In my last post, I discussed some interesting facts about who is most likely to steal from your company and how much it is likely to cost you. (In case you missed it, here’s the link: http://www.kahnlitwin.com/blog/2010/01/can-you-identify-whos-going-to-steal_06.html.)

The cost of fraud to an organization can be devastating, yet many people don’t want to hear about it until it’s too late. You don’t have to be a financial expert to implement controls to prevent fraud, but you do need, at a minimum, a basic understanding of the different types of fraud in order to know what you are trying to prevent.

With that, I wanted to take some time now to highlight some of the common areas that are susceptible to fraud and the types of theft related to them.

• Cash theft schemes – these can include the obvious to the not so obvious. Under this category you will find theft of cash payments, theft of all or part of a daily deposit, skimming from a daily deposit, voided sales and/or revenue transactions, and the theft of petty cash funds.
• Accounts receivable schemes – receivables schemes are directly related to the theft of cash. These can be a bit more complicated, and can include the lapping of receivables (which involves shifting receipts amongst customer balances to cover up theft), the unauthorized crediting of customer accounts, and the re-aging of receivables in order to hide misappropriations.
• Inventory schemes – these can include the theft of inventory and supplies, as well as the scrapping and subsequent resale of inventory.
• Fixed asset schemes – these schemes can come in a variety of different forms. They can include the theft of equipment and other assets held for use, the personal use of company assets, over-purchasing schemes, as well as the recording of fictitious assets (which in turn can conceal other thefts).
• Payables and disbursement schemes – these schemes are also directly related to the theft of cash. Payables schemes can include payments made on false or inflated invoices (including those to shell companies), excess purchasing as well as duplicate payment schemes. In addition, you can have situations where the employee is brazen enough to write the check directly to themselves or a family member, as well as the stealing of check stock for future use. 
• Payroll schemes – payroll schemes can be some of the easier schemes to detect, yet they often fly under the radar. These can include payments to fictitious employees, overpaying/double paying current employees, paying terminated employees, the diversion of tax and/or employee benefit plan payments, and various expense report reimbursement schemes.

Please keep in mind that the above is just the tip of the iceberg, and some of these schemes (and others not mentioned above) can be occurring in your organization right now. Fraudsters have been getting more and more sophisticated and are continuing to utilize advancements in technology to further their efforts. You need to be proactive in not only understanding the different ways these criminals can steal from your organization, but how to best protect yourself.

In my next post, I will begin to explore these areas in greater detail, highlighting the various opportunities for internal theft and what you can start to do to protect yourself. Until then, remember, it will always be more economical to implement measures to prevent fraud than it will be to detect it.

By John Surrette, Jr., CPA, CFE, MBA
Senior Audit Manager

Labels: Accounting, CPA, Different Types of Fraud, Fraud, Fraud to an Organization, Fraudsters., How to Detect Fraud, Inflated Invoices, Petty Cash Funds, Resale of Inventory, Theft of Cash Deposits

One theme that has been in the news over the past several months is the fact that accounting fraud has risen significantly over the past couple of years. Who didn’t see that one coming? Increased unemployment, the resetting of interest rates on adjustable rate mortgages, and the loss of personal wealth (mainly from declines in home values) are all reasons why we have seen a spike in this type of fraud.

At the end of my last post, I had mentioned that I was going to start to discuss some of the different types of fraud. As I think it’s important to understand who might be perpetrating the fraud, we’ll get into that topic next time.

So, you ask, what type of person is most likely to commit fraud? According to the 2008 Report to the Nation on Occupational Fraud & Abuse report (the Report) published by the ACFE, research shows that:

• Fraud is a man’s world. According to the survey, males are more than twice as likely to commit fraud as their female colleagues. Significantly, the median loss of fraud by men is more than twice as great as frauds perpetrated by women, according to the study.

• Many fraudsters are in their forties. The highest percentage of fraudsters in the study were between the ages of 41-50 (in more than half of all cases, the perpetrator was over 40). Generally speaking, older professionals often occupy positions with authority and more access to company resources. The Report finds that the median loss from fraud rose as the age of the fraudster increased. Schemes perpetrated by individuals in their 50s resulted in a median loss of $500,000, twice as high as any age bracket below them.

• The ‘lone wolf’ versus cooperative crooks. In nearly two-thirds of the fraud schemes covered by the study, the perpetrator acted alone. Yet when the scheme did involve collusion of two or more parties, the results were much more costly. Cases of collusion resulted in a median loss over four times higher than the amount lost to fraudsters acting alone. This might mean that collusion enables employees to better circumvent controls that might stop a single perpetrator.

• Education and position. Most perpetrators have attended or graduated from college.
About 11 percent have obtained a post-graduate degree. In general, the higher the education level, the more costly the fraud. Furthermore, the highest percentage of fraudsters worked in the accounting department when they executed their scheme. Because these employees handle financial transactions, they normally have the easiest access to fiscal assets and the most opportunity to conceal a fraud. Executives and upper management made up the second-most common category of fraudsters. The least common perpetrators? Internal auditors.

• Living the fraud life. According to the Report, there are several behaviors that serve as red flags displayed by perpetrators. The two most common traits are a tendency to live beyond one’s means, and a struggle with financial difficulties. More than a third of those identified displayed at least one of the aforementioned behaviors, and about 20 percent had either a “wheeler-dealer attitude,” control issues (unwillingness to share duties), or personal problems, such as a divorce. Other red flags might include irritability or defensiveness, addiction problems, past legal problems, refusal to take vacation and complaining about inadequate pay.

If you’d like to learn more about the findings in the Report, you can download online at the ACFE’s web site: www.ACFE.com/RTTN.

There are several other studies out there that have come up with similar conclusions. I don’t think there is anything too surprising in the results, but don’t be fooled. I’ve seen frauds committed by men and women much younger and much older. However, the one theme that you should focus on is the fact that these people are in positions of power and influence within their respective organizations. If those positions are appropriately monitored, your exposure can be reduced significantly. Remember, it’s much easier (and cheaper) to prevent fraud than it is to detect it and recoup your losess.

The ability to appropriately monitor these positions is predicated on the fact that you know what risks your company are exposed to, and how you can appropriately mitigate them. Having an understanding of the different types of frauds and how they can be perpetrated can be very helpful in assessing your exposure. We will start to explore these areas in my next post.

By. John Surrette, Jr., CPA, CFE, MBA
Senior Audit Manager

Labels: Accounting, CPA, Fraud, KLR, Surrette

How would you like another 7% to drop to the bottom line? Of course you would, right? Well, according to the Association of Certified Fraud Examiners 2008 Report to the Nation on Occupational Fraud & Abuse, that is the amount participants in the survey estimated was lost annually due to fraud. There are several other interesting statistics that came out of the survey, including the fact that the median loss was $175,000, and more than a quarter of the more than 959 cases studied suffered losses of over $1 million. With the economy continuing to decide on a direction, would you even want to suffer a loss of $10,000? I didn’t think so.

Now I know what you’re saying to yourself, my accountant is on the lookout for fraud so I have nothing to worry about. If you think that is the case, you may be in for a surprise. Bernie Madoff had an accountant too, who audited his company’s financial statements and issued a “clean” opinion on them. Remember Arthur Andersen? I know it’s been several years, but they were responsible for auditing Enron (and went out of business as a result of Enron’s collapse). I know these are two high profile examples, but the fact is, most frauds are uncovered by tips, and not by auditors.

So what does this all mean for you? What can you do to make sure your company is not the next to grace the front page with a story of financial malfeasance? There are a lot of different ways you can protect your assets, and it starts with taking a fresh look at your internal controls and evaluating where your exposure lies. In my next post I will start to explore the different types of internal fraud. Until then, remember, it’s always cheaper to prevent fraud than to try and recoup your loses after its been detected.

By. John Surrette, Jr., CPA, MBA
Senior Audit Manager

Labels: Accounting, Audit, Fraud, KLR, Surrette