Fraud: An Auditor’s Perspective - PowerPoint Presentation

Slide1

Fraud: An Auditor’s Perspective

Lindsey McGuire, CPA

Brown Armstrong Accountancy Corporation

Slide2

Slide3

Understanding the nature and characteristics of fraud Apply the knowledge on an entity level

Evaluate the risk under existing system and controls

Developing preventive internal controls

Detect fraud systematically

Evaluating the risks of Fraud

Slide4

Misappropriation of AssetMost common type of fraud and usually involves cashCorruption Schemes More difficult to protect against

Collusion increases opportunities for fraud

Fraudulent Financial Reporting

Generally higher level perpetrators involvedLargest loss per incidentTypes of Fraud

Slide5

Pressure Greed

Reason

Opportunity

Lack of controls

Ability to override controls Rationalization

Not wrong

No choice

Tone at the top

Characteristics of Fraud

Slide6

CharacteristicsReason – greed, enhanced lifestyle, pressureOpportunity – lack of controls or ability to circumvent or override controlsRationalization- victim is at fault

Approach

Establish

relationship

Put up a great façade Don‘t take or rarely take vacation Limit exposure

Who typically commits fraud?

Slide7

Living beyond meansFinancial difficultyDivorce or family problemsExcessive pressure from family, peers or bossControl issues, not wanting to share dutiesRefusal to take vacation

Defensiveness, excessive complaints

Irritability and inability to relax

Red Flags

Slide8

What conditions are necessary for it to occur?

Could this type of fraud occur here?

Slide9

Perpetrator was responsible for petty cash reconciliation and accounts payable Experienced employee with positive reputationInsisted on complete and accurate documentationWas always timely with the audit requirements

Almost too nice

Never took time off

Expense reimbursement

Slide10

Cash for estimated expenses were given to employees before trips Receipts were returned and kept in the petty cash drawerWhen petty cash drawer was full of vouchers

Perpetrator would prepare reimbursement and Treasurer would provide check to perpetrator to cash at the bank

Invoices were paid both with check and through petty cash

Incorrect totals on vouchers, duplicated or alerted receipts, original and “corrected” invoices submitted for payment

Double trouble payments

Slide11

Boss sought out information during perpetrator’s vacation Noticed petty cash disbursement to supplier was normally paid by check and started an investigation resulting in $100K in uncovered losses

Lessons learned

Offsite cash collections site have higher risk due to volumes of cash flow.

Need

segregation of duties in all areas SupervisionNeed control activities to ensure that reimbursement procedures are written and followed.

Discovery & Lessons Learned

Slide12

Perpetrator had experience but no higher education background. Moved up the chain from clerk to accounts payable over the course of 10 yearsAlmost too nice again Appeared to be a loyal employee and capable of performing duties

Responsible for payments to vendors and the bank reconciliation

Prepared check requests for tax payments

Altered payee to benefit himself

Some checks were written to bank credited to perpetrator’s benefits

Check Tampering

Slide13

After the employee left the agency, auditors performed an audit of the books Identified two checks to agency when they knew only the agency had only received one.Found cancelled checks written to bank instead of government

Segregation of duties

Don’t allow person responsible for issuing checks to be the person reconciling the bank accounts

Control activities Reassess controls on a regular basis and have the controls in writing

Trust employees, but create safeguards through cross trainings

Discovery & Lessons Learned

Slide14

CPA firm provides services to a client A wire transfer of $100K was authorized from the client’s bank to a bank in another state through the use of a “spear-phishing” scheme Occurred when CPA accessed the firm’s resources and opened an email containing a virus.

Information Technology weakness

Slide15

Discovered during the month end bank reconciliation. After investigation, each bank disclaiming responsibility for the hackers gaining access to the client’s electronically stored passwords and user IDs, and the client asserted that the CPA firm failed to take adequate steps to protect the client’s assets.

Discovery

Slide16

Always do timely cash reconciliations on a daily basis and on a monthly basis for all bank accounts (even clearing or zero balance)IT Fraud is on the rise with this ever growing technology age

Make sure your IT security is up to par

Perform IT risk assessments and security audits timely

Verify that any services provider has adequate security over your information

Provide adequate IT fraud training for your employeesLessons Learned

Slide17

Former president of a CPA’s audit client was convicted of colluding with the client’s bookkeeper to embezzle $2.6M over a 15 year period. The embezzlement was uncovered by the client. A long-time auditor’s check request resulted in a client uncovering an embezzlement by its accountant. The client lost track of a signature stamp. Embezzler use to stamp to forge an authorized signature on checks and falsified the system to indicate a legitimate vendor for checks made payable to the embezzler.

Fraudster embezzled money by inflating checks to pay the company’s credit card and applying the excess to make payments on their own personal credit card charges.

Examples of other Fraud and Defalcation claims

Slide18

Related party transactions through funds or component units, intergovernmental transfersInflating transactions to manipulate financials

Contract or CIP change orders

Issuing a contract to a vendor under the threshold for Board approval and then preparing a change order to move the amount over the threshold but not obtaining Board approval.

Federal/state awards funds or Special revenue funds are not being properly used for their purpose.

No proper review of transactions in detail for allowable costs/purpose in addition to accuracy. System

ability to manipulate or delete transaction after they have been posted

.

Other comment areas of risk

Slide19

Understand core systemsInitiation processAuthorization Execution Recording

Verification

Documentation

Are controls documented in detail?

NarrativesFlow ChartsScreen Prints Evaluating risk

Slide20

Identify areas affected by system Evaluate actions within the system Determine control activity when action supports assertion

Identify Control Activities

Slide21

Review control activitiesWhat could go wrong?Type of issuesDesign Operating effectivenessNature of issue

Was it an error or was it fraud?

Evaluate Control Deficiencies

Slide22

Conventional controls Performance indicatorsInformation processing controls Physical controlsSegregation of duties

Management review and approval

Tone at the top

How are the importance of ethical behavior and appropriate business practices communicated to employees?

Develop Preventive Internal Controls

Slide23

Tips – 43%Management review- 16%Internal audit – 14%Accident - 7%Account reconciliation – 7%Document examination – 4%

External audit & surveillance – 3% each

Law enforcement notification – 2%

IT controls, confession & other – 1%

How is it Found?

Slide24

Identify the highest risk areas Target signs of fraud using different approaches Analytical procedures- what should be versus what it is

Inspection

Observation

Inquiry

Confirmation Recalculation Re-performance Create Fraud Finding Procedures

Slide25

Questions?Lindsey McGuire

lmcguire@bacpas.com

661-324-4971

Fraud: An Auditor’s Perspective