community college budget, accounting and reporting group wenatchee, wa sarah walker, cfe ann strand...
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Community College Budget, Accounting and Reporting GroupWenatchee, WA
Sarah Walker, CFE Ann StrandFraud Manager Higher Education Coordinator
May 19, 2011
Fraud in the Workplace: Safeguarding assets and your employees
Washington State Auditor’s Office
“There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.” − Benjamin Franklin
Agenda We will learn how to identify, prevent and detect
employee fraud schemes including: Cash receipting
Accounts payable disbursements
Expense reimbursements
Credit and gasoline card disbursements
Payroll disbursements
By the end of the session, you will also understand: How to identify red flags
Why effective internal controls and monitoring are crucial to your organization
Fraud Program 2010 Statistics
As of December 31, 2010, 406 known or suspected losses have been reported to our Office, totaling at least $2,915,976.
Number of Amount of Area Losses Known Loss Reported
Loss of Assets/Theft of Property 177 $428,756.74Cash Disbursement/Credit Card Fraud 65 $1,057,250.23Cash Receipting 68 $90,529.92Payroll/Benefit Fraud 22 $291,206.00Other/Ethics 74 $1,048,233.23
Fraud Program 2010 Highlights
As of December 31, 2010, we reported 75 frauds totaling $1,864,652
Reported Case TypeNumber of Cases Amount of Known Loss
Loss of Assets 4 $3,768.12 Cash Disbursement/Credit Card Fraud 24 $112,999.99 Cash Receipting 28 $675,304.25 Payroll/Benefit Fraud 6 $921,487.75 Other 13 $151,091.46
Fraud HistoryYear Cases Amounts
1987 32 388,936
1988 26 451,122
1989 31 358,654
1990 15 120,121
1991 15 264,027
1992 20 226,629
1993 18 642,439
1994 30 903,304
1995 37 689,080
1996 48 958,805
1997 33 1,540,368
1998 31 597,479
Year Cases Amounts
1999 42 1,047,113
2000 30 167,363
2001 68 484,060
2002 56 1,122,3282003 62 2,253,394
2004 47 331,803
2005 57 258,960
2006 33 611,711
2007 24 1,722,207
2008 35 548,855
2009 53 2,055,775
2010 75 1,864,652
Totals 918 $19,609,185
Community College Fraud Statistics Between June 2009 and May 2011, 61 known or
suspected losses have been reported to our Office, totaling at least $85,618.
Number of Amount of Area Losses Known Loss Reported
Loss of Assets/Theft of Property 39 $56,413Cash Disbursement/Credit Card Fraud 4 $4,485Cash Receipting 14 $23,213Payroll/Benefit Fraud 0 $0Other/Ethics 4 $1,507
Examples of recent Higher Education fraud reports After an employee resigned, the Director noted
questionable transactions the former employee had submitted for reimbursement. The investigation found a total of $5,318 for personal items the employee had charged to the University.
The University found an employee was paid $14,356 more than her actual earnings. The employee also accrued 40 hours of sick leave and 56.7 hours of vacation leave that she did not earn.
Examples of recent Higher Education fraud reports
An employee in the fiscal department reported that a faculty member was collecting fees directly from the students, in violation of policy. Further research found these funds were not being deposited into College accounts. The funds were deposited into a personal bank account. The faculty member did not produce valid receipts to support the amount of funds collected by the students, causing a loss of $50,000.
Higher Education Audit Issues
Audit issues for the last three years have shown weaknesses in controls over key accounting areas, thus increase the risk of loss.
Number of Area Audit Issues
Cash Receipts 12Inventory / Assets 6Procurement / Contracts 5Accounts Receivable 4Disbursements / Travel / Credit Cards 4Miscellaneous 11
The ACFE Fraud Triangle
Fraud and Internal Controls
What are internal controls? Established and monitored by management Evaluated and tested by auditors
Why are they important? Safeguard assets Protect employees Provide accurate and reliable information Promote and improve operational efficiency
Monitoring Controls
Ongoing monitoring Review of budget to actual reports for revenues and
expenses
Comparing receipts to daily deposits
Bank reconciliation review
Periodic monitoring Trend analysis of revenues by source code
Trend analysis of expenses by fund and object code
Annual risk assessment of control processes
Review of Expense TrendsObject Title 2008 2009 2010
Supplies and Materials $12,242.29 $11,033.95 $22,565.43
Communications $90.41 $129.32 $78.28
Utilities $60,000.00 $52,290.00 $82,181.50
Professional Development $1,049.00 $1,244.97 $8,240.00
Rentals and Leases $150,734.74 $36,932.73 $0.00
Printing and Reproduction $777.69 $3,640.86 $1,250.83
Other Purchased Services $1,951.47 $19,653.43 $18,582.00
Data Processing Services $240,207.00 $239,332.00 $181,255.00
Other Goods and Services $5,009.69 $10,213.73 $22,992.75
Attorney General Services $12,379.00 $34,243.00 $71,580.00
Insurance $86,421.00 $45,432.00 $68,262.00
Out of State Lodging $2,993.28 $2,274.20 $18,853.00
Private Automobile Mileage $4,821.17 $2,881.53 $10,608.27
Review of Revenue Trends by Department
Revenues 2008 2009 2010
Textbooks $ 1,873,292 $ 1,864,380 $ 1,817,060
General Books $ 2,271 $ 4,165 $ 2,120
Supplies $ 85,162 $ 81,703 $ 71,718
Gifts and Soft Goods $ 46,383 $ 35,236 $ 30,435
Computer Software $ 13,185 $ 15,903 $ 15,223
Interest and Other $ 3,940 $ 3,376 $ 3,211
Total Revenue $ 2,024,233 $ 2,004,763 $ 1,939,767
Cash Receipting Schemes
Skimming Generally involves off-book sales or services that are
never recorded in the books − employee misappropriates the funds
Larceny Involves misappropriating funds that are already
recorded in the accounting system
Daily deposits Less cash schemes Voids and returns “Missing” funds
Red Flags of Cash Receipting Fraud Lack of segregation of duties or other compensating controls
Deposits not made daily and intact
Check/cash composition of the daily deposit does not agree to the mode of payment on the cash receipts
Cash deposits differ from normal patterns
Inventory discrepancies
Unusual over/short activity
Missing deposit slips
Unusual journal entries
High-void activity
Cash Receipting Prevention and Detection Have adequate segregation of duties or other
compensating controls
Compare bank deposits to cash receipt records and verify the mode of payment agrees
Review voided transactions to ensure they are supported
Verify inventory records agree to usage
Review bank reconciliations
Cash Receipting Fraud Cases While an employee was on administrative leave the
supervisor found cash receipts for the payment of electronic home confinement did not agree to the court records. Loss amount: $44,015
A citizen called to report they did not receive credit for a money order payment that was sent in for child support payments. Loss amount: $25,572
A management company for the housing authority found the bank records did not agree to the system reports for August. Loss amount: $15,330
A student notified the college that his payment was not properly applied to his account. Loss amount: $11,260
Accounts Payable Disbursements
Schemes in which a person causes his or her employer to issue a payment by submitting invoices for: Fictitious goods or services
Inflated invoices
Invoices for personal purchases
Red Flags of Accounts Payable Fraud Higher-than-usual costs
Excess goods and services
Copies of documents rather than originals
Missing documents
Unusual vendors
Unusual changes in the behavior or lifestyle of employees
Unusual endorsements on the checks
Accounts Payable Prevention and Detection Have adequate segregation of duties or other
compensating controls
Review vendor listings for unusual vendors or excessive payments to vendors
Ensure voided transactions are truly voided
Review for transactions that are out of the ordinary
Only pay original invoices – make sure they make sense
Ensure payments made outside normal process are approved, supported and for a public purpose
Ask questions and confirm with a third party if necessary
Accounts Payable Fraud Cases While performing the monthly reconciliation, the
City found a suspicious warrant made payable to a long-term, trusted employee that had recently retired. Loss amount: $1,091,208
A bank teller contacted the department regarding a check that was being deposited into a personal account. It required two signatures but only had one. Loss amount: $170,000
A supervisor received an anonymous complaint alleging childcare payments were being issued for care that was not provided. Loss amount: $130,377
Accounts Payable Fraud Cases
While filling in for an absent employee it was determined a case workers dependents were receiving payments for services that were not rendered. Loss amount: $126,000
A case manager was partnering with a contracted service provider to process false payments for services that were not provided. The funds were then split between the two individuals. Loss amount: $45,978
Expense Reimbursements
Any scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expense such as: Charging for items used for personal reasons
Seeking reimbursement for travel and expenses when they were paid on company credit card or advanced travel
Billing for expenses that did not occur
Falsifying receipts to make the purchases business related
Inflating mileage
Red Flags of Expense Reimbursement Fraud Expenses exceed what was budgeted or prior year
totals
Expenses claimed on days the employee did not work
Minimal or non existent support behind the request
Support is photocopies, not originals
Expenses all end in round numbers
Reports were approved by someone outside the department
Unusual or excessive reimbursements to one employee
Employee Reimbursement Fraud Prevention and Detection Have adequate segregation of duties or other
compensating controls
Establish policies and procedures and ensure they are enforced
Require detailed expense report with original receipts and documentation attached
Supervisor with knowledge of employees activities should be approving the report
Ask questions and get a supported answer
Employee Reimbursement Fraud Cases An employee failed to provide valid receipts to
support funds collected for travel purposes. Loss amount: $50,000
Employees falsified lodging receipts to receive travel reimbursements that were not allowed. Loss amount: $7,876
The department determined an employee was submitting mileage reimbursements for home visits with foster children that did not occur. Loss amount: $6,153
Credit and Gasoline Card Disbursements Use of entity credit cards, gasoline cards or open
purchase orders for personal purchases
Specific risks for credit purchases Used at unauthorized vendors Used for unauthorized purchases The approved spending limit may be exceeded
Red Flags for Credit Purchases
Lack of policies and procedures for credit purchases
Credit purchases are paid from the statements without having detailed receipts for support
Lack of monitoring of credit purchases
The detailed credit receipt is not obtained, just the summary
Credit bills go directly to purchaser versus a supervisor/monitor
Credit purchases are higher than expected
Credit Fraud Prevention and Detection Create and enforce adequate policies and
procedures regarding credit purchases
Review bills and support documentation submitted to ensure the purchases are approved, supported and for a public purpose
When irregularities are found, follow up to ensure the purchases were appropriate
Ensure items that were purchased were received and are onsite
Credit Card Fraud Cases The Hospital noticed unusual transactions on a
hospital credit card that appeared to be personal in nature. Loss amount: $13,687
The district found a gasoline card that had been reported stolen was actually being used by employees for personal use. Loss amount: $2,980
During the monthly reconciliation, the City found credit card charges that appeared to be personal in nature. In addition, the supervisor signature appeared to be forged. Loss amount: $1,451
Items were purchased on the College credit card that were for a personal vehicle. Loss amount: $1,270
Payroll Disbursements
A payroll fraud involves an employee causing his or her employer to issue a payment by making false claims for compensation
This can be achieved through several schemes such as: Adding “ghost” employees to payroll
Adding hours to timesheets that was not worked
Taking leave without using annual or sick leave
Manipulating benefit information
Payroll Fraud Red Flags
Unusual fluctuations in payroll expenses, including benefit line items
Poor internal controls
Employees with P.O. Box addresses
Missing paychecks
Employees with the same direct deposit account
When questions are asked, you do not receive an answer
Payroll Fraud Prevention and Detection Use the straight-line approach for payroll processing
Review payroll registers regularly – ask questions and get supported answers
Review personnel files to verify it is a real person and they are an employee (ghost employees can be real people)
Monitor to ensure overtime is supported and reasonable
Review leave reports for reasonableness
Keep unused check stock secured
Review returned checks for duel signatures
Create and review error reports
Same bank account number
Same address
Payroll Case Examples
An employee was calling in sick to one employer to work for another employer. Loss amount: $3,506.37
An employee was overstating the amount of hours worked. Loss amount: $13,989.57
An employee was clocking in for another employee prior to their arrival. Loss amount: $312.01
An employee who had prior access in the payroll system authorized additional payment to himself. Loss amount: $13,850.79
Payroll Case Examples An entity found an employee was employed and
working at another entity at the same time. Loss amount: $38,535
Overtime approval forms were falsified by an employee to receive additional pay they did not earn. Loss amount: $8,743
An employee overstated their timesheet and was paid for hours not worked. Loss amount: $15,085.45
An employee manipulated the leave system to ensure leave hours were not deducted from his balance. Hours were not “cashed out,” therefore loss is $0.
Closed Case Reviews
City of Arlington Case
Amount of the loss: $1,091,208
Timeline: June 1, 2001 – June 2, 2008
Background: The former employee had been with the City for more than 30 years in various positions. After she retired in 2008, the City found a questionable payment to her. When questioned about the payment by law enforcement, she confessed to misappropriating money.
City of Arlington Case
How the fraud was accomplished Manual warrants were processed outside the normal
A/P process.
Support documentation was included to make the payments look legitimate and to a legitimate vendor.
The warrants were altered.
The warrants had forged signatures.
How the fraud was detected After the employee retired a different employee was
performing the bank reconciliation. She found a suspicious check and further research found it was a false transaction.
Good Example
Fraudulent Example
Copy of “real” warrant on file
You could see white-out and the suspect’s name
Copy of warrant on file at the City
Back side of warrant on file at the city. The account number is personal and a stamp was used.
Copy of warrant that was deposited in suspect’s account
This warrant was in the suspect’s name and there was no stamp on the back of it.
Fraudulent example # 2 – copy of “real” warrant on file at city
Compare this to the copy of the warrant on file.
On File at the City
Compare to the support documents
Copy of the warrant that was deposited into the suspect’s account.
Example # 3– copy of “real” warrant in voucher packet on file at city
Support is in all-capital letters
Copy of physical warrant on file at City
The copy on file has the payee in lower case letters
Copy of warrant that was deposited into suspect’s account
City of Arlington Case
Internal control weakness Lack of segregation of duties, with insufficient
oversight and monitoring.
The trusted employee had complete control over the disbursement process.
City of Arlington Case
Lessons learned Bank statements should go to an independent third
party to perform the reconciliation.
Monitoring is essential, even for the trusted, long-term employees.
Ensure policies and procedures are followed as employees change positions within an entity.
City of Arlington Case
Conclusion The suspect pled guilty and was sentenced to pay
restitution and serve 36 months in federal prison.
Two houses and several vehicles were seized by the FBI during the investigation.
Payroll Fraud Case Review Ridgefield School District Amount of the loss: $806,645
Timeline: July 1999 to May 2009
Background: The employee had been with the District for more than 21 years as the payroll clerk and assistant business manager. She was a trusted employee who assisted other Districts with their payroll and computer system questions.
Payroll Fraud Case Review
How the fraud was accomplished After preliminary payroll reports were generated, the
employee inflated her salary and expensed it across multiple line items before finalizing payroll. Once payroll was finalized, most of the final reports showing the fraudulent transactions were missing or destroyed.
How the fraud was detected An outside company called to verify employment and
salary information. The District found discrepancies in the information and questioned the employee. The employee admitted to misappropriating public funds.
Payroll Fraud Case Review
Internal control weakness Lack of segregation of duties, with insufficient
oversight and monitoring.
The trusted employee had complete control over the payroll process with little monitoring.
Preliminary payroll reports were manipulated in various ways to look like final payroll reports.
Example of Accurate Payroll Processing Exhibits follow
Example − Attachment 1
Example − Attachment 2
Example − Attachment 3
Example − Attachment 4
Example of Fraudulent Payroll Processing Exhibits follow
Example − Attachment 1
Example − Attachment 2
Example − Attachment 3
Sick leave buy-back
Total gross pay
Total net pay
Example − Attachment 4
Negative adjustment – two negatives make a positive!
Fraudulent Example − Attachment 5Preliminary Payroll Run
Preliminary reports show correct direct deposit amount
Fraudulent Example − Attachment 5Final Payroll Run
Total actual direct deposit into her bank account
The other staff member amounts do not change from the preliminary to the final payroll run
Fraudulent Example − Attachment 6
Verification that the direct deposit that went into her account included the fraudulent portion for a total of $9,743.20
Fraudulent Example − Attachment 7How the Fraud was Obscured
Vendor credits to TRS vendor 6 that total the amount of the negative deduction - $9,063.81
Fraudulent Example − Attachment 8How the Fraud was Obscured
Payroll journal voucher shows suspect’s login information and proves she made the fraudulent negative transactions
Fraudulent Example − Attachment 9How the Fraud was Obscured
Deleted transaction to hide the fraud
Fraudulent Example – Preliminary Payroll Compute
Information for the TRS account prior to the fraudulent transactions
Run time is 10:34 a.m. on February 20
Fraudulent Example – Final Payroll Compute
Run time is 11:32 a.m. on February 20The final payroll includes the fraudulent transactions
Payroll Fraud Case Review
Lessons learned Monitoring is essential, even for the trusted, long-term
employee.
Direct deposit information can be manipulated.
Management needs to understand the process from beginning to end to be able to adequately monitor the outcome and be able to recognize anomalies.
Knowing what report you are looking at is imperative – in this case knowing whether you were looking at a preliminary report versus a final report was difficult depending on the report.
Payroll Fraud Case Review
Conclusion The former employee pleaded guilty to one count of
felony wire fraud.
Sentencing occurred in July. Plea deal includes:
Two-year prison term followed by three years of supervised release
Restitution of $806,645 Forfeiture of:
Deferred compensation account Credit union bank account All jewelry acquired in the past 10 years Two vehicles
Fraud Proceeds Were Used For:
Frequent vacations
Fraud Proceeds Were Used For:
Jewelry purchases and contributions to her grandchildren’s college savings accounts
Fraud Proceeds Were Used For:
2008 Chevrolet Tahoe
2004 Chevrolet SSR
Thurston Co. Fire Protection District No. 13 Case How the fraud was accomplished
Checks were marked “void” at the District but subsequently cleared the bank.
Checks had forged signatures. Names were changed on checks. Checks were deleted out of the District’s records.
How the fraud was detected On the former secretary’s day off, the Fire Chief found
suspicious cancelled checks.
This check had the vendor changed. The district records show the check was issued to the State Auditor’s Office.
The check had white-out on the payee line
The District records show this check is “VOID” and the original check was not on file.
This check was missing from the District’s records
The District’s records show this is a payment to the IRS
The District’s records show this was issued to the IRS. The check is not signed but still cleared the bank.
Thurston Co. Fire Protection District No. 13 Case Internal control weakness
Lack of segregation of duties, with insufficient oversight and monitoring.
The trusted employee had complete control over the disbursement process.
Thurston Co. Fire Protection District No. 13 Case Lessons learned:
Small entities can experience large losses.
Bank statements should go to an independent third party to perform the reconciliation.
Monitoring is essential in entities where segregation of duties is not possible.
Thurston Co. Fire Protection District No. 13 Case Conclusion
The suspect pled guilty to 10 counts of first-degree theft.
She is required to pay restitution in the amount of $184,000 and serve a four-year prison term.
The District now sends bills to the County Auditor’s Office to be processed and paid.
Summary
Fraud causes the public to lose faith and trust in government.
Fraud causes unwanted media coverage.
The best defense against fraud is a good offense. An ounce of prevention is better than a pound of cure.
The challenge is to go back to work and review transactions.
Awareness that fraud can (and does) happen is the key to detection.
Responsibility of Management
Protect their employees by establishing policies and procedures designed to safeguard funds from loss.
Be able to affix responsibility for funds to a particular employee at a point in time, all the time.
Ensure proper segregation of duties.
Monitor financial activity and understand it so you can identify irregularities.
Trust your employees and co-workers to a point.
Reporting Losses (RCW 43.09.185)
Immediately notify State Auditor’s Office on the Web at www.sao.wa.gov | Special Investigations | Fraud Program | Report a loss All suspected or known losses, including:
Money and other assets Other illegal acts
Reporting Losses
Notify all applicable employees in government
Protect accounting records from loss or destruction
Don’t enter a restitution agreement with an employee (Auditor/Attorney General approval required)
Ensure personnel action taken for violating policies and procedures, not for misappropriating public funds
File a police report (consult our Office on timing)
Key Reminders If Fraud Occurs Do not try to be the investigator. But do start a
record: how it came to your attention, records of conversations, etc.
Do not physically prevent an employee from leaving the room or leaving the building.
Do not agree to let the employee repay money and “it will all go away.” This is a civil compromise – can negate a potential criminal case – and makes you an accomplice.
Do not hold a staff meeting and announce “We’re investigating a theft” or “Joe seems to be taking money from the till.”
