Fraud Training

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Rachlin Cohen Holtz LLP How Sweet It Is How
to Find the Hand in the Cookie Jar José I.
Marrero, EA Ronald E. Wise, EA Susan L. Friend,
CPA FGFOA School of Finance November 12, 2007
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Fraud Training

• Introduction
• Who is Responsible for Detecting Fraud
• Fraud Risk Indicators
• Understanding Symptoms/Red Flags of Fraud
• Case Studies

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Introduction

• Overview
• SAS No. 99
• SSARS No. 12
• Circular 230

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ACFE Fraud Statistics 2006 Report to the Nation
on Occupational Fraud Abuse

• Major Categories
• Asset Misappropriation
• Over 85 involved the misappropriation of cash
• Theft of Inventory
• Corruption
• Fraudulent Statements
• Major Industries
• Financial Institutions
• Government
• Manufacturing
• Frequency vs. Loss

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ACFE Fraud Statistics 2006 Report to the Nation
on Occupational Fraud Abuse

• Government and Public
• Administration
• Billing schemes (procurement fraud) and non-cash
  theft were the most commonly reported forms of
  asset misappropriation.
• Abuse of Position
• Detection Methods
• Tips
• Accidental
• Internal Audit
• Internal Controls
• External Audit
• Law Enforcement

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2006 IRS Criminal Investigation Statistics

• Encompasses a Wide Variety of Criminal Offenses
• Bribery, extortion, embezzlement, illegal
  kickbacks, entitlement and subsidy fraud, bank
  fraud, tax fraud, and money laundering
• Examples
• Former Speaker of the North Carolina House of
  Representatives - accepting things of value
  concerning programs receiving federal funds
• Former Chairman of Palm Beach County Commission -
  misused his official position as an elected
  county commissioner to promote and conceal
  significant financial ventures

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Who is Responsible for Detecting Fraud?

• Auditors should have sufficient knowledge of
  fraud
• Auditors should include tests directed toward
  identification of other indicators of fraud
• Audit procedures alone do not guarantee that
  fraud will be detected.

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Fraud Risk Indicators

• Examples of fraud risk indicators
• Discrepancies in Accounting Records
• Account balances that are significantly over or
  understated
• Transactions not recorded in a complete or timely
  manner or improperly recorded as to amount,
  accounting period, classification, or entity
  policy
• Unsupported or unauthorized records, balances, or
  transactions
• Last minute client adjustments that significantly
  affect financial results (particularly those
  increasing income presented after submission of
  the proposed audit adjustments)

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Fraud Risk Indicators

• Conflicting or Missing Evidential Matter
• Missing documents
• Unexplained items on reconciliations
• Unavailability of other than photocopied
  documents
• Inconsistent, vague or implausible responses
  arising from inquiries or analytical procedures
• Unusual discrepancies between the client's
  records and confirmation replies
• Missing inventory or physical assets
• Excessive voids or credits
• Common names or addresses of payees or customers
• Alterations on documents (e.g. back dating)

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Fraud Risk Indicators

• Unusual Relationships With the Client
• Duplications (e.g., duplicate payments)
• Questionable handwriting on documents
• Denied access to records or facilities
• Denied access to certain employees, customers,
  vendors, or others from whom audit evidence might
  be sought
• Undue time pressures imposed by management to
  resolve complex or contentious issues
• Unusual delays in providing requested information
  
• Tips or complaints to us about fraud

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Fraud Risk Indicators

• Other Concerns
• Significant internal control weaknesses or prior
  year internal control weaknesses not corrected
• Unusual transactions
• Departure of key financial or operating personnel
  
• Personnel that do not take vacations
• Specific instances of management's conduct that
  raise serious concerns as to their integrity
• False, misleading, inconsistent, or contradictory
  statements
• Failure to file required reports, maintain
  records, returns or other important documents
• Pattern of similar unexplained transactions
• Reporting all income from one particular source,
  but reporting partial income from a second
  particular source or reporting no income from
  another source
• Sole control and responsibility for books,
  records, and financial transactions.

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Understanding Symptoms/Red Flags Of Fraud

• Accounts Payable Process
• Purchasing Process
• Payroll Process
• Cash Receipts Process
• Accounts Receivable Process
• Inventory Process

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Red Flags

• Accounts Payable Process
• Recurring identical amounts from the same vendor.
• Vendor addresses that do not agree with vendor
  approval application.
• Multiple remittance addresses for the same
  vendor.
• High volume of manually prepared disbursement
  checks.
• Payments to a vendor have increased dramatically
  for no apparent reason.
• Lack of segregation of duties between the
  following
• Processing of accounts payable invoice and
  updates to vendor master files
• Check preparation and posting to vendor account
• Check preparation and mailing of signed checks
• Check signer and initiator of purchases and
  receiver of goods
• No proper documentation of additions, changes, or
  deletions to vendor master file
• Excessive credit adjustments

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Red Flags

• Accounts Payable Process (cont)
• Lack of documentation for payment of invoices.
• Lack of adequate controls over wire transfers.
• Unrestricted access to blank checks, signature
  plates and check signing equipment.
• Excessive mis-codings to same expense accounts.
• No reconciliation of accounts payable sub-ledger
  to general ledger control account.
• Payments made on copies of invoices rather than
  originals
• Insufficient supervisory review of accounts
  payable activities.
• Vendor complaints
• Employee complaints regarding lack of vendor
  supplies
• Lack of managements periodic review of actual
  expenses to budget, with unanticipated variances
  being investigated.

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Red Flags

• Purchasing Process
• Turnover among personnel within the purchasing
  department significantly exceeds attrition rates
  throughout the organization.
• Purchase order proficiency rates fluctuate
  significantly among personnel with comparable
  workload levels.
• Dramatic increase in purchase volume for a
  certain vendor(s) not justified by competitive
  bidding or changes in production specifications.
• Unaccounted purchase order numbers or physical
  loss of purchase orders.
• Rise in the cost of routine purchases beyond the
  inflation rate.
• Unusual purchases not consistent with the
  categories identified by prior trends or
  operating budget.

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Red Flags

• Payroll Process
• Dramatic increase in labor force or overtime that
  is not justified
• Turnover within the payroll department
  significantly exceeds attrition rates throughout
  the organization.
• Missing or easy access to blank checks,
  facsimile, and manual check preparation machine.
• Tax deposits are substantially less than those
  required by current payroll expenses.
• High volume of manually prepared payroll checks.
• Lack of segregation of duties between the
  following
• Person preparing payroll and other personnel
  duties such as timekeeping, distribution of
  checks and hiring of employees.
• Persons preparing payroll and having the ability
  to modify information in the payroll system (i.e.
  add employees, modify amount of wages or hours)

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Red Flags

• Cash Receipts Process
• Improper safeguarding of cash under lock and key.
  
• No segregation of duties between the following
• Receiving cash and posting to customer accounts
• Issuing receipts and deposit preparation
• Infrequent bank deposits, allowing cash to
  accumulate.
• Consistent shortages in cash on hand.
• Consistent fluctuations in bank account balances.
  
• Closing out cash drawer before end of shift.
• Excessive number of voided transactions on a
  regular basis without proper explanation.
• Missing copies of pre-numbered receipts.
• Not balancing cash to accounts receivable
  subledger.
• Insufficient supervisory review of cashier's
  daily activity.

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Red Flags

• Accounts Receivable Process
• Lack of accountability for invoice numbers
  issued.
• Lack of segregation of duties between the
  following
• Processing of accounts receivable invoices and
  posting to subledger
• Posting to accounts receivable subledger and cash
  receipts
• Lack of policies and procedures regarding
  write-offs
• Frequent undocumented and/or unapproved
  adjustments, credits, and write- offs to accounts
  receivable subledger.
• Low turnover or slow collection cycle for
  accounts receivable.
• Dramatic increase in allowance for doubtful
  accounts in view of positive economic events and
  stringent credit policies.
• No reconciliation of accounts receivable
  subledger to general ledger control account.
• Insufficient supervisory review of accounts
  receivable activity as well as customer account
  aging schedule.
• Unrestricted access to subledgers and general
  ledger.

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Red Flags

• Inventory Process
• Credit balances in inventory accounts.
• Consistent fluctuations in inventory accounts
  between months (e.g. debit balance one month,
  credit balance the next).
• Excessive inventory write-offs without
  documentation or approvals.
• Unusual volume of adjustments, write-offs, and
  disposal of material, inventory, or capital
  assets.
• Unrestricted access to inventory storage areas by
  non-responsible employees and/or vendors.
• Significant weaknesses in inventory cut-off
  procedures.
• No policy regarding identification, sale, and
  disposal of obsolete and surplus materials.
• Finished goods inventory turnover rate does not
  correlate with operating cycle.
• No segregation of duties between
• Receipt of inventory and issuing of materials
• Recording of inventory accounts and ordering
  materials
• Identification of obsolete and surplus materials
  and sale and disposal of such materials
• There is no policy regarding inventory levels to
  be maintained (i.e., minimums, maximums, reorder
  points).

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Red Flags

• Finance Process
• Significant adjustments to accrued liabilities,
  accounts receivable, contingencies.
• Reconciliations to support account balances not
  prepared
• Dramatic change in key operating, and other
  ratios
• A change in legal counsel, or Finance department
  head.
• A delay in issuance of monthly, quarterly, or
  annual financial reports.

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Case Studies

• Village of XYZ cash receipts
• School District of ABC blank checks and lack of
  segregation of duties
• International Gas Company false invoices
• Medicare Fraud false claims

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Words of Wisdom

• EVERY MORNING IN AFRICA A GAZELLE WAKES UP. IT
  KNOWS THAT IT MUST RUN FASTER THAN THE FASTEST
  LION OR IT WILL BE KILLED.
• EVERY MORNING A LION WAKES UP. IT KNOWS IT MUST
  OUTRUN THE SLOWEST GAZELLE OR IT WILL STARVE TO
  DEATH.
• IT DOESN'T MATTER WHETHER YOU ARE A LION OR A
  GAZELLE, WHEN THE SUN COMES UP YOU BETTER BE
  RUNNING.

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Q A
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For Further Information
Rachlin, Cohen Holtz LLP 450 E. Las Olas
Blvd., Suite 950 Fort Lauderdale, Florida
33301 Phone [phone] Fax [phone] jmarr
ero_at_rachlin.com
www.rachlin.com
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