Detecting Frauds

1. DetectingMisappropriation Frauds Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA 305.812.4998 [email protected]

2. Detecting Misappropriation Frauds

Presentation for

FIU Fall Seminars

October 24, 2009

Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA

St. Thomas University

Kulzick Consulting, PA

305.812.4998 [email protected]

Information in this presentation is believed to be reliable at the time of the presentation; but the authors do not assume any responsibility for its use and it should not be relied upon as authoritative.

Forensic Accounting

Divorce

Fraud

Business Damages

Data Analysis for Litigation

Introduction

Responsibilities of CPAs

Small vs large companies

Fraud triangle

Detection Known fraud

Detection Unknown fraud

Common symptoms in small business

Conclusions

In past 3 years 85% of firms had fraud

37% theft of assets

27% theft of information

26% management conflict of interest

Large firms average loss = $ 23 million

Small Firms average loss = $ 5.5 million

2007 report

31% complexity of IT

28% entry into new markets

26% greater inter-firm collaboration

2008 report

25% weaker controls

Average loss was 7% of revenue

89% involved asset misappropriations

Average loss $175,000

Average loss for small business was $200,000

Average scheme duration = 24 months

29% Billing

25% Check tampering

21% Skimming

16% Expense reimbursement

15% Cash larceny

14% Payroll

15% Non-cash misappropriation

Note: Many schemes involved multiple types of fraud

SAS 99 Fraud in a FS Audit

SAS 78 Internal Controls

SAS 103-112 Risk-based Audits & Internal Controls

SSARS 10, 11 & 12 Reviews and Compilations

ISA 240 Fraud in a FS Audit

SOX 404 & PCAOB AS 5 Internal Controls

If find fraud during an attest engagement that requires further investigation

AICPA Rule 101 Independence

AU 317 Illegal acts by clients

AU 333 Management representations

Attest engagements include

Audits, Reviews, Prospective Financials

In conformance with SAS or SSARS

Internal audits

IIA PA 1210.A2-1 & -2 Auditors responsibilities relating to fraud

IIA PA 2120.A1-1 Assessing & reporting on control processes

1/2009 revisions require assess potential for occurrence and how organization handles risks

Public perceptions and malpractice

CAMICO survey showed 64% of the public believes that CPAs are required to find ALL fraud in an audit.

Trust

Small workforce

Failure to delegate

Overlapping/unclear job responsibilities

Controls not a priority

Known fraud

Search for symptoms based on specific types of fraud

Unknown fraud

Search for common symptoms not necessarily related to a specific type of fraud

Used for:

SAS 99 requires this approach

Forensic and proactive audits

Steps:

Risk analysis

Identify symptoms based on risk

Search for symptoms

Further investigation

Use of CAATTs recommended

Used for:

Initial stage or supplementary in audits

Reviews

Internal audits

Approaches:

Data profiling

Fraud ratio/variance analysis

Benfords Law

Further investigation

Use of CAATTs recommended

Tolerance of petty thefts

Lack of or override of controls

No segregation of duties

High pressure environment

High turnover

Complaints or lack of complaint tracking

No IT access controls

Living beyond means

Financial pressures on key individuals

No vacations in key positions

Employees complain about low pay or chaotic environment

Books & records out of balance

Transactions not entered timely

Journal entries at or near year-end

Missing documents

Only copies in files

Inventory adjustments

Credit memos or A/R write-offs

Debit memos or A/Pay adjustments

Bank reconciliations not done, not in balance or containing stale items

New, major vendors or customers

Significant changes evident in horizontal, vertical or ratio analysis

Unexplained increased borrowing

Subsidiary ledgers not in balance with general ledgers

Payroll taxes dont balance with salaries

Pre-number & reconcile forms

Screen prospective employees

Segregate cash-related functions as much as possible

Implement controls over checks

Limit computer access

Match invoices with checks

Periodically review Accounts Receivable and Accounts Payable

Receive unopened bank and credit card statements

Approve all Journal Entries

Be a good example

Be aware for red flags

Fraud is a major problem in organizations

CPAs are expected to detect it

Tools and approaches are available

Skepticism and common sense are essential

Thanks for your attention.

Ray Kulzick 305.812.4998