RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM.

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RED FLAGS OFOCCUPATIONAL FRAUD Caroline Burnell, CFE,

CAROLINE BURNELL Fraud Investigator 25 years experience in auditing and fraud investigations

SOURCES:

State of New York, Office of State Comptroller, Red Flags for Fraud http://www.osc.state.ny.us/localgov/pubs/red_flags_fraud.pdfAccessed January 8, 2014.

Wells, Joseph T; Corporate Fraud Handbook Prevention and Detection, 3rd Edition. 2011

cmburnell@comcast.net

RED FLAGSDefined

RED FLAGS

A set of circumstances that are unusual in nature or vary from the normal activity.

RED FLAGS

Do not ignore a red flag!

Studies of fraud cases consistently show that red flags were present, but either weren’t recognized or were recognized but not acted upon by anyone.

RED FLAGS

The investigation should be done by a responsible person who is unlikely to be committing the fraud if one is occurring.

Sometimes an error is just an error. cmburnell@comcast.ne

FRAUDAnd Its Perpetrators

KEY POINTSRequired Conditions:

ANYONE within the organization can

commit fraud.

Highly trusted employees are NOT

always honest.

PERPETRATORS Past Employment-Related Problems Unusually Close Association with Vendor/Customer

Wheeler-Dealer Attitude Irritability, Suspiciousness or Defensiveness

Control Issues, Unwillingness to Share Duties

Refusal to Take Vacations Complained About Inadequate PayComplained About Lack of Authority

PERPETRATORS Excessive Pressure from Within Organization

Excessive Family/Peer Pressure for SuccessFinancial DifficultiesAddiction ProblemsDivorce/Family ProblemsPast Legal Problems

Source: ACFE 2012 Report to the Nations

WAR STORY

WAR STORYRED FLAGS

Legal PressurePast TheftFinancial Pressure

Similar looking invoices

Sequentially numbered invoices

Same address / telephone number

No email or web address

Executive Directive submitted an invoice from one of his companies for payment of an item that was never delivered.

Checks payable to companies endorsed by Executive Director and/or his family

BILLING SCHEMES

SHELL COMPANIES

Shell companies are fictitious entities created for the sole purpose of committing fraud by shielding identities of the perpetrator and/or hiding money.

SHELL COMPANIESNo phone number No e-mail or web address No physical address No company logo No contact informationNo federal identification number

FALSE INVOICES

Running unsanctioned invoices through the accounts payable system.

May be done with vendor collusion.

FALSE INVOICESInvoices cannot be traced to shipments.

Multiple payments to single vendor on the same date.

Pattern of purchases just below review level.

Unusually quick turnaround of invoices.

Payment to multiple vendors for same product.

FALSE INVOICES

Expenses increase dramatically.

Unexplained rise in cost of goods sold.

Unexplained decrease in gross/net profits.

Excessive materials orders.

Goods not purchased at optimal point.

High level approval of a low level transaction

CHECK TAMPERING

Preparing a check for one’s own benefit

Intercepting a check intended for a third party and converting the check for one’s own benefit.

Endorsement

Check Tampering:

• Forged Maker Schemes

• Authorized Maker Schemes

• Concealed Check Schemes

• Intercepted Check Schemes

CHECK TAMPERING

Missing checks.

Voided checks

Bank accounts that are not reconciled on a timely basis.

Sudden activity in dormant bank accounts

CHECK TAMPERING

Significant increase in payments to one vendor

Duplicate payments

Payments without supporting documentation

Accounting records that disagree with the supporting documentation

CHECK TAMPERINGChecks to employees, in excess of the # and $ amount of normal payroll checks.

Vendor & customer complaints regarding nonpayment.

QUESTIONS

RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM.

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