steering clear of fraud

Steering Clear of Fraud

John L. Tonsick, CPA, CFE 213-716-0667

Stop Me When You Think We Have A Problem

• Director of Accounting– Received cash– Made bank deposits– Received and approved

vendor invoices– Wrote checks– Posted G/L– Payroll– Reconciled bank accounts– Custodian of records

John L. Tonsick, CPA, CFE 213-716-0667

Lifestyle

Modest income:

• Two homes

• Boat

• New car every 2 years

• Season baseball tickets

• Vacations

• Gambling

John L. Tonsick, CPA, CFE 213-716-0667

Auditors?

John L. Tonsick, CPA, CFE 213-716-0667

What Happened?

Stole more than $500,000 over 2 years

• Traveler’s checks• Corporate credit card• Cash receipts

John L. Tonsick, CPA, CFE 213-716-0667

How it was concealed?

• Fraudulent journal entries

• Altered bank deposits• Altered credit card

statements• Bank reconciliations

– Manipulated outstanding checks

– Altered bank statements

John L. Tonsick, CPA, CFE 213-716-0667

John L. Tonsick, CPA, CFE 213-716-0667

Fraud Statistics

• 5% of GDP lost to employee fraud & abuse• $652 billion annually• Median loss $159,000 • Nearly one in four caused losses in excess of $1 MM

Source: Association of Certified Fraud Examiners' Report to the Nation.

John L. Tonsick, CPA, CFE 213-716-0667

Fraud Statistics

• Men perpetrate 61% of fraud• Men cause losses more than twice those caused by

women• Median loss from fraud by employees making

$50,000/year or less is $75,000• Median loss from fraud by employees making

$500,000/year or more is $8 Million

Source: Association of Certified Fraud Examiners' Report to the Nation

John L. Tonsick, CPA, CFE 213-716-0667

Fraud Statistics

• Median losses caused by those 25 or younger are $25,000

• Median losses caused by those over 60 are $713,000• Perpetrators with post-graduate degrees cause losses

more than twice those of perpetrators with only undergraduate degrees

• Multiple perpetrators cause median losses of $485,000; nearly five times higher than perpetrators acting alone

Source: Association of Certified Fraud Examiners' Report to the Nation

John L. Tonsick, CPA, CFE 213-716-0667

How Fraud Happens

1. Asset Misappropriation: 92%.

2. Corruption – Bribery, Kick-backs, illegal gratuities, conflicts of interest: 31%.

3. Fraudulent Statements: 11%.

John L. Tonsick, CPA, CFE213-716-0667

Why Fraud Happens

• Immediate Need

• Opportunity

• Ability to Rationalize

John L. Tonsick, CPA, CFE213-716-0667

Immediate Need

Un-sharable Problem

• Living beyond one’s means• Drugs, alcohol, gambling• Romantic involvement• Financial emergency

John L. Tonsick, CPA, CFE213-716-0667

Opportunity

• Trust

• Weak Internal Controls– Lax oversight– Power to override

controls

John L. Tonsick, CPA, CFE213-716-0667

“Ability to Rationalize”

• “Everybody else is doing it”• “The company owes me”• “It’s just a loan, I’ll pay it back”• “The rules don’t apply to me”

John L. Tonsick, CPA, CFE 213-716-0667

“Red Flags of Fraud

• Lifestyle issues– Sex, drugs, rock & roll

• Performance that’s too good to be true

• Employees who never take vacation

John L. Tonsick, CPA, CFE 213-716-0667

“Red Flags” of Fraud

• Poor accounting records• Missing documents• Photocopies• Excessive adjustments• Increased write-offs• Customer/employee complaints• Related party transactions• General ledger doesn’t balance

John L. Tonsick, CPA, CFE 213-716-0667

Tools and Techniques

To Minimize Fraud Risk

John L. Tonsick, CPA, CFE 213-716-0667

# 1 - Expect Fraud

It cannot be eliminated; only managed!

John L. Tonsick, CPA, CFE 213-716-0667

# 2 - Know Your Business

John L. Tonsick, CPA, CFE 213-716-0667

# 3 – Know Your Employees

• Over 30% of resumes contain false statements

John L. Tonsick, CPA, CFE 213-716-0667

# 4 – Look For Fraud

John L. Tonsick, CPA, CFE 213-716-0667

# 5 – Recognize Limitations of Internal Controls

• Controls break down• Circumstances change

John L. Tonsick, CPA, CFE 213-716-0667

5 Things You Can Do Tomorrow

1. Compare A/P file to payroll fileCommon addresses

Bank account numbers

2. Review vendor master fileVendors without street addresses

Illogical addresses

Similar names

3. Review expense reports

4. Re-perform bank reconciliations

5. Re-perform subsidiary to G/L reconciliations

John L. Tonsick, CPA, CFE 213-716-0667

John Tonsick CPA, CFERisk Solutions & Investigations811 Wilshire Blvd., Suite 1650

Los Angeles, CA 90017email: John@Tonsick.comwebsite: www.Tonsick.com

213-716-0667