Steven Wischmann Fraud Detection

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Fraud Detec/on and Preven/on Presented by: Steve Wischmann, CPA, CFE, CFF, CCFE, MAFF

February 7, 2014

Agenda

1.  Actual Minnesota School Cases in the News 2.  Definition of Fraud 3.  Fraud Statistics-ACFE Report to the Nations 4.  Common Fraud Risks – Red Flags 5.  Fraud Prevention Tips and Resources

February 7, 2014 Confiden/al | | 2

Fraud Cases in Minnesota -‐ Schools

•  St. Paul Schools (2009) – U/lity Payments •  Shakopee Schools (2010) – Student Ac/vi/es •  Chokio-‐Alberta (2011) -‐ Payroll


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Definition of Fraud

•  Occupational Fraud is defined by the ACFE as: –  The use of one’s occupation for personal enrichment through the

deliberate misuse or misapplication of the employing organizations resources or assets.

–  5 elements of fraud include •  A representation about a material fact, which is false •  And made intentionally, knowingly, or recklessly •  Which is believed •  And acted upon by the victim •  To the victims damage


Definition of Fraud

•  Fraud is a Crime •  Fraud can be large or small (Madoff Case or Office Supply

Larceny) •  Fraud can never be totally eliminated, but cost effective

controls can be implemented to reduce the risk to an acceptable level.


Fraud Triangle


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2012 ACFE Report to the Na/ons

•  Survey par*cipants es*mated that the typical organiza*on loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a poten/al projected annual fraud loss of more than $3.5 trillion.

•  The 2012 report provides an analysis of 1,388 fraud cases inves/gated worldwide.

•  The median loss caused by the occupa*onal fraud cases in our study was $140,000. More than one-‐fi]h of these cases caused losses of at least $1 million.

•  Available at www.acfe.com.


Distribu/on of Dollar Losses



•  The frauds reported to us lasted a median of 18 months before being detected.

•  As in our previous studies, asset misappropria*on schemes were by far the most common type of occupa*onal fraud, comprising 87% of the cases reported to us; they were also the least costly form of fraud, with a median loss of $120,000.

•  Financial statement fraud schemes made up just 8% of the cases in our study, but caused the greatest median loss at $1 million. Corrup/on schemes fell in the middle, occurring in just over one-‐third of reported cases and causing a median loss of $250,000.


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•  As in our prior research, the industries most commonly vic*mized in our current study were the banking and financial services, government and public administra*on, and manufacturing sectors.

•  The presence of an*-‐fraud controls is notably correlated with significant decreases in the cost and dura*on of occupa*onal fraud schemes.

•  Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds commi_ed by owner/execu/ves was $573,000, the median loss caused by managers was $180,000 and the median loss caused by employees was $60,000.


Organiza/on Type of Vic/m -‐ Frequency


Organiza/on Type of Vic/m – Median Loss


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•  The vast majority (77%) of all frauds in our study were commiNed by individuals working in one of six departments: accoun*ng, opera*ons, sales, execu*ve/upper management, customer service and purchasing. This distribu/on was very similar to what we found in our 2010 study.

•  Most occupa*onal fraudsters are first-‐*me offenders with clean employment histories. Approximately 87% of occupa/onal fraudsters had never been charged or convicted of a fraud-‐related offense, and 84% had never been punished or terminated by an employer for fraud-‐related conduct.



•  In 81% of cases, the fraudster displayed one or more behavioral red flags that are oVen associated with fraudulent conduct. Living beyond means (36% of cases), financial difficul/es (27%), unusually close associa/on with vendors or customers (19%) and excessive control issues (18%) were the most commonly observed behavioral warning signs.

•  Nearly half of vic*m organiza*ons do not recover any losses that they suffer due to fraud.

•  Frauds most oVen discovered by TIP.


Detec/on of Fraud Schemes


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Detec/on of Fraud Schemes


Common Types of Fraud

•  Asset Misappropria/on –  The] of cash, false billing schemes or inflated expense reports

•  Corrup/on/Vendor Fraud –  Bribery, Kickbacks

•  Fraudulent Financial Statements –  Inten/onally materially missta/ng the financial condi/on of the organiza/on (be_er or worse)


Frauds by Category -‐ Frequency


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Frauds by Category – Median Loss


Perpetrators


Age of Perpetrators


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Tenure of Perpetrators


Educa/on of Perpetrators


Red Flags to Watch For -‐ Employees

1.  Employee lifestyle changes – living beyond means 2.  Significant personal issues (debt, family) 3.  Behavioral changes – indica/ons of drug or alcohol dependency,

gambling 4.  Refusal to take vaca/ons 5.  Refusal to cooperate with management or auditors 6.  Lack of segrega/on of du/es in cri/cal accoun/ng areas 7.  Photocopied or missing documents 8.  Excessive number of void transac/ons


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Red Flags -‐ Management

1.  Reluctance to provide informa/on to auditors 2.  Management decisions dominated by an individual or

small group 3.  Weak “tone at the top” and internal control environment 4.  Excessive number of checking accounts 5.  Any transac/on that “does not make sense”


Perpetrators – Behavioral Red Flags


Cases – Referred to Law Enforcement?


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Results of Cases Referred to Law Enforcement


Reasons not Referred to Law Enforcement


Recovery of Losses


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Recent Fraud Cases in the News

•  City of Dixon Illinois, popula/on 15,733 –  Rita A. Crundwell, comptroller for 30 years –  Plead guilty November 14, 2012 to stealing $53 Million from the City since

1990, spending on horse farm, horses, vaca/on homes –  Represents almost 1/3 of general fund budget annually for 21 years –  Diverted funds to personally controlled RSCDA account by crea/ng fic//ous

invoices –  Concealed scheme by telling city officials that City’s budget was short due

to state being late in tax payments. –  Crundwell picked up mail and bank statements and was in control of books

with no oversight. –  Discovered during extended vaca/on when another employee performed

her du/es and no/ced RSCDA bank account statement. February 7, 2014 Confiden/al | | 31

Fraud Preven/on Tips

•  Proper management “tone at the top” –  Code of conduct/ethics policy –  Communicate the policy on a regular basis –  Fraud awareness training –  Method to report fraud suspicions –  Training in necessary areas –  Fraud Hotline


Fraud Preven/on Tips

•  Oversight/Other –  Organiza/ons self review of internal controls – weaknesses/lack of

oversight in any significant area –  Review of remote opera/ons (food service, athle/c events, student

ac/vi/es, etc.) –  Review policies and procedures to strengthen controls –  The appearance of oversight is an important component –  Unannounced spot checks of various du/es –  Background checks on employees prior to hiring –  Consider posi/ve pay for disbursements –  Formal Fraud Risk Assessment


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Thank You! Steve Wischmann [email protected] 320-‐650-‐0217


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Steven Wischmann Fraud Detection

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