I think in our generation we can understand why fraud is not uncommon in the business world.

In fact, employee fraud

costs businesses billions of dollars each year.

Employee fraud is an ongoing, widespread and varied problem, one that comes in all sizes for all kinds of companies. It
can significantly impact a company’s productivity and profitability.

The reasons for fraud are not always obvious to the business owner or even their attorneys. However, what is obvious is
that it is often overlooked, ignored, and even undetected

staggering(shocking or surprising)

Theft, or misappropriation of assets, makes up the majority of fraudulent activity, according to the Association of
Certified Fraud Examiners.

These thefts, either by directly stealing cash, claiming bogus expenses or taking other property, are usually done by
employees. This is a tough fact for many small business owners, who often consider their employees as friends and even
members of an extended work family. The other primary types of fraud involve financial statement reporting and general
corruption, such as kickbacks or other schemes in which the employee benefits personally by violating their
responsibility to the employer.

Small and mid-sized businesses are more vulnerable to fraud than larger organizations, and the effects can be more
damaging. The types of fraud that businesses need to be aware of generally fall into three categories: Theft, financial
statement fraud and asset misuse. Theft, or misappropriation of assets, makes up the majority of fraudulent activity,
according to the Association of Certified Fraud Examiners.

These thefts, either by directly stealing cash, claiming bogus expenses or taking other property, are usually done by
employees. This is a tough fact for many small business owners, who often consider their employees as friends and even
members of an extended work family. The other primary types of fraud involve financial statement reporting and general
corruption, such as kickbacks or other schemes in which the employee benefits personally by violating their
responsibility to the employer.

The reason small and mid-sized businesses face a greater risk from fraud is due to many factors, including employees
performing many functions across the organization, the close relationships between staff that leads to less scrutiny, few
formal oversight procedures, less expertise on financial matters, and the large impact on cashflow that even a comparably
small fraud event can have on the fiscal health of the business.

Therefore, it’s vital that small businesses take steps to deter fraud, and to detect it as soon as possible.

1. Segregate Accounting Duties.

Because of their size, many small businesses have one person that always handles bookkeeping functions such as client
receivables, processing client payments, paying invoices, managing petty cash and recording these functions in their
accounting system. This makes it easy for cases of fraud to go unnoticed. Businesses should have at least two persons
handling these functions interchangeably, keep the handling of cash and accounting functions totally separate, or have the
functions performed through a virtual CFO relationship with an accounting firm.

2. Know Your Employees.

While every business strives to hire honest employees, having a formal hiring routine, even at a small business, can help
prevent fraud. Background checks should be performed for all staff handling cash or managing payments (and bank
account information) from customers. As the employee’s level of interaction with finances increases, so too should the
scrutiny paid to their past, and present, situations.

Although it may seem counterintuitive, employees committing fraud are often found to be the most endeared by their
coworkers, because the person will go out of their way to help and gain trust, often working longer hours and rarely taking
time off. This results in them handling several duties, and with less oversight. Likewise, employees facing sudden
financial challenges in their personal lives may succumb to temptations. Requiring staff to take their vacations can help
expose fraud, if it is occurring, and also can help relive overworked honest employees.

3. Maintain Internal Controls.

Even small businesses need to create and maintain internal controls that can prevent or detect fraud. This includes
restricting access to financial account data, inventory access, establishing multi-person sign-off on expense
reimbursements, overtime, all check writing functions, and other accounting or payroll functions, and performing an
overview of audit logs to ensure the integrity of the books.

4. Scrutinize Business Bank Accounts.

With online banking options, it’s easy to view account activity and statements whenever is convenient, and business
management should do this frequently to make sure that paper-based statements in the office have not been manipulated.
The key items to look for are missing or out-of-order checks, unknown payment recipients, and checks that were signed
over to a third party instead of deposited in a business account. Simply letting staff know that reviewing check activity is
part of the accounting review process can help prevent fraud.

5. Audit the Books Regularly.

Businesses should routinely audit areas that deal in cash, refunds, product returns, inventory management, and
accounting functions. Additionally, occasional non-scheduled audits can also help detect fraud in high risk, critical
business areas. The ACFE offers a Fraud Prevention Check-Up to help businesses identify the risk of fraud and develop
controls to prevent losses: http://www.acfe.com/fraud-prevention-checkup.aspx.

6. Train Employees To Prevent Fraud.

Employees in fraud-prone areas of the business should know the warning signs of fraud, prevention skills and how to
report suspicious behavior or actions by coworkers and customers. Establishing an anonymous reporting system or
process can also set their mind at ease about letting their bosses know about a fellow coworker. The management,
including owners of small businesses, should create a code of ethics that makes it clear that unethical behavior will not be
tolerated.

7. Protect Credit Card Information.

Credit card fraud is in the headlines so often that some people may have become numbed by the news. But businesses of
all sizes, even the smallest home-based endeavor, should start by firmly separating business and personal accounts.
Mingling of business funds with personal finances is not only prone to very costly errors, but can expose the individual to
lost funds on both sides if the credit card information is breached. Separating accounts also makes tracking business
expenses much easier. Businesses should also be wary of who they provide their credit card information to, and should
use secure, online bill payment services when possible, eliminating the potential for check fraud or theft.

8. Know Your Business Partners.

Before getting into a business relationship with another business, or individual, that requires some level of trust – such as
sending them an invoice after they’ve received a product or service – make sure you at least know the basics. Knowing
their physical address is a major deterrent to fraud, as is having alternate contact methods and persons, and references.
Even a simple web search of a company should provide enough information as to whether they are really in business, and
for how long. Additional resources that can provide background information include the Better Business Bureau and your
local, state or provincial government commerce department.

9. Check Into Every Case.

If you’ve set up fraud prevent steps and reporting procedures, but you don’t follow through by looking into reports or
suspicions, then you’re defeating your own security. In order to reinforce the business’ policy of no tolerance for
unethical behavior, each case should be looked at, regardless of size.
10. Get Expert Help.

If a business has implemented fraud prevention steps and the numbers still aren’t adding up, or when there are larger legal
implications, in may be prudent to hire a professional accountant to come in and perform a more extensive review and
audit of the business’ books and control processes. CPAs and Certified Fraud Examiners can provide extensive help in
fraud detection and prosecution, if necessary.

INTERNAL CONTROL ASSESSMENT

1. investigation of conflicts of interest between local business owner and elected official. (Government)

Investigation of alleged kickbacks in connection with overseas construction projects. (Construction)

Investigation of alleged kickbacks and conflicts of interest at a chemical manufacturing company.

Recommendations resulted in improvements of internal controls, and terminations of relationships with
questionable and suspicious contractors and suppliers. (Manufacturing)

Forensic Due Diligence in connection with an acquisition by a Fortune 20 healthcare provider, in response to
findings of illegal payments under the Foreign Corrupt Practices Act of 1977, resulting in a decrease of $300
million in the acquisition price. Used forensic data mining tools to detect further questionable payments and
relationships at the target’s domestic operation, resulting in termination of contractor / vendor relationships.
Managed a team of 7 professionals, and coordinated efforts with no less than 10 other professionals. (Hospitals &
Healthcare)

Investigation of alleged vendor fraud, kickbacks and tax evasion. (Energy & Environmental)

Investigation of unethical business practices in connection with contractual arrangement with

vendors. (Professional Services)

2. Capital projects not regularly monitored, denoting exposure to over-spent contracts, kickbacks, change order abuse,
and/or bid rigging ($114 Million). (Manufacturing)

3. Investigation of allegations of mortgage fraud and employee theft. (Banking & Financial Services)

4. Uncollected sales invoices older than 60 days, Accounts receivable older than 60 days, indicating ineffective
collection procedures

5. Identification of risk for payroll fraud and lost revenue. (Government)

6. Investigation of falsely reported hours and acceptance of unauthorized compensation. (Government)

7. Process inefficiencies in monthly financial closing, inventory management, and sales and production forecasting
processes for a global manufacturer of tractors and farm machinery. (Manufacturing) Beyond the limits

8. Control weaknesses and exposure to fraud risk including receivable

9. Income understatement, resulting from inventory valuation errors.

ANSWERS!
1. prior history
2.Management Fraud
Employee Fraud, and
External Fraud.
3. External Fraud
4. Employee Fraud
5. internal control
6. Asset Misappropriation
Vendor Fraud
Accounting Fraud
Payroll Fraud
Data Theft
Bribery and Corruption
7. Asset Misappropriation
8. Asset Misappropriation
9. Asset Misappropriation
10. VENDOR FRAUD
11.VENDOR FRAUD

12. Accounting Fraud

13. Accounting Fraud
14. Payroll Fraud
15. Data Theft
16. vulnerable
17. asset misuse
18. including employees performing many functions across the organization.
the close relationships between staff that leads to less scrutiny
few formal oversight procedures
less expertise on financial matters, and
the large impact on cashflow that even a comparably small fraud event can have on the fiscal health of the business.
19. FALSE we identify process and internal control weaknesses that can lead to fraud or abuse and recommends
operational improvements.

20. SLIDE 47

21.