Fraud & Abuse Dr. Raymond S. Kulzick, CPA, CFE St. Thomas University Miami, Florida Copyright 2004 R. S. Kulzick.

Fraud & AbuseFraud & Abuse

Dr. Raymond S. Kulzick, CPA, CFEDr. Raymond S. Kulzick, CPA, CFESt. Thomas UniversitySt. Thomas University

Miami, FloridaMiami, Florida

Copyright 2004 R. S. KulzickCopyright 2004 R. S. Kulzick

OverviewOverview

What is Occupational Fraud and What is Occupational Fraud and AbuseAbuse

Some FactsSome Facts Accounting & AuditingAccounting & Auditing Fraud TheoriesFraud Theories Internal ControlInternal Control Common Schemes & PreventionCommon Schemes & Prevention Concluding CommentsConcluding Comments

What is Fraud ?What is Fraud ?

Deception includingDeception including• A representationA representation• About a material pointAbout a material point• Which is falseWhich is false• And intentionally or recklessly soAnd intentionally or recklessly so• Which is believedWhich is believed• And acted upon by the victimAnd acted upon by the victim• To the Victim’s damageTo the Victim’s damage

Occupational FraudOccupational Fraud

The use of one’s occupation for The use of one’s occupation for personal enrichment through the personal enrichment through the deliberate misuse or deliberate misuse or misapplication of the employing misapplication of the employing organization’s resources or organization’s resources or assets.assets.

What is Abuse ?What is Abuse ?

Abuse describes employee practices Abuse describes employee practices that, directly or indirectly, increase an that, directly or indirectly, increase an employer’s costs.employer’s costs.

Examples:Examples:– Take sick time when not sickTake sick time when not sick– Come in late, take a long lunchCome in late, take a long lunch– Do slow or sloppy workDo slow or sloppy work– Take products belonging to the organizationTake products belonging to the organization– Collect more money than due on expensesCollect more money than due on expenses

Facts About Facts About Occupational Fraud Occupational Fraud and Abuseand Abuse Association of Certified Fraud Examiners Association of Certified Fraud Examiners

2002 Report to the Nation – Occupational 2002 Report to the Nation – Occupational Fraud and AbuseFraud and Abuse– 971 actual completed cases from CFEs – U.S.971 actual completed cases from CFEs – U.S.

KPMG Fraud Survey 2003KPMG Fraud Survey 2003– 450 U.S. execs in companies & government450 U.S. execs in companies & government

PWC Global Economic Crime Survey 2003PWC Global Economic Crime Survey 2003– Senior execs 3,600 companies in 50 countriesSenior execs 3,600 companies in 50 countries

ACFE 2002 ReportACFE 2002 Report

$600 billion cost in U.S.$600 billion cost in U.S. About $4,500 per employeeAbout $4,500 per employee 50% of frauds exceeded $100,00050% of frauds exceeded $100,000 16% of frauds exceeded $1,000,00016% of frauds exceeded $1,000,000 80% involve asset misappropriations, 80% involve asset misappropriations,

corruption, or fraudulent statementscorruption, or fraudulent statements

ACFE 2002 ReportACFE 2002 Report

Average scheme lasted 18 monthsAverage scheme lasted 18 months Most common discovery is a tipMost common discovery is a tip 22ndnd most common is by accident most common is by accident Hot lines reduce losses by 50%Hot lines reduce losses by 50% Internal audits, external audits, & Internal audits, external audits, &

background checks also reduced lossbackground checks also reduced loss Small businesses avg. loss $127,500Small businesses avg. loss $127,500

KPMG 2003 SurveyKPMG 2003 Survey

75% of organizations fraud in last year75% of organizations fraud in last year 60% of the frauds were employees60% of the frauds were employees Theft of assets, check fraud & Theft of assets, check fraud &

expense account abuse were most expense account abuse were most commoncommon

Leading discovery was internal Leading discovery was internal controls, followed by internal auditcontrols, followed by internal audit

Other top 5 were employees, accident Other top 5 were employees, accident & anonymous tip& anonymous tip

PWC 2003 Global PWC 2003 Global SurveySurvey 41% North American Companies 41% North American Companies

had loss in last two yearshad loss in last two years 52% for companies with 1,000+ 52% for companies with 1,000+

employeesemployees Average loss was $2,200,000Average loss was $2,200,000 All industriesAll industries Impact on brand image, reputation Impact on brand image, reputation

& morale were important& morale were important

PWC 2003 Global PWC 2003 Global SurveySurvey 60% of companies with a loss 60% of companies with a loss

reported asset misappropriationreported asset misappropriation 75% of victims recovered less 75% of victims recovered less

than 20% of lossthan 20% of loss Only half of victims had insuranceOnly half of victims had insurance

2004 Report to the Nation 2004 Report to the Nation On Occupational Fraud & On Occupational Fraud &

AbuseAbuse Largest fraud study everLargest fraud study ever Study of 2,608 fraud casesStudy of 2,608 fraud cases Reported by CFEsReported by CFEs Total: $15 billion in lossesTotal: $15 billion in losses $22 to $2.5 billion$22 to $2.5 billion

CostsCosts

How to measure? How to measure? Orgs don’t know what they loseOrgs don’t know what they lose Opinions of CFEsOpinions of CFEs Six percent of gross revenuesSix percent of gross revenues $400 billion per year$400 billion per year Twice the U.S. defense budgetTwice the U.S. defense budget

Position in the Position in the Organization - CasesOrganization - Cases

12%

30%

58%

0% 10% 20% 30% 40% 50% 60%

Owners

Management

Employees

Position in the Position in the Organization – Median Organization – Median

LossLoss

$1,000,000

$250,000

$60,000

$0 $200,000 $400,000 $600,000 $800,000 $1,000,000

Owners

Management

Employees

Median Loss by GenderMedian Loss by Gender

$48,000

$185,000

$0 $50,000 $100,000 $150,000 $200,000

Female

Male

Median Loss by AgeMedian Loss by Age

Direct and linear correlation Direct and linear correlation between age and median lossbetween age and median loss

Older tend to occupy higher Older tend to occupy higher ranking positionsranking positions

Greater access to revenues, Greater access to revenues, assets, resourcesassets, resources

5

Median Loss by AgeMedian Loss by Age

$346,000

$280,000

$196,000

$100,000

$54,000

$50,000

$12,000

$0 $100,000 $200,000 $300,000 $400,000

60+

51-60

41-50

36-40

31-35

26-30

<25

Median Loss by Marital Median Loss by Marital StatusStatus

$50,000

$54,000

$80,000

$150,000

$0 $50,000 $100,000 $150,000

Separated

Single

Divorced

Married

Median Loss by Median Loss by EducationEducation

$275,000

$200,000

$50,000

$0 $100,000 $200,000 $300,000

Post-Graduate(13%)

College (45%)

High School(42%)

Median Loss Per Median Loss Per Number of EmployeesNumber of Employees

$126,000

$80,000

$100,000

$120,000

$0 $40,000 $80,000 $120,000 $160,000

10,000+

1,000-10,000

100-1,000

1-100

Classifying Occupational Classifying Occupational

Fraud and AbuseFraud and Abuse

B rib ery

C on flic ts o f In te res t

I lleg a l G ra tu it ies

E xto rt ion

CORRUPTION

Larcen y

Skim m in g

F rau d u len t D isb u rsem en ts

C ash In ven to ry

ASSET M ISAPPROPRIAT ION

F in an c ia l

N on -F in an c ia l

FRAUDULENT STATEM ENTS

OCCUPATIONAL FRAUD AND ABUSE

Number of CasesNumber of Casesby Scheme Typeby Scheme Type

Asset Mis80.4%

Corruption14.6%

Other1.0%

Fraud Stmts4.0%

*Represents size of misstatement rather t*Represents size of misstatement rather than actual cash losshan actual cash loss

Median Loss by Median Loss by Scheme TypeScheme Type

$107, 230

$4,000,000*

$440,000

$65,000

0 1,000 2,000 3,000 4,000

Thousands

Other

Fraud Stmts

Corruption

Asset Mis