Sharon Hamrick presented the Annual Fraud Update for the IMA - Chattanooga chapter.

1. A Global Reach with a Local Perspective
www.decosimo.com
HOW DID THIS HAPPEN? WE HAVE
CONTROLS!
Sharon Hamrick – SHARONHAMRICK@DECOSIMO.COM

2. Fraud - A Hot Topic Everywhere
 Madoff, Medicare, healthcare, mortgage
fraud
 NPR – May 1st – “The Psychology of Fraud:
Why Good People do Bad Things”
 Yahoo CEO – Fraud on his CV
 Controller of Dixon, IL, town of 16,000,
accused of misappropriating $53 million over
21 years

3. The use of one’s occupation for personal enrichment
The misconduct of employees, managers and
executives

14. Behavioral Red Flags Exhibited
 81% of fraudsters exhibited at least one of the listed
behavioral red flags:
 36% Living beyond their means
 27% with financial difficulties
 19% with unusually close associations with vendors
or customers
 18% had excessive control issues with their duties

16.  41% of perpetrators are employees; 38% of perpetrators are managers
 Median losses of frauds by employees = $60,000; by managers =
$182,000
 Frauds lasted a median of 18 months before being detected
 49% of victim organizations in the study had not recovered any losses due
to fraud
 38% of perpetrators were between the ages of 36 and 45
 Median losses by gender: Males $200,000; by female fraudsters $91,000
 Executive/upper management caused largest fraud losses

17. Opportunity
Incentive/Pressure Rationalization

18. Cash Frauds – Case 1
 Cash received and deposited at remote locations
 Suspect was responsible for making daily deposits
 Cash collections were logged and records prepared by front-
desk employee who placed all together in the office safe
 Perpetrator actually made deposits at the bank, but removed
cash from deposit
 Deposits made to central checking account
 Supporting logs and documentation were forwarded to home
office; copies of deposit slips were filed at remote office
 Company experiencing significant growth and was delinquent
in bank reconciliations

19. Cash Frauds – Case 1
 How was the perpetrator caught?
 Another employee noticed a deposit which she had
prepared on the perpetrator’s desk with all supporting
documentation attached, but no cash attached
 She notified the manager of her concerns

20. Cash Frauds – Case 2
 Payroll deposits made for business owner
 Bookkeeper took owner’s bi-weekly payroll check to
bank for deposit, bringing him back $500 cash
 Began to draw $600, $800, $1,000 from his check,
while still delivering his $500
 Eventually began to cash most of his checks
 She also reconciled his personal checking – to cover
the lost deposits, she transferred funds from his
retirement account
 She even generated fake bank statements so she
could give him a monthly reconciliation of his account

21. Cash Frauds – Case 2
 How was the perpetrator caught?
 Owner’s investment advisor dropped in for an
unscheduled visit and asked the owner about putting
money in his retirement account for investment and
growth

22. Credit Card Fraud
 Company credit cards issuance and cancellation
 Nationwide sales staff were issued company
AmEx card for business and travel expenses
 Employees required to submit receipts with
expense reports validating charges
 Each sales person was emailed a copy of his
personal AmEx charges monthly for review
 Accounting manager responsible for issuing new
cards and cancelling cards of terminated
employees

23. Credit Card Fraud
 Accounting manager also responsible for various
online payments, including AmEx
 She kept a card for a terminated employee and gave
it to her husband
 He used her employee ID card to fabricate a card for
himself with his picture and the terminated
employee’s name in case he was asked for ID
 Although each employee with a card saw their own
charges monthly, no one except the perpetrator saw
the entire AmEx statement

24. Credit Card Fraud
 How was the perpetrator caught?
 Her husband attempted to use the card to purchase a
car from a used car dealer who, in the name of
caution, decided to call the company before
completing the transaction

25. Check Tampering/Purchasing Fraud
 Vendor checks signed by business owner converted
to bookkeeper’s personal use
 Bookkeeper prepared accounts payable checks and
gave to owner to sign along with supporting invoices
attached for his review
 After reviewing and signing, he gave back to her all
invoices for filing and checks for mailing
 She changed numerous payees to her own name
 To keep vendors paid, she would periodically pay
from statements, and busy owner did not notice
 Recorded some checks as voided in general ledger;
used reconciling items on bank reconciliation and
made journal entries to dispense check amounts
among various expense accounts

26. Check Tampering/Purchasing Fraud
 How was the perpetrator caught?
 She posted one of the checks to a fixed asset general
ledger account, and the plant manager began looking
for the invoice and payment while the perpetrator was
out for surgery

27. Payroll Fraud
 Terminated employees not removed timely from
payroll
 Large manufacturing company with several hundred
plant employees
 Payroll clerk had the responsibility to remove
terminated employees from payroll system
 Payroll clerk also printed payroll checks and put
checks in the mail or gave to supervisor for
distribution
 Rather than removing employees as of their
termination date, he would process one additional
check, feeling sure the employees would not realize
their W-2 had a few extra days or 1 extra week

28. Payroll Fraud
 How was the perpetrator caught?
 Had several paychecks in his coat pocket and
another employee accidentally knocked over his coat
rack. The checks fell from his pocket

29. Receivables Fraud
 Lapping scheme perpetrated by a/r clerk
 Customer payments were diverted to clerk’s personal
use
 To cover diversion, she posted another customer’s
payment to that customer’s account and continued to
roll or lap payments
 As she diverted additional checks, the scheme
became more and more complicated to maintain and
more and more important for her to be there every
day to keep scheme rolling

30. Receivables Fraud
 How was the perpetrator caught?
 Employee was in a serious automobile accident and
had to miss an extended period of work
 Another employee had to step in and perform her
duties
 As soon as another person tried to post payments,
the scheme unraveled and was revealed

31. Inventory Fraud/Misappropriation
 Employee stealing inventory for resale
 Plant manager responsible for ordering inventory and
scheduling shift employees
 Plant manager scheduled after-regular hours pick up
of empty containers for resale
 Plant staff for 2nd shift consisted of only a few
employees who regularly worked that shift
 Used containers were refilled with inventory, loaded
on a truck from the container purchaser, and the
proceeds of reselling inventory were split among
employees and truck driver

32. Inventory Fraud/Misappropriation
 How was the perpetrator caught?
 Volume of inventory being taken grew to such a level
that assuming differences were due to waste became
unacceptable
 New controller with a strong manufacturing
background was hired
 Spending patterns of plant manager grew to a level
that they were not consistent with income of him and
his wife

33.  Trust – especially in long-term employees
 Rapid growth of company, while increase in staff
and adjustments of duties lagged behind
 Lack of segregation of duties
 Lack of independent checks, especially arising
from becoming lax about performing these checks
regularly and thoroughly
 Lack of authorization and no negative
consequences
 Overriding of existing controls
 Inadequacy of the accounting system
 No requirement for employees to take vacation

34. EMPLOYEE RED FLAGS
COMMON IN THESE CASES
 Employee lifestyle changes
 Significant personal debt and credit problems
 Behavioral changes
 Very protective of files, work productivity
 Refusal to take vacation or sick leave
 Lack of segregation of duties in high-risk area

35. OTHER RED FLAGS
• Reluctance to provide information • Unexpected overdrafts or declines
to auditors or outside accounting in cash balances, inventory,
service provider receivables
• Photocopied or missing • Unexplained variations in expense
documents accounts
• Decisions dominated by an • Accounting personnel are lax or
individual or small group inexperienced
• Excessive number of year-end • High employee turnover rate
transactions • Compensation is out of proportion
• Complaints by customers or • Decentralization without adequate
vendors monitoring
• Weak internal control environment

36. So What Would Have Helped?
 Monitoring of controls and segregation of duties in place
 Owner receipt of unopened bank statements or regular
monitoring of account activity on line
 Monitoring of customer questions and complaints
 Required monitoring and verification of customer
account writeoffs and adjustments
 Regular review of general journal entries by appropriate
level of management
 Timely investigation of unusual variances in accounts
 Timely reconciliation of bank accounts by appropriate
personnel

37. So What Would Have Helped?
 Review of bank reconciliations by appropriate personnel
 Use of location checking accounts with funds transferred
to main checking by accounting department
 Don’t return signed vendor checks to the individual who
prepared them and/or records them
 Review of payroll registers and approval of changes in
the employee master file
 Comparison of number of employees to number of
payroll checks processed
 Spending limits on credit cards
 Requiring employees to use their own credit card, submit
receipts and reimbursing them for all business expenses

38. CONTACT INFO
Sharon P. Hamrick, CPA•CFF, CFE
Senior Manager, Decosimo Advisory
Services
sharonhamrick@decosimo.com
www.linkedin.com/in/sharonhamrick
423-756-7100
The contents and opinions contained in this article are for informational purposes only. The information is
not intended to be a substitute for professional accounting counsel. Always seek the advice of your
accountant or other financial planner with any questions you may have regarding your financial goals.

39. A Global Reach with a Local Perspective
www.decosimo.com
Questions?