watch your back: protecting your business against back-office fraud steve schottenfeld tracetech...

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Watch Your Back: Watch Your Back: Protecting Your Business Protecting Your Business Against Back-Office Against Back-Office Fraud Fraud Steve Schottenfeld Steve Schottenfeld TraceTech Solutions, LLC TraceTech Solutions, LLC

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Page 1: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Watch Your Back:Watch Your Back:Protecting Your Business Against Protecting Your Business Against

Back-Office FraudBack-Office Fraud

Steve SchottenfeldSteve Schottenfeld

TraceTech Solutions, LLCTraceTech Solutions, LLC

Page 2: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

In January, 2010, a Michigan man was sentenced to one year in prison after he

and his wife (a bookkeeper for a McDonald’s franchise owner) admitted

to stealing $441,672.75 from the business.

Over a nine-month period she wrote 42 unauthorized checks to

herself and her husband

Page 3: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

In June, 2008, a payroll and benefits coordinator for Cavicchio

Greenhouses, Inc. in Sudbury, MA pleaded guilty to stealing more that

$290,000 from the firm

She had created and “paid” two ghost employees

The scheme went undetected for four years

Page 4: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

In May, 2008, a bookkeeper at Maine’s Winslow Aluminum, Inc.

pleaded guilty to stealing $900,000 from the company

The bookkeeper was the company president’s daughter

Page 5: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

A Florida magazine publisher’s CFO was recently found guilty of setting up bogus accounts that only he had

access to, and depositing forged checks into those accounts

After four years he had stolen $1,500,000 from the company

Page 6: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

In August, 2009 a former bookkeeper for several Planet

Fitness clubs in Texas and Oklahoma was sentenced to 41

months in prison and ordered to pay restitution 0f $600,000.

Over a 30-month period she made out checks payable to cash, to

herself, and to her then-husband

Page 7: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

In May, 2009, an accounts payable clerk at Drytac, Corp., a small

Virginia manufacturer, pleaded guilty to embezzling $151,000 from

the firm

She had been with the firm for ten years

The theft was discovered only when she left a counterfeit check on the copier

before she went on vacation

Page 8: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

A bookkeeper for a California orchard grower recently pleaded guilty to writing additional payroll

checks to herself

Before the scheme was uncovered she had stolen

$470,000 from the company over a five-year period

Page 9: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

You’ll LearYou’ll Lear n About …n About …

the risks of employing a dishonest the risks of employing a dishonest personperson

low-cost ways to mitigate that risklow-cost ways to mitigate that risk

how to deal with fraud after it’s been how to deal with fraud after it’s been detecteddetected

Page 10: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

AgendaAgenda

The human aspect of fraudThe human aspect of fraud

The statisticsThe statistics

Combating back-office fraudCombating back-office fraud

Responding to fraudResponding to fraud

Page 11: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

The PerpetratorsThe Perpetrators

Trusted employeesTrusted employees

Financial responsibilitiesFinancial responsibilities:: bookkeepers, accountants, A/P clerks, A/R bookkeepers, accountants, A/P clerks, A/R

clerks, payroll managers, CFOsclerks, payroll managers, CFOs

Familiar with the business’ Familiar with the business’ financial financial controlscontrols

Page 12: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

The PerpetratorsThe Perpetrators

Typically femaleTypically female

Age: 40-49Age: 40-49

Frequently living beyond their means Frequently living beyond their means or experiencing financial difficultiesor experiencing financial difficulties

First-time offenderFirst-time offender

Page 13: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

The Fraud RecipeThe Fraud Recipe

PRESSURE RATIONALIZATION OPPORTUNITY

$THEFT

Page 14: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

StatisticsStatistics(period from 2006 to 2007)(period from 2006 to 2007)

Average fraud loss:Average fraud loss:• 7%7% of of annualannual revenues revenues**

• $200,000$200,000 over 2 years over 2 years

Average fraud scheme duration:Average fraud scheme duration:• overover 22 years*years*

*** Based on the “2008 Report to the Nation on Occupational Fraud and Abuse”, Association of Certified Fraud Examiners

Page 15: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Fraud RiskFraud Risk

Less-effective or non-existent fraud Less-effective or non-existent fraud prevention and detection controlsprevention and detection controls

Unwarranted reliance on external Unwarranted reliance on external auditors to detect fraudauditors to detect fraud

Small businesses are high fraud risks

Page 16: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Red FlagsRed Flags

Financials do not adhere to normsFinancials do not adhere to norms

Employees living beyond expectationsEmployees living beyond expectations

Employees who refuse vacationsEmployees who refuse vacations

Lack of complete and timely Lack of complete and timely reconciliation of assetsreconciliation of assets

Page 17: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Mitigating Small Business Fraud Mitigating Small Business Fraud RiskRisk

EnvironmentalEnvironmental Establish a culture of honesty and ethicsEstablish a culture of honesty and ethics Extend behavioral expectations to vendors, Extend behavioral expectations to vendors,

contractors, customers, volunteers, interns contractors, customers, volunteers, interns and othersand others

SpecificSpecific Policies, procedures, controls to counter Policies, procedures, controls to counter

common schemescommon schemes

Page 18: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Common Small Business Fraud Common Small Business Fraud SchemesSchemes

Check TamperingCheck Tampering Fraudulent BillingFraudulent Billing Payroll FraudPayroll Fraud

… … many othersmany others

Page 19: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Check TamperingCheck Tampering

Intercepting, forging or altering a Intercepting, forging or altering a check drawn on one of the check drawn on one of the organization’s bank accountsorganization’s bank accounts

Page 20: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Mitigating the RiskMitigating the Risk

Keep checkbooks under lock and key (if practical)Keep checkbooks under lock and key (if practical)

Sign all checks, and only with proper documentationSign all checks, and only with proper documentation

Segregate check-writing and bank reconciliation duties Segregate check-writing and bank reconciliation duties (if practical)(if practical)

Examine disbursements (check images and electronic Examine disbursements (check images and electronic transfer descriptions) in bank statements to determine transfer descriptions) in bank statements to determine actual payeesactual payees

Page 21: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Fraudulent BillingFraudulent Billing

Any scheme in which a person causesAny scheme in which a person causes

an employer to issue a payment byan employer to issue a payment by

submitting invoices for fictitious goods orsubmitting invoices for fictitious goods or

services, inflated invoices or invoices forservices, inflated invoices or invoices for

personal purchasespersonal purchases

Page 22: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Mitigating the RiskMitigating the Risk

Vet every new vendorVet every new vendor Segregate responsibilities of initiating and Segregate responsibilities of initiating and

vetting new vendors (if practical)vetting new vendors (if practical)

Examine a vendor report from the Examine a vendor report from the accounting system annuallyaccounting system annually Pay special attention to unfamiliar service Pay special attention to unfamiliar service

providersproviders

Examine credit card statements monthlyExamine credit card statements monthly Look for unauthorized, personal purchasesLook for unauthorized, personal purchases

Page 23: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Payroll FraudPayroll Fraud

Any scheme in which an employee Any scheme in which an employee causes his/her employer to issue a causes his/her employer to issue a payment by making false claims for payment by making false claims for compensationcompensation

Page 24: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Mitigating the RiskMitigating the Risk

Regularly examine payroll reports. Look for:Regularly examine payroll reports. Look for:

Unexpectedly high salaries, wages Unexpectedly high salaries, wages commissions and bonusescommissions and bonuses

Ghost employeesGhost employees

Employees with few or no deductionsEmployees with few or no deductions

Page 25: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Establishing Financial ControlsEstablishing Financial Controls

Accountants can provide Accountants can provide excellent, independent advice on excellent, independent advice on strengthening your business’ strengthening your business’ financial controls.financial controls.

Page 26: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

When Fraud Is SuspectedWhen Fraud Is Suspected

““Suspected” is different than “Proven”Suspected” is different than “Proven”

The extent of the fraud may be unknownThe extent of the fraud may be unknown

The highest priority is protecting the The highest priority is protecting the innocentinnocent

Seek helpSeek help AccountingAccounting LegalLegal Human ResourcesHuman Resources

Page 27: Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC

Parting ThoughtsParting Thoughts

Small business, back-office fraud is a problem Small business, back-office fraud is a problem that can significantly impact cash flow, profit and that can significantly impact cash flow, profit and employee relationsemployee relations

Small business, back-office frauds are Small business, back-office frauds are perpetrated by the least-suspected employeesperpetrated by the least-suspected employees

Good preventive and deterrent controls don’t Good preventive and deterrent controls don’t negate the need for vigilance. negate the need for vigilance. Trust but VerifyTrust but Verify. .