Uneak White's Personal Brand Exploration Presentation
Fraud Prevention and Internal Controls - A Winning Combination
1. A Global Reach with a Local Perspective
University of North Alabama
19th Annual Decosimo Accounting Forum
July 22, 2011
www.decosimo.com
Fraud Prevention and Internal Controls
– A Winning Combination
PAM MANTONE, CPA, CFF, CFE, FCPA, CITP
Senior Assurance Manager
2. ACFE 2010 Report to the Nation
Financial statement fraud cases were less than 5%
of the total fraud cases reported
However
Financial statement fraud cases were the most
costly of all fraud cases reported, causing a median
loss of more than $4 Million!
3. Percent of Total Dollar Losses
20.8%
Asset Missapropriation
11.30% Corruption
67.90%
Financial Statement
Fraud
4. Spotting Creative Accounting
Why boost the Balance Sheet?
Create appearance of a strong financial position –
More easily obtain lines of credit at low interest rates
Easier to issue debt financing or issue bonds on better terms
Maintain compliance with existing loan covenants
Increase earnings power in future periods
Increase earnings power in current period
Keep investors happy!
Food for thought – Why decrease the Balance Sheet?
5. Financial Statement Fraud
The deliberate misrepresentation of the financial
condition of an entity.
Intentional misstatement or omission of amounts or
disclosures in the financial statements in order to
deceive financial statement users
Objectives
Overstate profits, revenues or assets
Understate losses, expenses or liabilities
What about reversing these – would you think
financial statement fraud in this case?
Committed at the upper-management level
6. Common Schemes
Improper revenue recognition
End result – overvaluing assets
Improper asset valuation
Provision for doubtful accounts
Inventory manipulation
Fixed Assets
Concealed expenses and liabilities
In July 2002, the SEC charged Adelphia with fraudulently
excluding over $2.3B in bank debt by deliberately shifting
liabilities to off-balance sheet unconsolidated entities
Improper disclosures or omissions
8. Overvaluing Assets
My hints for the day:
Inventory increasing faster than sales
Inventory rising faster than total assets and falling
cost of sales as a percentage of sales
Balance sheet item growing at a faster pace than the
income statement item
Equity method limits available information-easier to
conceal or overstate
9. Improper Disclosures or Omissions
Loan covenants or contingent liabilities
Subsequent events
Significant fraud committed by officers, executives,
and others in key positions of trust
Changes in accounting principles, estimates, and
reporting entities
Related party transactions
Tyco – failed to disclose hundreds of millions of
dollars of low-interest and interest-free loans. Also
CEO forgave $50M in loans to himself and another
$56M for 51 favored employees
10. Preventive Controls
Effective oversight a must!
Gain a solid understanding of the business
Maintain appropriate levels of skepticism
Consider incentives, pressures, opportunities and
rationalizations to commit fraud
Explore fraud risk scenarios
Assess the financial reporting culture
Organizational Structure
“Tone at the Top”
Zero Tolerance
Ethics Policy
12. Co. B Board Co. A
Member
Board Your Board Co. C
Member Operation Member
Board Board
Member Member
Co. F Co. E
Co. G Board Member Inter-relationships
13. Accounts Payable Detection and Prevention
Potential Fraud schemes
Employees Committing Purchase Fraud
Fictitious Vendors
Personal purchases with company funds
Vendors Committing Fraud
Over-charging for goods purchases
Duplicate billings
Billing for goods not ordered or shipped
Collusion
Kickbacks
14. Identification of Red Flags
Employees committing purchasing fraud
Vendor name, address = employee name, address
Undisclosed conflicts of interest
Vendors committing fraud
Documentation does not exist or lacks appropriate
detail
Pricing does not agree with contracts
Duplicate invoices
Invoices submitted for materials not ordered or
delivered
15. Preventive Controls
Implement a fraud hotline and notify employees and
vendors of its existence
Separate duties of A/P processing, vendor file
maintenance, check stock custody, check
preparation, check signing, check mailing and bank
reconciliation
Separate purchasing and receiving functions
Require mandatory vacations and cross train
employees so that someone else can fill in for these
positions
16. Preventive Controls
Use physical and software controls to restrict
access to A/P and cash disbursements systems,
including access to banking software
Maintain an approved vendor list independently of
the purchasing department
Restrict access to the vendor master file and flag
any changes to the file
Periodically purge the vendor master file to maintain
only active approved vendors
Require proper authorization of all transactions
Do not pay from statements!
17. Preventive Controls
Never sign blank checks!
Severely restrict the use of manual checks
Use positive pay or reverse positive pay systems
Use quality check stock
Investigate and void and reissue checks more than
90 days outstanding
Deface voided checks
Use pre-numbered, multi-part checks
Do not allow access to blank checks to those with
signatory authority
Lock up check stock, signature stamps, plates
18. Preventive Controls
Require dual signatures for payments over an
established threshold
Request bank notification if a duplicate debit is
pending posting
22. Searching for Addresses: Geo-Coding
Must be consistent in entering data for both the
Employee Master and the Vendor Master files for
matching
Obstacles
St. vs. Street
NE vs. North East
123 Main Street, Apartment B vs. 123 Main Street B
or
123 Main Street
Apartment B
23. Geo-Coding
http://www.gpsvisualizer.com/geocode
I enter: 1089 East Harrison Street, Martinsville, IN
The Google geocoder found:
1089 E Harrison St, Martinsville, IN 46151, USA street
address: 1089 E Harrison St ZIP/postal code: 46151 city:
Martinsville state/province: IN country: USA latitude,
longitude: 39.429443, -86.415746
39.429443 -86.415746
N39° 25.7666', W086° 24.9448'
(precision: address)
24. By themselves, internal controls will not prevent
fraud.
- Yet -
The perception of detection through monitoring of
internal controls is a great way of discouraging
fraud.
25. Connect with me
Pamela S. Mantone, CPA, CFF, CITP,
CFE, FCPA,
Senior Assurance Manager
423.756.7100
pammantone@decosimo.com
On LinkedIn:
http://www.linkedin.com/pub/pamela
-mantone/10/824/807
Disclaimer: The contents of this presentation 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 or specific situations.