Fraud and Embezzlement Jeff Dieleman, CPA Partner MOSS ADAMS LLP 1
The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought. MOSS ADAMS LLP 2
AGENDA I. II. Fraud Impact Fraud Definitions III. 2014 ACFE Report IV. Fraud Prevention Techniques MOSS ADAMS LLP 3
WHY ARE WE TALKING ABOUT THIS? Because fraud happens more than you know! MOSS ADAMS LLP 4
SOME NOTORIOUS Madoff MOSS ADAMS LLP 5
SOME NOT SO NOTORIOUS Women sentenced in Mattawa day care case YAKIMA, Wash. -- A federal judge today sentenced five Mattawa women involved in what began as a day care fraud case to three years of probation... Bank fraud plea sends woman to prison A Yakima woman will serve more than three years in prison after pleading guilty in a bank fraud-case that involved more than $500,000 taken from a Yakima Valley fruit company. Christi Lee Erickson was sentenced Tuesday in U.S. District Court in Yakima to... Dead man found off I-82 was wanted for fraud SELAH, Wash. -- The man who died when his vehicle plunged over a cliff north of Selah was set to be sentenced Thursday in Hawaii for a large fraud scheme, authorities confirmed Yakima man gets five years for embezzling $2 million A Yakima man accused of embezzling more than $2 million from local orchard companies faces sentencing next week for three counts of federal bank fraud. David Lenihan, 55, was already sentenced Friday on related state charges. He pleaded guilty in Yakima... Embezzler ordered to pay restitution A federal judge in Yakima has ordered an embezzler to pay $412,000 in restitution to a local orchard company he defrauded. U.S. District Judge Fred Van Sickle on Thursday also ordered David Lenihan to serve 21 months in prison Sunnyside police clerk sought on theft warrant SUNNYSIDE, Wash. -- Police here have accused one of their own clerks of embezzling more than $11,000. Virginia Perez, 21, has been charged with five counts of felony theft in Yakima County Superior Court and a warrant has MOSS ADAMS LLP 6
WHAT IS THE COST OF FRAUD? CFE s Estimate 5% of annual revenue But truly incalculable Because fraud inherently involves efforts at concealment, many fraud cases will never be detected, and of those that are, the full amount of losses might never be determined or reported. Consequently, any attempt to quantify total occupational fraud losses will be, at best, an estimate. MOSS ADAMS LLP 7
Impact of Theft Average Margin: 30% Average Inventory Turns: 4 per year Hardware Store MOSS ADAMS LLP 8
Impact of Theft Required Sales Theft Required Sales Cost Recovery Margin & Cost Recovery Recovery Period Cost Cost & Margin January February March April May June July August September October November December January MOSS ADAMS LLP 9
DEFINITION: FRAUD: Fraud is any intentional act or omission designed to deceive others and resulting in the victim suffering a loss and/or perpetrator achieving a gain. MOSS ADAMS LLP 10
FRAUD CATEGORIES OCCUPATIONAL FRAUD Misappropriation of Assets o Involve the theft or misuse of an organization s assets. (Common examples include skimming revenues, stealing inventory, and payroll fraud.) Corruption o Fraudsters wrongfully use their influence in a business transaction in order to procure some benefit for themselves or another person, contrary to their duty to their employer or the rights of another. (Common examples include accepting kickbacks and engaging in conflicts of interest.) Fraudulent Financial Statements o Falsification of an organization s financial statements. (Common examples include overstating revenues and understating liabilities or expenses.) MOSS ADAMS LLP 11
ASSOCIATION OF CERTIFIED FRAUD EXAMINERS 2014 Report to The Nation This study is based on data compiled from 1,483 cases of occupational fraud that were investigated between January 2012 and December 2013. All information was provided by the Certified Fraud Examiners (CFEs) who investigated those cases. MOSS ADAMS LLP 12
OCCURRENCE RATES TYPES OF FRAUD - 2014 Fraudulent F/S 9.0% 36.8% Corruption 85.4% Assets Misapprop. 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% MOSS ADAMS LLP 13
OCCUPATIONAL FRAUD MEDIAN LOSS BY CATEGORY - 2014 Fraudulent F/S $1,000,000 $200,000 Corruption $130,000 Assets Misapprop. $- $200,000 $400,000 $600,000 $800,000 $1,000,000 MOSS ADAMS LLP 14
ASSET MISAPPROPRIATION SUB-SCHEMES MOSS ADAMS LLP 15 15
MEDIAN DURATION OF FRAUD BASED ON SCHEME TYPE-2014 26 Check Tampering Payroll Financial Statement Fraud Expense Reimbursements Billing Cash on Hand Skimming Corruption Larceny Register Disbursement Non-Cash 24 24 Scheme Type 24 24 19 18 18 18 14 12 0 10 20 Median Months to Detection 30 MOSS ADAMS LLP 16
DURATION OF FRAUD SCHEMES FREQUENCY AND MEDIAN LOSS MOSS ADAMS LLP 17 17
PROFILING THE PERPETRATORS MOSS ADAMS LLP 18
PERPETRATOR S AGE More than half of the fraud cases studied involved a fraudster over the age of 40, and over one-third of the schemes were perpetrated by individuals between the ages of 41 and 50. 3% >60 56-60 51-55 46-50 41-45 36-40 31-35 26-30 <26 5% 10% 5% 18% 18% 16% 11% 4% 0% 15% 10% 15% 20% MOSS ADAMS LLP 19
THE PERPETRATORS AGE OF PERPETRATOR - MEDIAN LOSS MOSS ADAMS LLP 20
TENURE OF PERPETRATOR More than 10 Years 25.2 6 to 10 Years 27.3 1 to 5 Years 40.7 6.8 Less than 1 Year 0 20 40 60 MOSS ADAMS LLP 21
THE PERPETRATORS PERPETRATOR S GENDER The majority of fraud cases were perpetrated by males. (67%) Men are also associated with a median loss more than twice as great as that caused by women. $250,000 $200,000 $150,000 $100,000 $50,000 $0 Men Women MOSS ADAMS LLP 22
PERPETRATOR S DEPARTMENT Department Percent of Cases Accounting 17% Operations 15% Sales 12% Executive/Upper Management 12% Customer Service 7% Purchasing 7% Finance 5% Warehousing/Inventory 4% Information Technology 3% Manufacturing & Production 2% Marketing/Public Relations 1% Board of Directors 1% Human Resources 1% Research & Development 1% Legal.6% Internal Audit.5% MOSS ADAMS LLP 23
THE IMPACT OF COLLUSION MOSS ADAMS LLP 24 24
PERPETRATOR WARNING SIGNS Changes in lifestyle Living beyond apparent means Close association with vendor Won t take vacations Personal financial difficulties Control issues Family problems Addiction issues Defensive MOSS ADAMS LLP 25
PROFILING THE VICTIM MOSS ADAMS LLP 26
VICTIM ORGANIZATION TYPE FREQUENCY Type of Victim Organization 2014 37.9% 28.5% 15.1% 10.8% 0% 20% Percent of Cases Private Company Public Company Government Not-For-Profit 40% MOSS ADAMS LLP 27
SIZE OF VICTIM ORGANIZATION FREQUENCY Number of Employees 2014 10,000+ 1,000-9,999 Percent of Cases 19.9% 27.9% 100-199 23.6% <100 0% 28.8% 10% 20% 30% MOSS ADAMS LLP 28
WATCH FOR CONDITIONS MOSS ADAMS LLP 29
FIRE - THREE CONDITIONS ARE PRESENT Fuel Heat Oxygen MOSS ADAMS LLP 30
FRAUD - THREE CONDITIONS ARE PRESENT Incentive / Pressure Personal financial problems Personal vices such as gambling, drugs, extensive debt, etc. Fraud I really need this money and I ll put it back when I get my paycheck I d rather have the company on my back than the IRS I just can t afford to lose everything my home, car, everything Lack of: Supervision and review Separation of duties Management approval System controls MOSS ADAMS LLP 31
DETECTION MOSS ADAMS LLP 32
Are you watching for it? Video MOSS ADAMS LLP 33
INITIAL DETECTION OF OCCUPATIONAL FRAUDS-2014 42.20% Tip Management Review 16.00% Detection Method Internal Audit 14.10% By Accident 6.80% 6.60% 4.20% Account Reconcilliation Document Examination 3.00% External Audit 2.60% Surveillance/Monitoring 2.20% Notified by Police 1.10% IT Controls Confession 0.80% 0% 10% 20% 30% 40% 50% Percent of Cases MOSS ADAMS LLP 34
MEDIAN LOSS BY DETECTION METHOD 1,000,000 Detection Method Police (3%) Other (1.1%) 378,000 External Audit (3.3%) 370,000 Confession (1.5%) By Accident (7%) Tip (43.3%) Account Reconcilliation Management Review (14.6%) IT Controls (1.1%) Document Examination Internal Audit (14.4%) 225,000 166,000 144,000 124,000 123,000 110,000 105,000 81,000 Percent of Cases MOSS ADAMS LLP 35
REPORTING Only 60% of victims reported the fraud o o o o o Fear of bad publicity Internal discipline sufficient Private settlement Too costly Lack of evidence 58% of the time there was no recovery from perpetrator MOSS ADAMS LLP 36
PREVENTION Internal Controls Specific Anti-Fraud Measures Perception is Prevention MOSS ADAMS LLP 37
DEFINITION OF INTERNAL CONTROL Internal Control is a process-effected by an entity s Board of Directors, management, and other personnel-designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Reliability of financial reporting. Effectiveness and efficiency of operations. Compliance with applicable laws and regulations. MOSS ADAMS LLP 38
TYPES OF INTERNAL CONTROLS Preventative Detective Trust is not a control MOSS ADAMS LLP 39
SEGREGATE DUTIES The basic idea behind segregation is that no employee should be in a position to both perpetrate and to conceal fraudulent activity in the normal course of their duties. MOSS ADAMS LLP 40
INCOMPATIBLE DUTIES Custody of assets Authorization of transactions related to those assets Recording or reporting of related transactions MOSS ADAMS LLP 41
ANTI-FRAUD MEASURES IT STARTS AT THE TOP! Set the Tone at the Top Establish a Code of Conduct Maintain an enforced fraud and embezzlement policy MOSS ADAMS LLP 42
ANTI-FRAUD MEASURES The ACFE found that organizations that used antifraud measures, such as o o o o a fraud hotline internal audits surprise audits fraud awareness/ethics training had median fraud losses half the size of the losses for entities without these anti-fraud measures. MOSS ADAMS LLP 43
IMPACT OF HOTLINES 50.9% Tip 34.6% 0% 10% 20% Percent of Cases Organization With Hotlines Organization Without Hotlines 30% 40% 50% MOSS ADAMS LLP 44
ANTI-FRAUD MEASURES Banks statements mailed directly to owner home Periodic review of bank reconciliations o Numerically account for check sequence Positive Pay Mandatory vacations Mandatory duty rotation Employee Background Checks MOSS ADAMS LLP 45
ANTI-FRAUD MEASURES Offer an employee hot-line for tips and complaints Know financial key trends and indicators In-house or professional counseling for employees Internal audits Surprise spot audits Examine cancelled checks Hire a professional MOSS ADAMS LLP 46
WHAT IF WE SUSPECT FRAUD HAS OCCURRED? Be Careful! MOSS ADAMS LLP 47
WHAT IF WE SUSPECT FRAUD HAS OCCURRED? 1. 2. 3. 4. 5. 6. 7. 8. 9. Contact legal counsel Contact your insurer Prepare action plan Deal with the alleged perpetrator Act quickly Know employer rights Know employee rights Secure data Remember the Iceberg Principle MOSS ADAMS LLP 48
COMMON EXCUSES We trust our employees Our employees have been with us for a long time and would never do that; they re like family We don t need a hotline, we have an open door policy MOSS ADAMS LLP 49
THANK YOU! Jeff Dieleman, CPA Partner Moss Adams LLP QUESTIONS? jeff.dieleman@mossadams.com (509) 834-2451 MOSS ADAMS LLP 50