New age of risk for contractors slide presentation

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Presented by:

Andrew Kramer, CPA

Fraud; A New Age of Risk for Contractors

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Forensic Accounting and Investigative Services

• Fraud prevention• Internal control review• Fraud awareness training• Pre-employment background checks

• Fraud detection• Fraud scheme detection• Interviews and interrogation

• Fraud investigation• Asset theft investigation• Partnership malfeasance investigations• Documentation of fraud occurrence

• Litigation support

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Trends in Fraud

• Economy and fraud have an indirect relationship.• Increase in fraud occurrences since economic

crisis began in 2008.• Scheme with the greatest increase in

occurrence:• Theft of company property.• Embezzlement and expense account fraud

• More fraud occurrences due to the economy will be found at a later date.• Median duration of all fraud schemes is 18

months.Institute of Internal Auditors, “Knowledge Alert; Emerging Trends in Fraud Risks, 2010”

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Trends in Fraud

• Most frauds are uncovered by:• Tips (40.2%)• Management review (15.4%)• Internal audit (13.9%)

• Small organizations (>100 employees):• Suffer the greatest percentage of frauds.• Median fraud scheme loss of $155,000.• Most common schemes:

• Billing• Check tampering• Corruption• SkimmingAssociation of Certified Fraud Examiners, “Report to the Nation, 2010”

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Fraud Trends in the Construction Industry

• Median fraud loss is $200,000• Out of the construction cases polled:• Corruption (45.5%)

• Use of influence that violates duty of due care to employer.

• Billing (29.9%)• Payments are issued for fraudulent invoices of goods

or services, invoices with inflated prices, personal expenses.

• Check tampering (18.2%)• Checks are intercepted, forged, or altered.

Association of Certified Fraud Examiners, “Report to the Nation, 2010”

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Fraud Trends in the Construction Industry

• Skimming (15.6%)• Employee steals Cash from an organization before it

is recorded in the accounting system.

• Non-cash Theft (15.6%)• Employee steals or misuses non-cash assets of the

organization.

• Expense Reimbursements (13.0%)• Employee requests reimbursement for personal,

fictitious, or inflated business expenses.

Association of Certified Fraud Examiners, “Report to the Nation, 2010”

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Four Elements of Fraud

• Hidden (concealed)

• Intentional; violates the employee’s fiduciary duty to the company

• The perpetrator receives a benefit

• Costs the employing organization assets, revenue, etc.

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The Fraud Triangle

Financial Pressure

Rationalization O

ppor

tuni

ty

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The Fraud Triangle; Pressure

• Causes an employee to commit fraud• High amounts of debt• Family medical costs• Housing market pressures• Bad investment decisions• Addiction Problems

• Drugs, alcohol, gambling

• Lavish lifestyle

• Poor economy = greater pressure on employees

Economy

PressureFraud Occurrence

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The Fraud Triangle; Rationalization

• Means of justifying the fraudulent act.• Low employee morale can result in a

rationalization to commit fraud.• Low employee morale is often linked to theft more

often than low pay is linked to theft.

“The boss can afford it.”

“I’ll pay this back.”

“They owe me.”

“I’m not hurting anyone.”

“No one will notice if this is gone.”

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The Fraud Triangle; Opportunity

• Ability for an employee to commit a fraud.• Employee exploits job duties and

responsibilities.• Weak internal controls• Poor oversight• Abuse of decision making authority

• Opportunity is the factor most able to be changed by the organization.

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Fraud Prevention

• Eliminate Opportunity• Increase the perception of detection• People rarely commit fraud if they think they

will be caught.

• Implement strong internal controls

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Increasing Perception of Detection

• “Tone at the Top” • Managers need to communicate that they are

serious about fraud detection and prevention

• Employee Education• Internal controls for monitoring employees• Company fraud (ethics) policy

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Increasing Perception of Detection

• Proactive policies• Surveillance• Fraud assessment questioning• Mandatory vacations• Surprise audits

• Vigorously pursue dishonest acts• Implement fraud hotline

• With hotline:• Median Loss: $100,000• Duration of fraud: 13 months

• Without hotline:• Median Loss: $245,000• Duration of fraud: 20 months

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Internal controls

• Segregation of duties:• Authorization• Recording (Record keeping)• Custody of assets

• Proper procedures for authorization• Adequate documents and records• Physical control over assets and records• Independent checks on performance

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Internal controls

• Develop policies and procedures• Demand compliance by employees• Enforce punishment for violations

• Complete pre-employment background investigations of employees

• Safeguard company assets• Utilize employee dishonesty insurance

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Case Study 1

• Perpetrator• Project Manager

• Victim Company• Construction Company

• Fraud Scheme:• False Invoices/Check Interception

• Facilitation• A. Spescia and “A.J. Splescian”

• Loss: $2.8 Million

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Case Study 2

• Perpetrator• Bookkeeper

• Victim Company• Construction Company

• Fraud Scheme:• Fraudulent Disbursements

• Loss: $333,103.30

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Case Example 3

• Perpetrator• Divisional Merchandising Manager

• Victim Company• Home Improvement Retailer

• Fraud Scheme• Acceptance of Bribes

• Facilitation• No quote/bid requirements

• Loss: $2.5 Million

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What can you do NOW?

Improve perception of detection:• Implement a fraud policy.• Decide what fraud is and the consequences of

committing fraud.• Communicate policy to employees.

• Employ a fraud hotline or anonymous reporting system.

• Check if insurance policy covers acts of employee dishonesty.• If not, look into the cost/benefit of adding

coverage.

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What can you do NOW?

Implement internal controls:• Segregation of duties: Cash receipts• Separate cash handling and record keeping.• Deposit receipts ASAP.• Reconcile deposit slips to deposit receipts.

• Segregation of duties: Cash payments• Separate authorization, custody, record

keeping.• Require a check to invoice review when

manually signing checks.• Review cancelled checks during bank

reconciliation.

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What can you do NOW?

Implement internal controls:• Segregation of duties: Payroll• Separate inputting information into system

and running payroll.• Periodic review of employee listing.

• Compare addresses to vendor listing.• Look for non-current employees.

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Andrew Kramer1850 North Central Ave, Suite 400.

Phoenix, AZ 85004602-264-8604

[email protected]

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