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Fraud Detection and PreventionPresentedby:CarrieKennedy,CPA,PartnerAnthonyPorter,CPA,Manager

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Thematerialappearinginthispresentationisforinformationalpurposesonlyandshouldnotbeconstruedasadviceofanykind,including,withoutlimitation,legal,accounting,orinvestmentadvice.Thisinformationisnotintendedtocreate,andreceiptdoesnotconstitute,alegalrelationship,including,butnotlimitedto,anaccountant‐clientrelationship.Althoughthisinformationmayhavebeenpreparedbyprofessionals,itshouldnotbeusedasasubstituteforprofessionalservices.Iflegal,accounting,investment,orotherprofessionaladviceisrequired,theservicesofaprofessionalshouldbesought.

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PRESENTATION OBJECTIVES

• Attheendofthepresentation,participantsshouldbeableto:o Understandthekeyglobalstatisticsonfraudandhowtheyrelatebacktotheircreditunion

o Identifythekeyfraudrisksandkeyfraudprevention/detectioncontrols

o Establishacultureoffraudawareness,prevention,anddetection

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WHY THE FOCUS ON FRAUD?

“Atanygivenmoment,thereisacertainpercentageofthepopulationthat’suptonogood.”

J.EdgarHoover

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WHY THE FOCUS ON FRAUD?

Report:82% ofexecutivesadmittocheatingonthegolfcourse

Source:FastCompany

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SIGN OF THE TIMES…

Loyalemployeeshavebillstopayandfamiliestofeed.Inagoodeconomy,theywouldneverthinkofcommittingfraudagainsttheiremployers.Butespeciallynow,organizationsmustbevigilantduringtheseturbulenttimesbyensuringproperfraudpreventionproceduresareinplace.

ACFE President James D. Ratley, CFE

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ECONOMIC RECESSION

• Employeesposethegreatestfraudthreatinthecurrenteconomy

• Layoffsareaffectingorganizations’internalcontrols

• Fraudlevelsareexpectedtoremainelevated

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FRAUD RISK

Opportunity

Pressure/Incentive Rationalization

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ASSOCIATION OF CERTIFIED FRAUD EXAMINERS

• TheAssociationofCertifiedFraudExaminers(ACFE)completesareporteverytwoyearssummarizingthekeycharacteristicsoffraud.

• Themostrecentreportisfrom2012.

• Thefollowingareexcerptsfromthatsummary(totalof1,388cases– worldwide)

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MOST COMMON FRAUD – FREQUENCY

Source: ACFE 2012 Report to Nations

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MOST COMMON FRAUD – MEDIAN LOSS

Source: ACFE 2012 Report to Nations

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INITIAL DETECTION OF FRAUD

InitialDetectionofOccupationalFraudsTip:43.3%

ManagementReview:14.6%InternalAudit:14.4%

ByAccident:7.0%AccountReconciliation:4.8%DocumentExamination:4.1%

ExternalAudit:3.3%Source: ACFE 2012 Report to Nations

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SOURCE OF TIPS

Source: ACFE 2012 Report to Nations

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IMPACT OF HOTLINES

Source: ACFE 2012 Report to Nations

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TYPE OF VICTIM - FREQUENCY

Source: ACFE 2012 Report to Nations

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SIZE OF VICTIM - FREQUENCY

Source: ACFE 2012 Report to Nations

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DISCUSSION

• Loanofficerperpetratesafraudbyadvancingfundsonarevolvingline

• Fraudgoesundetectedforanextendedperiodoftime

• Ultimatelyidentifiedbyarandomaccountconfirmation

• Whatcouldhavebeendonetoeitherpreventthefraudortodetectitsooner?

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INDUSTRY OF VICTIM ORGANIZATIONS

Source: ACFE 2012 Report to Nations

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IMPACT OF FRAUD-PREVENTION CONTROLS

Source: ACFE 2012 Report to Nations

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IMPACT OF FRAUD-PREVENTION CONTROLS

Source: ACFE 2012 Report to Nations

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DISCUSSION

• Internalaccountantresponsibleforapprovinginvoicescreatesafictitiouscompany(avalidcorporationisformed)andgeneratesinvoicestorunthroughthecreditunion

• TheywerealsoresponsiblefornewvendorapprovalandentryintotheAPsystem

• Theyapprovetheinvoiceswhicharesubsequentlypaid• Onlyidentifiedaftertheycontinuedtoincreasethesizeoftheinvoicetolevelthatwasverynoticeable

• Howcouldthishavebeenpreventedordetectedearlier?

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PRIMARY INTERNAL CONTROL WEAKNESSES OF VICTIMS

Source: ACFE 2012 Report to Nations

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DISCUSSION

• Individualresponsibleforreconcilingsuspenseaccountsstealsfromthecreditunionforanextendedperiod

• Theyalsohavemaintenanceaccesstobothdepositaccountsandthegeneralledger

• Ultimatelycaughtwhentheygottoogreedyandtheimpactwasnoticeableontheincomestatement

• Howcouldithavebeenpreventedordetectedearlier?

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WHO COMMITTED THE FRAUD

Source: ACFE 2012 Report to Nations

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WHO COMMITTED THE FRAUD

Source: ACFE 2012 Report to Nations

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WHO COMMITTED THE FRAUD

Source: ACFE 2012 Report to Nations

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WHO COMMITTED THE FRAUD

Source: ACFE 2012 Report to Nations

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WHO COMMITTED THE FRAUD

Source: ACFE 2012 Report to Nations

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WHO COMMITTED THE FRAUD

Source: ACFE 2012 Report to Nations

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SIGNIFICANT FRAUD RISK FACTORS

• Lackofdetailedformalwrittenpoliciesandprocedures

• Lackofsegregationofduties• Membercomplaints• Unreconciledaccountsandreviewofreconcilements

• Recurringauditfindings• Missingfinancialrecords

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SIGNIFICANT FRAUD RISK FACTORS

• Untimelypreparationoffinancialstatements• Lackofemployeevacations• Lackofsignificantcontrolovertransactioncycles• Lackofmanagementoversight• Excessiveemployeeaddictions(gambling,drugs)• Incorrect,incomplete,orerroneousfinancialreporting

• Lackofinternalcontrolreportsfromdataprocessingsystem

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SIGNIFICANT FRAUD RISK FACTORS

• Bonusorincentiveplans• Complextransactions• Rapidgrowth• Corporatecreditcards• Employeefinancialproblems• InactiveSupervisoryCommittee• Lackofaudit/verification• Lackofemployeetraining• Highemployeeturnover

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ACFE – EXECUTIVE SUMMARY

• Assetmisappropriationmostfrequentfraud,butfinancialfraudhasthebiggestdollarimpact.

• Averagelifeoffraudapproximately18months.

• Tipscontinuetobetheprimarydetectionsource.

• Smallerorganizationsmostsusceptibleduetolackofcontrols.

• Anti‐fraudcontrolshelpedtoloweroveralllossandduration.

• Fraudsbyexecutivescausethemostdamage.

• Organizationstendtoover‐relyonexternalauditsasthefraud‐preventiontool.

• Surpriseauditswereunderutilized.Lessthan30%ofvictimsactuallyperformedthem.Theyarekey“perception”toolstoeliminatethe“opportunity.”

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INTERNAL CONTROL AND FRAUD PREVENTION TIPS

• Evaluatemanagement’sassessmentoffraudandmitigatingcontrols.

• Evaluatetheinternalauditor’stestingoftheeffectivenessofeachfraudcontrol.

• Evaluatehowmanagementhas“setthetonefromthetop”topromoteethicalbehavior.

• Communicatezerotolerance.

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INTERNAL CONTROL AND FRAUD PREVENTION TIPS

• EnsuretheinternalauditfunctionreportsdirectlyandcandidlytotheSupervisoryCommittee.

• Ensurethatinternalauditorscontinuallyconductteststodetectfraudorcontrolgaps

• Followuponpriorauditfindingsfromtheinternalauditor,externalauditor,andregulators.

• Evaluatethenatureandcauseoffindings.• Ensurethatannualfraudpolicy(orcodeofconduct)issignedbyallemployees.

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BASIC INTERNAL CONTROL SAFEGUARDS

• Toneatthetop• Segregationofduties• Whistleblowerpolicyandhotline• Rotationofpersonnel• Mandatoryvacations• Reconciliationandreviewprocess• Settingofaccountingsystemprivileges• Accesslevels– reviewandadjust

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THE REPUTATION RISK ASPECT OF INTERNAL FRAUD

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THANK YOU

CarrieKennedy,CPA,PartnerMossAdamsLLP(509)777‐0160Carrie.Kennedy@mossadams.com

AnthonyPorter,CPA,ManagerMossAdamsLLP(425)258‐5899Anthony.Porter@mossadams.com