AFOA Canada National Conference

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AFOA Canada National Conference

• In Control
• Fraud and Internal Controls
• February 27, 2004

pwc
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Presenters

• Shannon Ryhorchuk
• Calgary Audit Partner with extensive experience
  servicing the First Nation, Municipal Government
  and Not-For-Profit sectors.
• Chad Cretney
• Calgary Financial Advisory Services Senior
  Manager with extensive experience conducting
  forensic investigations. These assignments have
  been completed in a wide range of areas,
  including First Nations.

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Introduction

• In this presentation we will discuss
• Discuss how changes in a current environment
  create opportunities for fraud.
• Introduce and explain some of the most commonly
  perpetrated internal frauds.
• Identify the key controls that should be in place
  to complement the activities of First Nations.
• Discuss the importance of having a strong system
  of Internal Controls to prevent and detect fraud.

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Current Environment

• Changes in the business and economic environment
  create opportunity for fraud.
• Increased use of technology
• Technology advances ahead of security devices
• Increased complexity of banking arrangements
• Increased complexity of economic transactions
• Impact on economic development from world events
• Management, auditors and those responsible for
  governance, such as Chief and Council, have
  increased responsibility for assessing risk of
  fraud.

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Internal control Key Concepts

• Control comprises those elements of an
  organization that, taken together, support people
  in the achievement of the organizations
  objectives.
• Internal control is effective to the extent that
  it provides reasonable assurance that the
  organization will achieve its objectives
  reliably.
• Control can only provide reasonable, not
  absolute, assurance.
• Internal controls must adapt to any changes in
  the external and internal factors

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The control environment

• The control environment comprises management's
• Philosophy
• Attitude and
• Demonstrated commitment
• to control and sets the tone by which the
  business operates.

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Types of internal controls

• Management Controls
• Accounting Controls

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Key Management Controls

• Budgets preparation, approval and monitoring
• Regular financial reporting
• Preparation and review of monthly financial
  information
• Monitoring and review of key transactions
• Policies and procedures
• Tone at the Top

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Key Accounting Controls

• Record Keeping
• Reconciliations
• Approval/Authorization limits
• Supporting documentation
• Verification

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Fraud prevention

• Where does fraud occur?
• Why does fraud occur?
• Major types of fraud
• Fraud prevention What can you do?

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Crime Facts

• The Bigger You Are, the Harder You Fall
• No Industry is safe
• Asset misappropriation is the most widely
  reported crime
• Asset misappropriation and Cybercrime are the
  biggest concerns for the future
• The impact on reputation, image and staff morale
  can be more important than financial loss
• 75 of victims recover less than 20 of losses
• Less than 50 of victims have economic crime
  insurance

2003 PwC Global Economic Crime Survey
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Where does Fraud Occur?
Organization
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Where does Fraud Occur?
Organization
- Short Shipments - Double Billing - False
Invoices - Employee Bribery
Suppliers
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Where does Fraud Occur?
Competitors
- Employee Bribery
Organization
Suppliers
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Where does Fraud Occur?

• Shoplifting
• False Returns
• False Credit Cards
• Fraudulent Cheques

Customers
Competitors
Organization
Suppliers
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Where does Fraud Occur?
Customers
Competitors
Government

• Tax Evasion
• Contract Cost Padding

Organization
Suppliers
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Where does Fraud Occur?
Customers
Competitors
Government
Organization
Insurers
Suppliers

• False Loss Claims

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Where does Fraud Occur?
Customers
Competitors
Government
Organization
Insurers
Suppliers
Employees (Internal Fraud)
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Most Common Types of Economic Crime Experienced
2003 PwC Global Economic Crime Survey
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Why does fraud occur?
OPPORTUNITY
THE FRAUD TRIANGLE
PRESSURE
RATIONALIZATION
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Major types of internal fraud

• Expense Account Schemes
• Purchasing and Billing Schemes
• Bribery and Conflicts of Interest
• Inventory and Other Assets Frauds
• Payroll Fraud
• Cheque Tampering
• Skimming Schemes

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Expense account schemes

• Main Risk Over reimbursement to employees.
  Prevalent issue when employees travel regularly
  to or from a major centre.
• Mischaracterized expenses
• Overstated expenses
• Fictitious expenses
• Multiple reimbursements

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Key Controls Expense claims

• Key controls include
• Formal written policies
• Pre-approval of all travel costs.
• Approval of expense claims by a properly
  authorized senior person prior to payment
• Original receipts or other supporting
  documentation required
• Matching of expenses to receipts
• No expense advances, reimbursement only.

• Main Risk Over reimbursement to employees.
  Prevalent issue when employees travel regularly
  to or from a major centre.
• Mischaracterized expenses
• Overstated expenses
• Fictitious expenses
• Multiple reimbursements

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Accounts Payable - Purchasing and billing schemes

• Main risks Invoices will be paid more than once
  or in error and/or not all liabilities will be
  recorded.
• Phantom vendors/Shell companies
• Accomplice vendors
• Personal purchases

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Key Controls Purchasing Billing Schemes

• Key controls in this area include
• Proper authorization to setup vendor accounts
  periodic review of vendors
• Supporting documentation for payments
• Proper authorization for disbursements
• Cheque signing controls
• Scheduled A/P payment dates
• Purchase orders
• Corporate credit cards
• Conflict of interest policy
• Budgets

• Main risks Invoices will be paid more than once
  or in error and/or not all liabilities will be
  recorded.
• Phantom vendors/Shell companies
• Accomplice vendors
• Personal purchases

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Conflicts of interest
Conflict of interest arises when an employee,
department manager, or executive officer has an
undisclosed economic or personal interest in a
transaction that affects the organization
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Bribery and conflicts of interest

• Bribery
• Invoice kickbacks
• Bid rigging
• Conflict of interest
• Purchases schemes
• Sales schemes

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Key Controls - Bribery and conflicts of interest

• Bribery
• Invoice kickbacks
• Bid rigging
• Conflict of interest
• Purchases schemes
• Sales schemes

• Key controls in this area include
• Conflict of interest policy including annual
  declarations of compliance
• Monitoring/control of vendor information
• Review/approval of significant transactions by
  senior management and/or Chief and Council
• Formal bid/tendering policy
• Budgets
• Monitoring of customer/staff complaints
• Tone at the Top

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Inventory and fixed asset frauds

• Main risk Safeguarding assets from
  misappropriation and the reliability of the
  reported values.
• Theft
• Asset requests and transfers
• False sales and shipping
• Purchasing and receiving
• Misuse of common assets
• Computers
• Illegal activities or hacking
• Telephones
• Company Vehicles equipment
• Use of company car and equipment for a side
  business

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Key Controls - Inventory and fixed assets

• Main risk Safeguarding assets from
  misappropriation and the reliability of the
  reported values.
• Theft
• Asset requests and transfers
• False sales and shipping
• Purchasing and receiving
• Misuse of common assets
• Computers
• Illegal activities or hacking
• Telephones
• Company Vehicles equipment
• Use of company car and equipment for a side
  business

• Key controls in this area include
• Detailed fixed asset listing.
• Physical verification/counts of assets
• Physical protection of assets
• Policies regarding use of assets
• Approvals/accounting for asset requests and
  transfers
• Separation of purchasing receiving
• Purchase approval levels
• Review of A/R ageing/collection

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Payroll fraud

• Main Risks Overpayment of employees and
  improper recording of payroll costs.
• Ghost employees or dead horses on the payroll
• Falsified wages
• Commission schemes
• Workers compensation

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Key Controls - Payroll

• Key controls in this area include
• Review of the payroll register
• Review and update of employee personnel files
• Separation of Personnel functions from Payroll
  functions.
• Budget
• Validation checks on payroll input
• Direct Deposit vs. cheque distribution

• Main Risks Overpayment of employees and
  improper recording of payroll costs.
• Ghost employees or dead horses on the payroll
• Falsified wages
• Commission schemes
• Workers compensation

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Cash - Cheque tampering

• Main risk Cash is the easiest asset to
  misappropriate.
• Stealing blank cheques
• Forging signatures.
• Intercepting legitimate cheques
• Submitting fraudulent cheques with legitimate
  ones to be approved by an inattentive signer.
• Authorized cheque signatory prepares and signs
  fraudulent cheques for their personal benefit.

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Key Controls - Cash

• Key controls in this area include
• Physical safeguard of blank cheques
• Control of physical cheques after signing
• 2 signatories required over thresholds
• Scheduled cheque runs
• Controls over vendor masterdata
• Approval of all cheques and bank transactions by
  senior and appropriate personnel.
• Bank reconciliations

• Main risk Cash is the easiest asset to
  misappropriate.
• Stealing blank cheques
• Forging signatures.
• Intercepting legitimate cheques
• Submitting fraudulent cheques with legitimate
  ones to be approved by an inattentive signer.
• Authorized cheque signatory prepares and signs
  fraudulent cheques for their personal benefit.

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Accounts Receivable - Skimming schemes
Main risks Amounts are not recorded or not
recorded in a timely manner, and amounts are not
collectible.

• Skimming is the removal of cash from a victim
  entity prior to its entry in the accounting system

• Types of skimming
• Unrecorded sales and receivables
• Receivables skimming

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Key Controls - Accounts Receivable
Main risks Amounts are not recorded or not
recorded in a timely manner, and amounts are not
collectible.

• Key controls in this area include
• Review of the aged accounts receivable listing.
• A/R ageing
• Review of unapplied cash
• Customer complaints
• Use of cash registers/customer receipts
• Budgets

• Skimming is the removal of cash from a victim
  entity prior to its entry in the accounting system

• Types of skimming
• Unrecorded sales and receivables
• Receivables skimming

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Fraud prevention What can you do?

• Poorly designed internal controls or a breakdown
  in existing controls are the number one reasons
  fraud and abuse are allowed to occur.
• All organizations are vulnerable no one is
  immune.

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Fraud prevention What can you do?

• Fraud can be extremely costly to any
  organization, therefore fraud prevention is
  critical
• Control culture integrity and accountability in
  leadership
• Risk management accounting and management tools
• Adopt controls that work for you

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Conclusion Effective internal control and fraud
prevention

• Set the tone at the top
• Management must lead the way
• Sound internal control
• The weapon to combat fraud
• The high costs of fraud
• Misappropriated assets
• Investigation
• Recovery
• External assistance is available
• Fraud vulnerability assessments
• Fraud-awareness training for management and
  employees

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Pwc
111 - 5th Avenue SW, Suite 3100 Calgary, Alberta,
T2P 5L3 Fax [phone] Shannon Ryhorchuk
[phone] shannon.g.ryhorchuk_at_ca.pwc.com Cha
d Cretney [phone] chad.j.cretney_at_ca.pwc.co
m