Key Highlights from the 2016 Fraud Survey: Association of Certified Fraud Examiners

The Association of Certified Fraud Examiners conducts a biennial fraud survey titled Report to the Nations on Occupational Fraud and Abuse.

Fraud Survey

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Key Fraud Survey Statistics

Here are some statistics from the 2016 report:

  • The most common detection method is tips — 39% of fraud was detected by tips
  • The median loss per fraud case is $150,000
  • 41% of fraud cases are not referred to law enforcement (mainly due to fear of bad publicity)
  • The typical organization loses 5% of its revenue to fraud
  • Large organizations are more apt to use antifraud programs than small ones
  • Banking, governments and manufacturing suffer the largest losses (and in that order)
  • The average fraud exists 18 months before detection
  • Fraud schemes lasting more than 5 years caused a median loss of $850,000
  • 82% of the entities in the survey underwent audits
  • 95% of the time the fraudster took efforts to conceal the theft
  • Fraud losses increase with the number of people involved in the theft
  • Most fraudsters are first-time offenders (with only 5% having been previously convicted of theft)
  • The typical fraudster is:
    • Male (69%),
    • Middle-aged (30 to 50 years of age),
    • Educated (60% had college degrees), and
    • Works with the organization for a number of years
  • 19% of the frauds involved owners or executives resulting in median losses of $703,000
  • Only 8% of the frauds were committed by an employee with less than one year of employment
  • Billing schemes such as fictitious vendors continue to cause significant losses
  • 23% of the fraud cases were for more than $1 million dollars

See the complete ACFE survey here.

See my fraud prevention book on Amazon here.

Are You Looking for an Easy-to-Understand Fraud Prevention Book?

Do you lie awake at night wondering if theft is occurring in your organization?

Do you lie awake at night wondering if theft is occurring in your organization? Are you looking for an easy-to-understand guide to fraud prevention?

Find simple but insightful guidance in The Little Book of Local Government Fraud Prevention.

Written by a Certified Public Accountant and a Certified Fraud Examiner with over thirty years experience, you’ll find loads of great ideas to stop fraud dead in its tracks.

Fraud Prevention Book

How This Fraud Prevention Book Empowers You

While the book focuses on local government fraud, you’ll find fraud prevention techniques for nonprofits and small businesses as well.

The books enables you to:

  • Understand what fraud is (and what it is not)
  • Implement powerful fraud prevention techniques
  • Recognize the red flags of theft
  • Understand how frauds occur at the transaction level (e.g., accounts payable fraud)

You don’t have to be a CPA to understand this book–or to use the guidance. The book is useful to laypeople and fraud prevention experts alike.

You will also find transaction-level checklists for implementing internal controls (for example, questions prompting you to evaluate your payroll process).

Be empowered to guard your organization from fraud. See the book on Amazon by clicking here.

Praise for the Book

Here are a few comments from Amazon Reviews:

Bought it this morning and read it all in one sitting. It was clear, concise and kept my attention with practical examples. I often find that some of the books I read on fraud topics are abstract and confusing. This one was just the opposite. Thanks for authoring this book Charles.

Christopher Arsenault

Charles captures key controls required not only in government entities, but all entities and illustrates what can happen in absence of those controls. If you are an auditor, accountant, manager, or board member you will find this information useful.

Donald Vieira

The book highlights several real world case studies of fraud and abuse. This book describes various levels of controls, separation of duties and the value of a Certified Fraud Examiner. Great book!

Paul

I am looking forward to speaking the the Georgia Association of School Business Officials in Augusta, Georgia on November 8th. We’ll review a few school fraud cases and then look at how to prevent thefts in local school systems.

Date:November 8, 2016
Time:9:00 a.m. - 4:00 p.m.
Event:Charles Hall providing fraud prevention class at the Georgia Association of School Business Officials Conference
Topic:Prevention of Fraud in Local Schools
Public:Private

I will be speaking at the Georgia Government Finance Officers’ Conference on October 4, 2016. My presentation is titled “Steal Like a Boss,” a tongue-in-cheek view of how fraudsters think and act. Hope to see you there.

Date:October 4, 2016
Time:2:20 p.m.
Event:Georgia Government Finance Officers' Conference
Topic:Steal Like a Boss
Sponsor: Georgia Government Finance Officers
Venue: Evergreen Marriott Conference Resort | Stone Mountain GA
Public:Public

Fraud Risk Assessments: How to Perform

A new fraud brainstorming idea guaranteed to generate better results

Do your fraud brainstorming sessions lack vigor. In this video, I provide an idea that will liven up your discussions and result in better identification of potential thefts. I also discuss auditor’s responsibilities with regard to fraud and–as you perform risk assessments–ways to score points with your clients.

To see my previous (written) post about how to perform fraud risk assessments, click here.

25 Ways Fraud Happens

Here's a list of common thefts

To prevent fraud, we must know how it happens.

Fraud Prevention

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Common Frauds

Here’s a list of common company thefts:

  1. Collection clerk steals cash prior to recording it
  2. Collection clerk steals cash after recording a customer receipt; he voids the receipt and adjusts (writes down) the customer’s account
  3. Collection clerk places a personal check (for $5,000) in the cash drawer and takes an equivalent amount of cash; the clerk leaves the check in the drawer for months—in effect the clerk has an unauthorized loan
  4. The cash collections supervisor steals cash after receiving funds from collection clerks but before the money is deposited; she adjusts the related bank reconciliation by the amount stolen
  5. The person opening the mail steals checks before they are receipted; these amounts had not previously been recorded as a receivable
  6. Employees steal capital assets (knowing that no one performs periodic inventories)
  7. Employees use company credit cards for personal purchases but code the transactions as company expenses
  8. Accounts payable clerks cut checks to themselves (or to an accomplice) but record the check as company expenses; the check signatures are forged
  9. Accounts payable clerks establish fictitious vendors using their own addresses, a P.O. Box, or that of an accomplice; payments are made to the fictitious vendor and covered up with fictitious invoices; the checks are signed electronically as they are printed
  10. Accounts payable employee intentionally double-pays an invoice, then requests that the vendor refund the extra payment (with the refund going directly to the payable clerk)—check is converted to personal use
  11. Payroll personnel increase the pay rate—in the master pay rate file—for themselves or for friends working in the company
  12. Payroll personnel pay themselves (or friends) twice for each payroll
  13. Payroll personnel purposefully overpay withholding taxes and inflate the withholding amount on their own W-2, resulting a tax refund that includes the excess payments
  14. Purchasing department personnel are bribed by a vendor; the vendor recoups the bribe costs by inflating its subsequent invoices
  15. State, city, county elected officials are bribed; the vendor recoups the bribe costs by inflating its subsequent invoices
  16. Vendors give favors (e.g., free vacations) to those with the power to buy—commonly called a gratuity; vendor recoups the cost of the favors by inflating its subsequent invoices
  17. CEO orders accounts payable staff to make payments to himself (with an implied threat); payments are coded in a manner that hides the payment
  18. Money is wired by the CFO to the CFO but is recorded as a legitimate expense using a journal entry
  19. Money is wired to the CFO who then leaves the country without trying to cover up the theft
  20. The CEO or CFO makes payments to someone who is threatening their life or is blackmailing them; the expense is coded as legitimate
  21. A secret bank account is opened in the name of the business by the CFO but the sole authorized check signer is the CFO; checks are made from a legitimate business bank account to the secret bank account; the CFO writes checks to himself from the secret account
  22. A sales person steals rebate checks that belong to the company; she deposits the checks into her personal bank account by writing “pay to the order of…” on the back of the check
  23. The payables clerk writes a manual check to himself and then records the check with a journal entry that reflects a legitimate vendor
  24. The CFO inflates revenue at year-end with fictitious journal entries; stock prices go up; the CFO sells personally-owned company stock, then the CFO reverses the year-end accruals
  25. The inventory clerk steals stock and covers the theft by altering the inventory records

Fraud Brainstorming for Auditors

In performing your fraud brainstorming, consider printing out this list and seeing if any of these thefts are relevant to your audit.

City Manager Pockets Cash from the Sale of Excess Property

Day 30 of 30 Days of Fraud

The Theft

Is it possible to convert large pieces of excess property to cash–all without anyone knowing? Apparently yes.

Two men, Alfred Ketzler (the city manager) and Alfred Fabian, were found guilty of wire fraud and theft from the city of Tanana, Alaska.

Illegal sales of government property

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Department of Justice Indictment Press Release

So what happened?

First, the Department of Justice stated “Ketzler would acquire surplus federal property that was stored at several different locations without notifying the mayor of Tanana or the city council for the city of Tanana of the federal excess and surplus property obtained on behalf of the city of Tanana.”

The Department of Justice went on to say “that Fabian, for his part, would transport federal excess and surplus property obtained on behalf of the city of Tanana to storage locations in and around Fairbanks, Alaska, including his own residence.”

Finally, the indictment stated that once the excess property was received, Ketzler would sell the equipment to individuals and businesses, telling them the property belonged to the City of Tanana. He asked that the checks be made out to him personally. The indictment continued by saying Ketzler would deposit the checks in his personal account and make payments to Fabian.

The indictment stated that the men received approximately $122,000 in illegal funds.

The property sold included:

  • Trucks
  • Fork Lifts
  • Bulldozers
  • Other industrial equipment

Department of Justice Sentencing Press Release

A June 2014 Department of Justice press release stated:

Anchorage, Alaska – U.S. Attorney Karen L. Loeffler announced today that two Fairbanks men were sentenced on Friday, June 6, 2014, in federal court in Fairbanks after being found guilty of wire fraud and theft from a local government receiving federal funds.

Alfred Richard Ketzler, Jr., also known as “Bear” Ketzler, 57, of Fairbanks, Alaska, was sentenced to 16 months in prison to be followed by two years of supervised release by Chief U.S. District Court Judge Ralph R. Beistline. Ketzler pled guilty in March 2014. Ketzler has already paid restitution to the City of Tanana in the amount of $116,500.

Alfred McQuestion Fabian, 62, of Fairbanks, Alaska, was sentenced to six months in prison to be followed by two years of supervised release by Chief U.S. District Court Judge Ralph R. Beistline. Fabian pled guilty in March 2014.

The Weakness

The city may have had appropriate inventory controls (the DOJ press releases did not say). Most noteworthy, this case appears to reflect a circumvention of controls. The city manager had the power and ability to consummate transactions that were (apparently) not recorded on the city’s records. The indictment states that Ketzler did not provide the city with appropriate notice of the receipt and sale of the excess property. Also the payments received were not recorded on the city’s books.

The Fix

Organizations should do all they can in the hiring process to bring people in that are honest. How? Background checks and the calling of references are critical.

It is imperative that all property be included in inventory—as soon as title transfers to the city. And, obviously, all payments should be made to the city (in this case) and not to individuals. A receipt should be issued to the payor that details the reason for the payment, the amount, and who made it.

How a Tax Commissioner Walks Away with $800,000

Day 29 of 30 Days of Fraud

The Theft

Some twenty years ago, I was working on an audit of a county tax commissioner’s office. We were noticing differences in the receipts and the cash collections.

Theft of cash

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So one day I walk into the Tax Commissioner’s office. As I step in, I see several thousand dollars of cash laying on her desk. So, I remarked to her, “Haven’t made a deposit lately?” She laughed and said, “No, I’ve been too busy lately.”

I thought to myself, “Strange. She knows we’re here for the annual audit, and she has all this undeposited cash in open view. It’s as though she has no fear.”

The next day a gentleman comes into the room where we (the auditors) were working and whispers to me, “The Commissioner has a cocaine habit.” I did not know the fellow, so I wondered if the assertion had any merit. Regardless, this was shaping up to be an interesting audit.

Our audit disclosed unaccounted-for funds of over $300,000 in the year one. Year two, the differences continued and exceeded $500,000. After three years, the unaccounted-for amount was in the $800,000 range.

Why was she not removed? Tax Commissioners are elected in Georgia, so the only person that could remove her was the governor. The local county commissioners could not dismiss her.

Finally, the FBI was brought in. But even they could not prove who was stealing the money. Why? The tax office had two cash drawers and eight clerks. All eight worked out of both drawers. So when cash went missing, you could not pin the differences on any one person.

In addition, the books were a disaster, postings were willy-nilly. There was no rhyme or reason–what I call “designed smoke.”

The tax commissioner eventually went to prison for tax evasion. She made the mistake of depositing some of the stolen cash into her personal bank account, and the Feds were able to prove she had not reported the income.

The Weakness

The primary weakness was the lack of design in the collection process. Two or more people should never work from one cash drawer. Deposits were not timely made (and in many cases, not made at all). And then the books (mainly the tax digest) was not appropriately posted as collections were received.

The Fix

The primary fix was to remove the tax commissioner.

Next, each cash drawer should be assigned to only one person at a time.

Cash receipts should be written and the tax digest should be posted as tax payments are received.

Finally, deposits should be made daily.

How a College Aid Official Stole $4.1 Million

Day 28 of 30 Days of Fraud

The Theft

When I was a student at the University of Georgia, I needed every dollar I could find. I ate my share of cheap hamburgers and peanut butter sandwiches. In the summers, I scouted peanuts and cotton to make ends meet. So when I see a college aid official stealing student money, I wince.

Picture is courtesy of AdobeStock.com

Picture is courtesy of AdobeStock.com

A New York college aid administrator used a simple scheme to steal $4.1 million of student aid funds. How? She made out financial aid checks to nonexistent students and then endorsed them over to the name of an alias. The administrator set up a bank account in the name of the alias and deposited the checks into the bank account, allowing her to convert the checks to cash.

How long did the theft go on? Over ten years.

How many fraudulent checks did she issue? Over 1,000, each to a different student.

The Weakness

No one was comparing the checks written to student admission files. Legitimate students have admission and other information that can be used to verify the students’ existence.

The Fix

A person other than the financial aid administrator should compare the student name on the check to student files to verify the existence of the student. If this control can’t be performed for each disbursement, it should be performed on a sample basis, and the persons creating and signing the checks should know their work is being monitored.

This test could be performed by someone in the financial aid office or by an external professional such as a CPA or a Certified Fraud Examiner.

The college can request from the bank the endorsement side of the cleared checks. If the back side of the checks are obtained, then the endorsements could be examined for appropriateness.