Fraud Detection and Prevention Presented by Carrie Kennedy and Dustin Birashk, Moss Adams LLP June 20, 2012 1 Financial Services Group, Moss Adams LLP DISCLOSURE STATEMENT The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this
information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought. 2 Financial Services Group, Moss Adams LLP ABOUT MOSS ADAMS LLP
3 Full-service public accounting firm with assurance, tax, and consulting services for middle-market public and private companies One of the 15 largest accounting firms in the
U.S. and largest firm headquartered on the West Coast 21 offices in Arizona, California, Kansas, New Mexico, Oregon, and Washington Founded in 1913 and headquartered in Seattle, Washington We are the 4th largest firm servicing credit unions in the nation (based on assets) Founding member of Praxity, a global alliance of accounting firms Financial Services Group, Moss Adams LLP PRESENTERS Carrie Kennedy, CPA, Partner
Carrie has been in public accounting since 1997 and is an audit partners specializing in credit unions and other financial services companies. Dustin Birashk, CPA, Senior Manager Dustin has been in public accounting since 1999 and is an audit senior manager specializing in credit unions and other financial services companies. 4 Financial Services Group, Moss Adams LLP PRESENTATION OBJECTIVES
At the end of the presentation, participants should be able to: o Understand the key global statistics on fraud and how they relate back to their credit union o Identify the key fraud risks and key fraud prevention/detection controls o Establish a culture of fraud awareness, prevention, and detection 5 Financial Services Group, Moss Adams LLP WHY THE FOCUS ON FRAUD?
At any given moment, there is a certain percentage of the population thats up to no good. J. Edgar Hoover 6 Financial Services Group, Moss Adams LLP WHY THE FOCUS ON FRAUD? Report: 82% of executives admit
to cheating on the golf course Source: Fast Company 7 Financial Services Group, Moss Adams LLP FRAUD EXAMPLES IN THE NEWS NEC o Invalid revenue ($18M) and kickbacks ($4.2M) NBC Universal, Inc. o Wire fraud ($813K)
Madoff o Ponzi scheme ($50B) 8 Financial Services Group, Moss Adams LLP SIGN OF THE TIMES Loyal employees have bills to pay and families to feed. In a good economy, they would never think of committing fraud against their employers. But especially now,
organizations must be vigilant during these turbulent times by ensuring proper fraud prevention procedures are in place. ACFE President James D. Ratley, CFE 9 Financial Services Group, Moss Adams LLP ECONOMIC RECESSION Employees pose the greatest fraud threat in the current economy Layoffs are affecting organizations internal
controls Fraud levels are expected to remain elevated 10 Financial Services Group, Moss Adams LLP FRAUD RISK Opportunity Pressure/Incentive
11 Rationalization Financial Services Group, Moss Adams LLP ASSOCIATION OF CERTIFIED FRAUD EXAMINERS The Association of Certified Fraud Examiners (ACFE) completes a report every two years summarizing the key characteristics of fraud. The most recent report is from 2012. The following are excerpts from that summary (total of 1,388 cases worldwide)
12 Financial Services Group, Moss Adams LLP MOST COMMON FRAUD FREQUENCY Source: ACFE 2012 Report to Nations 13 Financial Services Group, Moss Adams LLP MOST COMMON FRAUD MEDIAN LOSS Source: ACFE 2012 Report to Nation s
14 Financial Services Group, Moss Adams LLP INITIAL DETECTION OF FRAUD Initial Detection of Occupational Frauds Tip: 43.3% Management Review: 14.6% Internal Audit: 14.4% By Accident: 7.0% Account Reconciliation: 4.8% Document Examination: 4.1% External Audit: 3.3%
Source: ACFE 2012 Report to Nations 15 Financial Services Group, Moss Adams LLP SOURCE OF TIPS Source: ACFE 2012 Report to Nations 16 Financial Services Group, Moss Adams LLP IMPACT OF HOTLINES
Source: ACFE 2012 Report to Nations 17 Financial Services Group, Moss Adams LLP TYPE OF VICTIM - FREQUENCY Source: ACFE 2012 Report to Nations 18 Financial Services Group, Moss Adams LLP
SIZE OF VICTIM - FREQUENCY Source: ACFE 2012 Report to Nations 19 Financial Services Group, Moss Adams LLP DISCUSSION Loan officer perpetrates a fraud by advancing funds on a revolving line Fraud goes undetected for an extended period of time Ultimately identified by a random account
confirmation What could have been done to either prevent the fraud or to detect it sooner? 20 Financial Services Group, Moss Adams LLP INDUSTRY OF VICTIM ORGANIZATIONS 21 Source: ACFE 2012 Report to Nations Financial Services Group, Moss Adams LLP
IMPACT OF FRAUD-PREVENTION CONTROLS Source: ACFE 2012 Report to Nations 22 Financial Services Group, Moss Adams LLP IMPACT OF FRAUD-PREVENTION CONTROLS Source: ACFE 2012 Report to Nations
23 Financial Services Group, Moss Adams LLP DISCUSSION Internal accountant responsible for approving invoices creates a fictitious company (a valid corporation is formed) and generates invoices to run through the credit union They were also responsible for new vendor approval and
entry into the AP system They approve the invoices which are subsequently paid Only identified after they continued to increase the size of the invoice to level that was very noticeable How could this have been prevented or detected earlier?
24 Financial Services Group, Moss Adams LLP PRIMARY INTERNAL CONTROL WEAKNESSES OF VICTIMS Source: ACFE 2012 Report to Nations 25 Financial Services Group, Moss Adams LLP
DISCUSSION Individual responsible for reconciling suspense accounts steals from the credit union for an extended period They also have maintenance access to both deposit accounts and the general ledger Ultimately caught when they got too greedy and the impact
was noticeable on the income statement How could it have been prevented or detected earlier? 26 Financial Services Group, Moss Adams LLP WHO COMMITTED THE FRAUD 27
Source: ACFE 2012 Report to Nations Financial Services Group, Moss Adams LLP SIGNIFICANT FRAUD RISK FACTORS Lack of detailed formal written policies and procedures Lack of segregation of duties Member complaints Unreconciled accounts and review of reconcilements Recurring audit findings Missing financial records
28 Financial Services Group, Moss Adams LLP SIGNIFICANT FRAUD RISK FACTORS Untimely preparation of financial statements Lack of employee vacations
Lack of significant control over transaction cycles Lack of management oversight Excessive employee addictions (gambling, drugs) Incorrect, incomplete, or erroneous financial reporting Lack of internal control reports from data processing system 29 Financial Services Group, Moss Adams LLP SIGNIFICANT FRAUD RISK FACTORS
Bonus or incentive plans Complex transactions Rapid growth Corporate credit cards Employee financial problems Inactive Supervisory Committee
Lack of audit/verification Lack of employee training High employee turnover 30 Financial Services Group, Moss Adams LLP ACFE EXECUTIVE SUMMARY Asset misappropriation approximately 90% of all frauds. Approximately 5% financial fraud, yet loss can be largest. Average life of a fraud = 18 months. Tips continue to be the primary detection source.
Smaller organizations most susceptible due to lack of controls. Banking industry once again at the top of the list. 31 Financial Services Group, Moss Adams LLP ACFE EXECUTIVE SUMMARY Anti-fraud controls helped to lower overall loss and duration. Frauds by executives cause the most damage. Organizations tend to over-rely on external audits as the fraud-prevention tool. Surprise audits were underutilized. Less than
30% of victims actually performed them. They are key perception tools to eliminate the opportunity. 32 Financial Services Group, Moss Adams LLP INTERNAL CONTROL AND FRAUD PREVENTION TIPS Evaluate managements assessment of fraud and mitigating controls. Evaluate the internal auditors testing of the effectiveness of each fraud control. Evaluate how management has set the tone
from the top to promote ethical behavior. Communicate zero tolerance. 33 Financial Services Group, Moss Adams LLP INTERNAL CONTROL AND FRAUD PREVENTION TIPS Ensure the internal audit function reports directly and candidly to the Supervisory Committee. Ensure that internal auditors continually conduct tests to detect fraud or control gaps Follow up on prior audit findings from the internal
auditor, external auditor, and regulators. Evaluate the nature and cause of findings. Ensure that annual fraud policy is signed by all employees 34 Financial Services Group, Moss Adams LLP BASIC INTERNAL CONTROL SAFEGUARDS
Tone at the top Segregation of duties Whistleblower policy and hotline Rotation of personnel Mandatory vacations Reconciliation and review process Setting of accounting system privileges Access levels review and adjust 35
Financial Services Group, Moss Adams LLP THANK YOU Carrie Kennedy 509-777-0160 [email protected] Dustin Birashk 425-303-3023 [email protected] 36 Financial Services Group, Moss Adams LLP
