PowerPoint Presentation
Fraud Autopsies: Inside Real-Life Fraud InvestigationsWhen
Internal Controls Fail Or Fail to Exist Devastation Strikes!
Frank A. Suponcic, CPA, CFE, CFFFebruary 28, 2017
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WHAT DO I DO?
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stylesSecond levelThird levelFourth levelFifth levelAbout ABC
Company:Cleveland-area medical services companyS corporationWas
owned equally by two individuals each earning an annual salary of
$360,000 One owner focused on the technical aspects of the business
while the other owner was strictly administrativeThey both shared
the same officeand even faced each other every day. The
administrative owner was so highly regarded that he was chosen to
be the best man in the technical owners wedding.
CASE #1: ABC COMPANY
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Fraud covered five years before detected by accidentIt took
nearly 18 months to secure all of the documents that enabled us to
draw our conclusions as to the different types and magnitude of the
various fraudsTo this date, the nearly $7M of misappropriations
identified in this case formed the basis of the largest forensic
case we have investigatedJust what does one do with $7M in stolen
funds?Despite the material loss of funds, the company remains in
business todayCASE #1: ABC COMPANY
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DiscoveryThe participantsThe investigationExpansive
methodsCriminal conviction for income tax evasionSentencing and
restitutionInternal controlsLines of defense
What preventive controls might have stopped this?
CASE #1: ABC COMPANY
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stylesSecond levelThird levelFourth levelFifth levelMethods of
Theft:Unauthorized officer compensation ($1.6M)Bogus payroll and
employee benefit deductions Unauthorized credit cardsUnauthorized
home equity line paymentsPersonal expenditures on corporate credit
cards ($3.4M)
What detective controls might have caught this?
CASE #1: ABC COMPANY
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stylesSecond levelThird levelFourth levelFifth levelMethods of
Theft:Personal payments with corporate checksFraudulent electronic
transfers to personal accounts of family members and a
trustFictitious employeesTheft of co-owners and former employees
paychecksCash receipt diversion
What detective controls might have caught this?
CASE #1: ABC COMPANY
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stylesSecond levelThird levelFourth levelFifth levelOther Matters
of Concern:Under-reporting of wages and withholding to city ($637K
of withholding not paid)Under-payment of Ohio Workers Compensation
premiums ($202K)Penalties NOT associated with the actual
theftFraudulent federal corporate and individual income tax
returnsConvicted for?Sentence
CASE #1: ABC COMPANY
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About DEF CompanyNationally recognized privately held Ohio
manufacturer with distribution outlets in every stateCompany
president has an exhaustive schedule, constantly traveling
throughout the U.S. As a result, he requires an accountant to
manage his personal financial affairs and those of a smaller
related entity. His paychecks fund the operations of the related
entity.The accountant, highly recommended by his previous employer,
and earning an annual salary of $100,000, began his employment with
DEF in 2002. In 2004, he was promoted to handle the financial
matters of DEFs president. CASE #1: DEF COMPANY
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Fraud went undetected for over six yearsLength of investigation
Fraud discovered by accident. Employee was restructured out of the
position enabling him to commit the crimeRecipe for disaster:
Trusted employee Worked aloneMinimal supervisionFew internal
controls$2M embezzlementWhat preventive controls might have stopped
this?
CASE #2: DEF COMPANY
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Methods of Theft:Expense report fraudUnauthorized credit card
transactionsPayments to cash and to the thief directlyDirect
payments for personal credit cards
Only six monthly expense reports were substantiated77% of all
disbursements lacked substantiation
CASE #2: DEF COMPANY
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stylesSecond levelThird levelFourth levelFifth level605 QuickBooks
payee disbursement alterations concealed the embezzlement
133 direct payments $430K179 checks payable to cash $185K18
personal expenditures $46K129 payments to three different credit
card companies $995K605 fraudulent corporate credit card charges
$324K
CASE #2: DEF COMPANY
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stylesSecond levelThird levelFourth levelFifth levelThe Target:Gave
away some of the stolen money in order to feel loved as he suffered
from very low self-worthHoarded many unauthorized purchasesRe-paid
$435KLiquidated all real estate and personal assetsPled guilty to
aggravated theftSentenced to six years in prison
What detective controls might have caught this?
CASE #2: DEF COMPANY
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stylesSecond levelThird levelFourth levelFifth levelAbout GHI
Company:Cleveland-area scrap-related companyOwned by a father and
son who were both highly technologically knowledgeable in this
competitive industry Client of the firmwhile we had assisted them
in a prior litigation support matter, the engagement did not
involve an internal misappropriationSelling the need for a
preventive forensic assessment is challenging. Recognizing a red
flag, GHI engaged us to review their existing internal controls and
provide suggestions for enhancement. CASE #3: GHI COMPANY
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One of the five employees interviewed by us for an internal
control assessment (with 40 recommendations) was later convicted of
a $330,000 payroll-related embezzlement. How could this have
happened?Immense managerial trust: Longtime employeeRed flags and
internal control weaknesses were present Theft occurred over 9+
yearsNegative payroll deductionsA background check would have
disclosed his criminal past
CASE #3: GHI COMPANY
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Pled guilty to theftComplete restitutionSentenced to five years
probation and 30 weekends in jailFailed to report theft income on
Form 1040
CASE #3: GHI COMPANY
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stylesSecond levelThird levelFourth levelFifth levelSix employees
conspired to kill this trucking company so that they could start up
a competing businessWillful destruction of accounting recordsGift
card abuse/rebate theft/petty cash theftTheft of fuel, vehicles and
other assetsPayroll/HR sick and vacation abuseLack of evidence did
not allow a criminal indictment
CASE #4: JKL TRUCKING
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stylesSecond levelThird levelFourth levelFifth level50-year-old
single motherPigs get fat, hogs get slaughteredDiscovered by chance
by a temporary workerUsed erasable inkPled guilty to theftSentenced
to five years probation
CASE #5: DR. COACH
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stylesSecond levelThird levelFourth levelFifth levelPart-time
bookkeeperbeginning salary $18,000Sloppy work, many payroll tax
compliance errorsExecutive requests a forensic investigationSalary
increased to $26,000 + perksA year later, her salary was
$250,000fired!Sued for wrongful terminationCASE #6: MNO COMPANY
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stylesSecond levelThird levelFourth levelFifth levelEffective
internal controls are critical in minimizing fraudFinancial greed
and need are powerful motivatorsFrauds can occur undetected for a
long time. Time = MoneyForensic investigations are not
cheapInternal control assessments, if recommendations are
implemented, are a prudent expenditure of fundsObserve
employeesdoes lifestyle match earnings?Trust can be easily broken
(assuming it ever existed)
TAKEAWAYS
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Background and Credit ChecksSetting the anti-fraud tone at the
topMandatory vacation and job rotation (if possible)Fraud risk
assessmentEmployee educationStand-alone written fraud policy
SUGGESTIONSFRAUD PREVENTION
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Use of External Internal AuditorsSurprise Fraud
AuditsWhistle-Blower Incentive ProgramsFraud HotlineTest the
Internal ControlsBond Your EmployeesForensic Review
SUGGESTIONSFRAUD PREVENTION
Controls, Controls, Controls!
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Frank A. Suponcic, CPA, CFE, CFFPartner, Valuation and
Litigation Advisory ServicesSkoda Minotti CPAs, Business and
Financial Advisors
[email protected] more information,
please visit skodaminotti.com/vlasand click on Litigation
CONTACT ME
company/skoda-minotti@SkodaMinotti/SkodaMinotti
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