Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech...
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Transcript of Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech...
Watch Your Back:Watch Your Back:Protecting Your Business Against Protecting Your Business Against
Back-Office FraudBack-Office Fraud
Steve SchottenfeldSteve Schottenfeld
TraceTech Solutions, LLCTraceTech Solutions, LLC
In January, 2010, a Michigan man was sentenced to one year in prison after he
and his wife (a bookkeeper for a McDonald’s franchise owner) admitted
to stealing $441,672.75 from the business.
Over a nine-month period she wrote 42 unauthorized checks to
herself and her husband
In June, 2008, a payroll and benefits coordinator for Cavicchio
Greenhouses, Inc. in Sudbury, MA pleaded guilty to stealing more that
$290,000 from the firm
She had created and “paid” two ghost employees
The scheme went undetected for four years
In May, 2008, a bookkeeper at Maine’s Winslow Aluminum, Inc.
pleaded guilty to stealing $900,000 from the company
The bookkeeper was the company president’s daughter
A Florida magazine publisher’s CFO was recently found guilty of setting up bogus accounts that only he had
access to, and depositing forged checks into those accounts
After four years he had stolen $1,500,000 from the company
In August, 2009 a former bookkeeper for several Planet
Fitness clubs in Texas and Oklahoma was sentenced to 41
months in prison and ordered to pay restitution 0f $600,000.
Over a 30-month period she made out checks payable to cash, to
herself, and to her then-husband
In May, 2009, an accounts payable clerk at Drytac, Corp., a small
Virginia manufacturer, pleaded guilty to embezzling $151,000 from
the firm
She had been with the firm for ten years
The theft was discovered only when she left a counterfeit check on the copier
before she went on vacation
A bookkeeper for a California orchard grower recently pleaded guilty to writing additional payroll
checks to herself
Before the scheme was uncovered she had stolen
$470,000 from the company over a five-year period
You’ll LearYou’ll Lear n About …n About …
the risks of employing a dishonest the risks of employing a dishonest personperson
low-cost ways to mitigate that risklow-cost ways to mitigate that risk
how to deal with fraud after it’s been how to deal with fraud after it’s been detecteddetected
AgendaAgenda
The human aspect of fraudThe human aspect of fraud
The statisticsThe statistics
Combating back-office fraudCombating back-office fraud
Responding to fraudResponding to fraud
The PerpetratorsThe Perpetrators
Trusted employeesTrusted employees
Financial responsibilitiesFinancial responsibilities:: bookkeepers, accountants, A/P clerks, A/R bookkeepers, accountants, A/P clerks, A/R
clerks, payroll managers, CFOsclerks, payroll managers, CFOs
Familiar with the business’ Familiar with the business’ financial financial controlscontrols
The PerpetratorsThe Perpetrators
Typically femaleTypically female
Age: 40-49Age: 40-49
Frequently living beyond their means Frequently living beyond their means or experiencing financial difficultiesor experiencing financial difficulties
First-time offenderFirst-time offender
The Fraud RecipeThe Fraud Recipe
PRESSURE RATIONALIZATION OPPORTUNITY
$THEFT
StatisticsStatistics(period from 2006 to 2007)(period from 2006 to 2007)
Average fraud loss:Average fraud loss:• 7%7% of of annualannual revenues revenues**
• $200,000$200,000 over 2 years over 2 years
Average fraud scheme duration:Average fraud scheme duration:• overover 22 years*years*
*** Based on the “2008 Report to the Nation on Occupational Fraud and Abuse”, Association of Certified Fraud Examiners
Fraud RiskFraud Risk
Less-effective or non-existent fraud Less-effective or non-existent fraud prevention and detection controlsprevention and detection controls
Unwarranted reliance on external Unwarranted reliance on external auditors to detect fraudauditors to detect fraud
Small businesses are high fraud risks
Red FlagsRed Flags
Financials do not adhere to normsFinancials do not adhere to norms
Employees living beyond expectationsEmployees living beyond expectations
Employees who refuse vacationsEmployees who refuse vacations
Lack of complete and timely Lack of complete and timely reconciliation of assetsreconciliation of assets
Mitigating Small Business Fraud Mitigating Small Business Fraud RiskRisk
EnvironmentalEnvironmental Establish a culture of honesty and ethicsEstablish a culture of honesty and ethics Extend behavioral expectations to vendors, Extend behavioral expectations to vendors,
contractors, customers, volunteers, interns contractors, customers, volunteers, interns and othersand others
SpecificSpecific Policies, procedures, controls to counter Policies, procedures, controls to counter
common schemescommon schemes
Common Small Business Fraud Common Small Business Fraud SchemesSchemes
Check TamperingCheck Tampering Fraudulent BillingFraudulent Billing Payroll FraudPayroll Fraud
… … many othersmany others
Check TamperingCheck Tampering
Intercepting, forging or altering a Intercepting, forging or altering a check drawn on one of the check drawn on one of the organization’s bank accountsorganization’s bank accounts
Mitigating the RiskMitigating the Risk
Keep checkbooks under lock and key (if practical)Keep checkbooks under lock and key (if practical)
Sign all checks, and only with proper documentationSign all checks, and only with proper documentation
Segregate check-writing and bank reconciliation duties Segregate check-writing and bank reconciliation duties (if practical)(if practical)
Examine disbursements (check images and electronic Examine disbursements (check images and electronic transfer descriptions) in bank statements to determine transfer descriptions) in bank statements to determine actual payeesactual payees
Fraudulent BillingFraudulent Billing
Any scheme in which a person causesAny scheme in which a person causes
an employer to issue a payment byan employer to issue a payment by
submitting invoices for fictitious goods orsubmitting invoices for fictitious goods or
services, inflated invoices or invoices forservices, inflated invoices or invoices for
personal purchasespersonal purchases
Mitigating the RiskMitigating the Risk
Vet every new vendorVet every new vendor Segregate responsibilities of initiating and Segregate responsibilities of initiating and
vetting new vendors (if practical)vetting new vendors (if practical)
Examine a vendor report from the Examine a vendor report from the accounting system annuallyaccounting system annually Pay special attention to unfamiliar service Pay special attention to unfamiliar service
providersproviders
Examine credit card statements monthlyExamine credit card statements monthly Look for unauthorized, personal purchasesLook for unauthorized, personal purchases
Payroll FraudPayroll Fraud
Any scheme in which an employee Any scheme in which an employee causes his/her employer to issue a causes his/her employer to issue a payment by making false claims for payment by making false claims for compensationcompensation
Mitigating the RiskMitigating the Risk
Regularly examine payroll reports. Look for:Regularly examine payroll reports. Look for:
Unexpectedly high salaries, wages Unexpectedly high salaries, wages commissions and bonusescommissions and bonuses
Ghost employeesGhost employees
Employees with few or no deductionsEmployees with few or no deductions
Establishing Financial ControlsEstablishing Financial Controls
Accountants can provide Accountants can provide excellent, independent advice on excellent, independent advice on strengthening your business’ strengthening your business’ financial controls.financial controls.
When Fraud Is SuspectedWhen Fraud Is Suspected
““Suspected” is different than “Proven”Suspected” is different than “Proven”
The extent of the fraud may be unknownThe extent of the fraud may be unknown
The highest priority is protecting the The highest priority is protecting the innocentinnocent
Seek helpSeek help AccountingAccounting LegalLegal Human ResourcesHuman Resources
Parting ThoughtsParting Thoughts
Small business, back-office fraud is a problem Small business, back-office fraud is a problem that can significantly impact cash flow, profit and that can significantly impact cash flow, profit and employee relationsemployee relations
Small business, back-office frauds are Small business, back-office frauds are perpetrated by the least-suspected employeesperpetrated by the least-suspected employees
Good preventive and deterrent controls don’t Good preventive and deterrent controls don’t negate the need for vigilance. negate the need for vigilance. Trust but VerifyTrust but Verify. .