Fraud

Awareness
Training

Beach Cities Chapter

Institute of Internal Auditors
PRESENTED BY
J’on Dennis

March 16, 2017

Presenter

J’on Dennis, CPA

Director, MGO State and Local Government
Assurance Services
Fraud Awareness Training
OBJECTIVES

• Understanding Profile of a Fraudster

• Identifying Indicators of Fraud
• Implementing Controls to Prevent Fraud
What is Fraud?
FRAUD DEFINITIONS

Legal:
”A knowing misrepresentation of the truth or concealment of a
material fact to induce another to act to his or her detriment.”
Black’s Law Dictionary, 3rd Ed. Criminal or civil fraud (tort)
What is Fraud?
FRAUD DEFINITIONS

Working:
A form of employee misconduct where an employee uses deceit
to take (steal) or misuse an employer’s resources.
Who Commits Fraud?

PEOPLE – 3 KINDS
• Always Steal
• Never Steal
• Steal Under Perceived Pressure
• Donald Cressey
• Sociology Professor
• Subgroup of embezzlement felons in prison
(exemplary lives before – no prior criminal history)
 Fraud Diamond
Pressure

• Pressure
• Rationalization
• Opportunity
• Capability
Capability Opportunity

DAVID WOLFE AND DANA HERMANSON (Developers

Rationalization
Fraud Diamond (continued)
Fraudster Profile

55.7% 44.3%
Fraudster Profile
(continued)
AGE

Born: 1971 – 1980

Age: 36 – 45
39.4%
of Cases
 Fraudster Profile (continued)
DEPARTMENT
PERPETRATOR, DEPARTMENT, FREQUENCY AND MEDIAN LOSS
18.0% $1,000,000

16.0%
16.6%
14.9% $850,000 $800,000
14.0%

12.0% 12.4%
10.9% $600,000
10.0%
9.0%
8.0% 7.7% $400,000
6.0%

4.0% 4.5%
$234,000 $200,000
$197,000
2.0% $150,000
$105,000 $100,000 $45,000
0.0% $0
Accounting Operations Sales Executive/Senior Customer Purchasing Finance
Mgmt Service

Median Loss Percent of Cases

Fraudster Profile (continued)
SUMMARY
Dimensions Highest Frequency

• Gender • Male
• Age • 36 – 45 Years
• Position • Employee
• Tenure • 1 – 5 Years
• Department • Accounting
Red Flags
BEHAVIORAL RED FLAGS
Red Flag
Refusal to Take Paid Time Off 7.8%
No Behavioral Red Flags 8.8%
Complained About Inadequate Pay 9.0%
Addiction Problems 10.0%
Irritability, Suspiciousness, or Defensivness 12.3%
Divorce/Family Problems 13.4%
Control Issues 15.3%
Wheeler-Dealer Attitude 15.3%
Unusually Close Vendor Association 20.1%
Financial Difficulties 30.0%
Living Beyond Means 45.8%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Red Flag
Red Flags (continued)
LIFESTYLE CHANGES

Living • Expensive/multiple vacations

• Upgraded/expensive vehicles
Beyond • Upgraded clothing or style
Means • New level of donations or gifts
Red Flags (continued)
LIFESTYLE CHANGES

• Multiple homes or
Living renovations
Beyond • Upgraded personal grooming
• New business/investment
Means • Recreational activities
Red Flags (continued)
COMMON PERSONALITY TRAITS

• Controlling/unwilling to share
duties
PERSONALIT • Do not like their work being
Y TRAITS reviewed
• Strong desire for personal
gain
Red Flags (continued)
COMMON PERSONALITY TRAITS

• Controlling/unwilling to
PERSONALIT share duties
Y TRAITS • Unable to relax
• "Beat the system" attitude
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Brags about purchases

BEHAVIO • Unusual amounts of cash in
R possession
• Borrows money from
CHANGES coworkers
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Collection calls at work

BEHAVIO
• Outside business calls at
R work
CHANGES • Becomes irritable or moody
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Territorial over responsibility

BEHAVIO area
R • Takes PTO in small increments
• Redoes or rewrites work to
CHANGES "make it neat"
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Unreasonably upset when

BEHAVIO questioned about work
• Starts coming in early or
R staying late
CHANGES • Discusses/mentions family or
financial problems
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Absenteeism
ADDICTIO • Manipulative behavior
N FLAGS • Looks/acts ill
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Illogical/inconsistent
ADDICTIO decisions and actions
N FLAGS • Loss of sleep
• Loss of appetite
Red Flags (continued)
COMMON BEHAVIOR CHANGES

• Frequent work issue

complaints
DISSATISFACTIO • Decreased productivity
N
• Change in attire/grooming
• Irregular schedules
Red Flags (continued)
CHANGE CHANGE
Operations
Objectives
Financial Reporting Objectives
Non-Financial
Reporting Objectives
Internal Reporting Objectives

Directional
Change
Prevention
TONE AT THE TOP

Deeds Match
Transparency Openness Supportive
Words
Prevention (continued)
DECISION RIGHTS

Authority Responsibility

COMPETENCY
Prevention (continued)
SEPARATION OF DUTIES (Basic) – ROLES|1

Access/ Reconciliatio
Approval Recording
Custody n
 Prevention (continued)
SEPARATION OF DUTIES (Complex) – ROLES|2

Authorizatio
Approval Execution Access
n

Supervisory
Reconciling Recording
Review
Prevention (continued)
SEPARATION OF DUTIES (Minimum) – ROLES|3

Custody / Access Recording Reconciliation**

**
With separate/extra management review
Prevention (continued)
ESCALATION POLICY

1. Assists employees with their reporting of incidents,

events, conditions
2. Ensures proper evaluation and escalation
3. Identifies incidents, events or conditions
• external or internal
• not contemplated by existing policy, procedure, or
guidance
Prevention (continued)
ACCOUNTABILITY
Enforces
Establishes
Structures,
Performance Evaluates
Authorities,
Measures
Responsibilities

Rewards or Evaluates Considers

Disciplines Performance Excessive Pressure
Questions?
Let’s Talk.
J’on R. Dennis, CPA
(213) 408-8679
jdennis@mgocpa.com
Twitter: @jrdennis_CPA
Linkedin: jondennisCPA