, Fraud, and Internal Controls

• Do you need internal controls if everyone is completely honest?

• Can fraud occur if you have great internal controls?

• Could your auditor miss ongoing fraud?

Audits, Fraud, and Internal Controls, cont.

CASE STUDY

ALBOR CHARTER SCHOOL

Watch Those Vendors

Fraud

There are many words for fraud

Fraud, cont.

What is your word for fraud?

Fraud, cont.

Misappropriation

Fraud, cont.

Theft

Fraud, cont.

MisappropriationTheftEmbezzlement

Let’s focus on the two terms of –

Misappropriation and fraud

Fraud, cont.

Fraud, cont.

What is MISAPPROPRATION OF FUNDS?

Definition of Misappropriation

“In law, misappropriation is the intentional, illegal use of the property or funds of another person for one's own use or other unauthorized purpose, particularly by a public official, a trustee of a trust, an executor or administrator of a dead person's estate or by any person with a responsibility to care for and protect another's assets (a fiduciary duty).”

Definition of Fraud

Black’s Law Dictionary defines fraud as:

“all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning or dissembling, and any unfair way by which another

is cheated.”

Fraud, cont.

DISSEMBLING

Adoption of a false appearance

Fraud, cont.

WHY ARE CHARTER SCHOOLS A TARGET FOR FRAUD ?

Fraud, cont.

What Should We Be Looking For?

Fraud, cont.

What are Some Examples of Fraud?

List a few…

Fraud, cont.

• Falsified or exaggerated attendance• Not recording vacation or sick time off• Paying vendor “buddies” for no work product• Purchasing supply items for personal use• Unsubstantiated travel expenses• Duplicate or fictitious employees

Fraud, cont.

Auditors that actively plan and search for fraud

Fraud, cont.

What ingredients are needed for fraud?

How many ingredients?

Fraud, cont.

THREE INGREDIENTS NEEDED FOR FRAUD

Fraud, cont.

MOTIVE

Fraud, cont.

OPPORTUNITY

Fraud, cont.

ACCESS

Fraud, cont.

WHAT IS SO IMPORTANT ABOUT motive, opportunity, and access?

Fraud, cont.

IT TAKES A PERSON TO ACT

•WHO?

• WHO?

• WHO?

Fraud, cont.

Think about these three things when planning an audit or administering oversight

• WHO HAS OPPORTUNITY?• WHO HAS MOTIVE?• WHO HAS ACCESS?

Access or No Access?

Fraud, cont.

OPPORTUNITY and ACCESS is limitedwith a good system of what?

Internal Controls

We have all heard the words “internal controls” over and over. Simple internal controls do a lot in helping to prevent fraud and errors that look like fraud.

Internal Controls, cont.

Simple INTERNAL CONTROLS help mitigate fraud, improve protections against motive, opportunity, and access, as well as shield employees from accusations of fraud.

What Do Internal Controls Include?

An organizational culture that promotes awareness and takes fraud seriously at all levels

What Do Internal Controls Include?, cont.

Fraud detection, oversight, and auditing is more about awareness and observation than checklists.

What Should We Consider?

What are some audit and oversight metrics that should be considered when evaluating a charter school’s financial performance?

How Do We Evaluate Performance?

How do you evaluate your charter school’s performance and ability to continue as a going concern?

How Do We Evaluate Performance?, cont.

Evaluate the audit report?

Compare the charter’s budget, first interim, second interim, and unaudited actuals?

Better Charter Oversight and Auditing Metrics

Commonly Evaluated

• Evaluate audit report• Compare budget, 1st, 2nd,

and unaudited actuals

More Details

• Prepare a comparison of audit reports and trend analysis

• Compare budget and unaudited actuals within the year and against the prior year

Better Charter Oversight and Auditing Metrics, cont.

• Trend analysis at the object code level.• Common size analysis with revenue and expenses.• Examine AGED accounts payable at the Individual

Vendor level.• Audit ADA WITHIN the charter’s attendance program.• Evaluate the charter each year as a going concern.

Better Charter Oversight and Auditing Metrics, cont.

Better Charter Oversight and Auditing Metrics, cont.

Better Charter Oversight and Auditing Metrics, cont.

Attendance Mismatches

Going Concern Checklist

Going Concern Checklist, cont.

Going Concern Checklist, cont.

Going Concern Checklist, cont.