CCIA 2011 Fall Conference

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10 Νοε 2013 (πριν από 3 χρόνια και 9 μήνες)

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CCIA 2011 Fall Conference

Occupational Fraud
Schemes & Increasing
Fraud Awareness


Jenny Dominguez

Sr. Manager, VLS Fraud Solutions


October 6, 2011

Presenter Contact Information



Jenny Dominguez, CPA/CFF, CFE


Vicenti, Lloyd & Stutzman, LLP

jdominguez@vlsllp.com

www.vlsllp.com




2

Topics To Cover

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I.
The Fraud Triangle


factors that influence the
commission of fraud

II.
The Fraud Tree


occupational fraud & abuse
classification system

III.
Fraud Schemes


Case Studies


I.


Three
Factors of the Fraud
Triangle

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What 3 Factors
Influence the
Commission of Fraud?

FRAUD

TRIANGLE

“Pressures


(Motive)

“Opportunities”

“Rationalization”

(Developed by Donald R. Cressey)

5

Pressures

Serious financial problem that
requires immediate attention
and cannot be resolved by
ordinary financial resources

Opportunities

Become aware that financial
problem can be solved by
stealing from organization or
falsifying organizations
records

Rationalization

Mindset and thinking that
what you are doing is justified




II.


The Fraud Tree:

Occupational Fraud & Abuse
Classification System

6

Occupational Fraud

7

The use of one’s
occupation

for
personal
enrichment

through the
deliberate misuse or
misapplication of the
employing
organization’s
resources or assets.

What is the Fraud Tree?

8

Corruption

Asset
Misappropriation

Fraudulent
Statements

Three Major Types of Occupational Fraud

(page 7 of ACFE 2010 Report to the Nations)

Off
-
book frauds that
occur in the form of
kickbacks, gifts, or
gratuities to
employees from
contractors /
vendors

Theft or misuse of
organization’s cash
or assets

Deliberate
misrepresentation of
the financial
condition of an
organization through
intentional
misstatement or
omission

III.


Fraud Schemes

Case Studies

9

Corruption


Interesting Facts

10

32.8%

of the cases studied in the ACFE 2010 Report to the
Nations involved some form of
Corruption
.


The median loss suffered was
$250,000
.


Of the 90 cases studied involving organizations in the “Education”
industry, Corruption was the
2
nd

most common

type of
occupational fraud committed, after billing schemes.

(page 35 of ACFE 2010 Report to the Nations)

Corruption


Types of Frauds

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Conflicts of Interest

-
Purchase Schemes

-
Sales Schemes

-
Other


Bribery

-
Invoice Kickbacks

-
Bid Rigging

-
Other


Illegal Gratuities


Economic Extortion

Corruption


Case Study

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Background / Summary


Government agency


Performed $100
-

$400 million in construction activity annually


Construction work was contracted out


internal project managers


“Emergency” work was approximately $2 million per year


95% of “emergency” work went to the same vendor


Several large construction projects had change orders that exceeded
50% of the original contract, one exceeded 100%


Manager of construction management department moved up the ranks
from field personnel


Manager and CEO vacationed with one particular vendor

Any of these stand out as red flags?

Corruption


Case Study

13

Internal Audit Revealed


“Emergency” work being performed did not qualify as emergency under
PCC:


Fixing potholes outside of Board member’s house


Painting & other general work due to project time constraints


Documentation was not kept to support that all contractors on approved
list for emergency work were solicited for quotes


Change orders paid on some projects were not related to the original
construction contract


Project tracking system not reconciled to accounting system


Construction contracts did not include “right to audit” clause

What would next steps be?

Asset Misappropriation


Interesting Facts

14

86.3%

of the cases studied in the ACFE 2010 Report to the
Nations involved some form of
Asset Misappropriation
.


The median loss suffered was
$135,000
.


Of the 90 cases studied involving organizations in the “Education”
industry, “Billing” schemes were the
most common

type of
occupational fraud committed.

(page 35 of ACFE 2010 Report to the Nations)

Asset Misappropriation


Types of Frauds

15


Cash

-
Larceny

-
Skimming

-
Fraudulent Disbursements


Inventory & All Other Assets

-
Misuse

-
Larceny

Asset Misappropriation


Case Study

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Background / Summary


Small dental practice


Office manager handled:


Entering patient services into patient billing system


creating A/R


Collecting patient payments


Entering patient payments into patient billing system


Billing patients


Creating deposits and taking to bank


Over 2 years “skimmed” approximately $35,000


Unrecorded sales


Write
-
offs and write
-
downs


Modified historical payment amounts


Patient billing system did not have the capability to lock older months

Asset Misappropriation


Case Study

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Red Flags


Lack of segregation of duties


No reconciliations between accounting software and other systems


Change in level of activity for certain collection type, particularly cash


Refusal to take vacation or share duties


Increase in Accounts Receivable


Increase in Write
-
offs


Working during “off” hours


Write
-
offs / other adjustments don’t require approval


Assets are not safeguarded


Deposits done infrequently or irregularly

Asset Misappropriation


Case Study

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How Can This Be Prevented / Detected Earlier?


Prevention:


Better segregation of duties


Secondary / separate approval or log
-
in required for write
-
offs


Lock patient tracking system to prevent modification


Perform background checks of new employees


Issue pre
-
numbered receipts for all payments (perform independent
check daily)


Detection:


Analytical procedures


compare sales / collections over time


Review of historical write
-
offs


Perform regular reconciliations between the patient tracking system
(which reports total collections) to QuickBooks


Have aggressive collection department / personnel

Fraudulent Statements


Interesting Facts

19

4.8%

of the cases studied in the ACFE 2010 Report to the Nations
involved some form of
Financial Statement Fraud
.


The median loss suffered was
$4.1 million
.


Of the 90 cases studied involving organizations in the “Education”
industry, “Financial Statement Fraud” was the
least common

type
of occupational fraud committed.

(page 35 of ACFE 2010 Report to the Nations)

Fraudulent Statements


Types of Frauds

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Financial

-
Timing Differences

-
Fictitious Revenue

-
Concealed Liabilities & Expenses

-
Improper Disclosures

-
Improper Asset Valuations


Non
-
Financial

-
Employment Credentials

-
Internal Documents

-
External Documents

Fraudulent Statements


Case Study

(Improper Disclosures)

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Background / Summary


City government
-

defined benefit pension plan


Beginning in 1982 adopted use of “surplus earnings” to alleviate financial
obligations of City:


“13
th

Check”


extra check to retirees


$10 million, one
-
time reduction in City’s contribution to pension


Paid 100% of post
-
retirement healthcare benefits


1996: Passed “MP
-
1” which set City contribution rates at negotiated rates
lower than the actuarially calculated rate


2002: Pass “MP
-
2” which reduced trigger in MP
-
1 and slowly ramped up
contribution rates


Manipulated actuarial valuations:


Changed valuation methods based on what favored City


Excluded certain liabilities as “contingent”


legally required to pay


Reset amortization period of unfunded liability

Fraudulent Statements


Case Study

(Improper Disclosures)

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Background / Summary


Investigated financial statement disclosures over 7 years


Primary issue: Disclosures related to pension plan funding


City claimed it was funding the pension system at
actuarially determined rates, when it was not


City failed to disclose that surplus earnings were used
to pay for retiree healthcare benefits


Secondary issue: Conflict of interest


Pension board members voted on changes to the
pension system that eroded assets and increased their
individual benefits

Fraudulent Statements


Case Study

(Improper Disclosures)

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Motivation?


City issued $3.1 billion in public bonds from 1996
-

2003


City sought credit ratings from the various Rating Agencies


Better rating provided for better interest rate


Email communication discovered during investigation:


“…when we book the NPO [Net Pension Obligation]
the rating agencies won’t like it. It will be a negative for
the City. As we market a large amount of bonds it might
cost us a lot of money…”
-

1998


“…my biggest suggestion to her is to eliminate any
reference to fitch and rating agencies…this letter will be
seen by press and the city does not need to telegraph its
pension problems to the rating agencies…”
-

2002

Fraudulent Statements


Case Study

(Improper Disclosures)

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Cost to City


$$$$$


$24 million in fees for investigation


Increased auditor fees


Additional costs to comply with SEC & DA investigations


Higher interest rate on bonds


Decreased credit rating


Delayed / rejected bond approvals by tax payers


Delayed audits (FY2003 completed in 2007)


Employees fired and under investigation


Significant reduction in public services


Reduction in benefits for incoming employees

Fraudulent Statements


Case Study

(Improper Disclosures)

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Red Flags


Ineffective Board of Directors or Audit Committee


Significant, unusual, or highly complex transactions


Recurring attempts by management to justify marginal or
inappropriate accounting


Formal or informal restrictions on the auditor that limit
access to people or information


Non
-
financial management’s excessive involvement in
determination of significant estimates


Insufficient training of accounting staff


Lack of “ownership” of financial statements

Fraudulent Statements


Case Study

(Improper Disclosures)

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How Can This Be Prevented / Detected Earlier?


Implement full internal audit department


Implement use of independent fraud hotline


Ownership for financial statements is clearly assigned


establish accountability


Adequate and continuous technical training for employees
(accounting department)


Training for all employees on what constitutes dishonest
behavior


Implement Audit Committee

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THANK YOU!