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Fraud Prevention, Detection and Investigation in the Payday Advance Industry
1. Fraud Prevention, Detection and
Investigation in the Payday Advance
Industry
D. Michael Costello, CPA•ABV,
CFE
2008 CFSA Annual Meeting and Conference
Las Vegas, Nevada
March 6, 2008
2. Overview
What are fraud and embezzlement?
How do fraud and embezzlement happen in the
payday advance industry?
What steps can be taken to prevent fraud and
embezzlement in our business?
How is fraud detected?
How do we investigate fraud?
3. Who is committing fraud?
Other Employees
Outsiders <$100,000
Managers <1 Year $100,000–$1 million
Managers 1+ Years >$1 million
5. Fraud and Embezzlement Defined
Fraud: a misrepresentation or false statement
knowingly made to a victim who relies on it and
incurs detriment or harm as its result to the
benefit of the perpetrator
Embezzlement: ―the fraudulent appropriation of
property by one lawfully entrusted with its
possession‖ (Black’s Law Dictionary)
6. The Nature of Fraud
Schemes are always hidden or concealed—
absence of fraud can never be absolutely proven
Courts (juries) are the final arbiter of whether or
not a fraud has occurred
Certified Fraud Examiners can only conclude
that there is an appearance of fraud
7. Categories
Means of concealment
– Lack of documents
– Creation of fake documents
Basic classes of fraud
– Internal
– External
Relation to accounting
– On-book
– Off-book
8. External Fraud
Committed by people outside the business, or by
the business itself against a third party
– Bank fraud
– Investor/securities fraud
– Health care fraud
– Defense contracting fraud
– Bankruptcy fraud
9. Internal Fraud
Committed against an entity by its own
employees, officers, or directors
– Embezzlement
– Theft of petty cash
– Misappropriation of inventory
– Payroll fraud
– Expense account schemes
10. On-book Fraud
Money is diverted from regular accounts, or the
books are manipulated
The books and records provide evidence
11. Off-book Fraud
Diverted money or assets never reach the
financial statements
Very hard to discover/prove
When evidence does turn up, intent is
convincingly established
12. Fraud in the Payday Industry—
Case Study
A remote location of a chain had a lack of oversight and
of internal controls
Manager’s authority:
– sign checks
– make computer entries
– make deposits
– keep customer records
– prepare and sign payroll checks
– receive and reconcile bank statements
What’s wrong with this picture?
13. Concentration of Duties
When one person has certain combinations of
responsibilities, he can cover his own tracks
The manager had been there several years—
ownership, to its cost, trusted him
Manager pocketed cash while entering the
payments as being made
Thus, bank and customer records differed—but
no one reconciled them
14. Other Lapses of Oversight
Bookkeeper never questioned checks being
cashed instead of deposited, commission
advances not being repaid, bad checks from the
manager not followed up on—was too busy
dealing with many locations
Management dismissed the branch’s poor
performance as ―to be expected for a small
town‖
15. Endgame
New bookkeeper quickly noticed something was
wrong
But by the time management had it checked out,
all the records had been destroyed
16. Other ―War Stories‖
Employee ―Hotline‖ used to detect fraud
Performance of ―Fraud Risk Assessment‖
procedures
Investigation of ―trusted‖ bookkeeper
17. Fraud Prevention
TEEAM
– Timely
– Effective
– Efficient
– Accurate
– Mobile
18. Timely
Especially in a cash-intensive business like
check advance, timely data is critical
Be ahead of the situation—err on the side of
overprotection
Analyze data daily to find anomalies, and act on
them immediately
– Problems are caught quickly
– The tone discourages illegal activity
19. Effective and Efficient
Use information that is relevant and correlated
with the problem
– Daily deposit totals are a critical variable
– Count of checks held v. internal or industry norms
can be useful
If data’s not relevant, don’t bother with it—
you’ll just waste time you could use on
something more important
20. Accurate
The data used must properly reflect what it
appears to
Test the accuracy of counts regularly (e. g. by
physically counting held checks)
21. Mobile
Managers should visit stores regularly
Each should have just a few stores, and should
know and closely observe those stores
22. Operating Procedures
Communicate to employees by way of a manual
Routine ―surprise‖ audits of centers
Weekly management audits of center results
Monthly full audits
– Review held checks
– Sample-test petty cash
– Verify that appropriate reports are being used
– Report to audit committee, senior managers, and (for serious issues) to the
full board of directors
– Follow up immediately
Twice/year collections audits
Employee ―Hotlines‖
23. Internal Control
Main Categories
– Financial Reporting
– Safeguarding of Assets
Five Components
– Control Environment
– Risk Assessment
– Information/Communication
– Control Activities
– Monitoring
24. Control Environment
―Tone at the top‖
Integrity/ethics
Commitment to competence
Role of board and audit committee
Philosophy and operating style
Organization structure
Assigning authority and responsibility
HR policies and procedures
25. Risk Assessment
Operating environment
Information systems
Growth of products/customers/employees
New technology
New accounting pronouncements
26. Information and Communication
Refers to all of the operations performed on
transactions and conditions to maintain
accountability for assets, liabilities, and equity
28. Monitoring
Assessment of the quality of internal control
over time
May be ongoing activities, discrete evaluations,
or a mix
29. Opportunity to Commit Fraud
Assets susceptible to misappropriation
Lack of internal control
30. Symptoms of Misappropriation
Accounting—Suspicious Analytical—Unusual
items in the records relationships/events
– Manipulated source – Odd time or place
documents – Participants who wouldn’t
– Journal entries that are normally be involved
somehow not normal – Odd policies/procedures/
– Disagreement between practices
records and physical – Excessive (or deficient)
counts (or other records) frequency
31. Fraud Detection Interviews
Conduct with all employees—not a sign of a
specific suspicion of a person
Establish rapport and get basic facts first
Then move on to the fraud-related questions
32. Questions to ask:
Do you understand the purpose of this
interview?
– Again, note this is not an accusation
Do you think fraud is a problem for business in
general?
Do you think this company has a problem with
fraud?
If employees or managers are stealing from the
company, why do you think they would do it?
33. More Questions
If you knew another employee was stealing from
the company, what would you do?
Do you know anyone that might be stealing or
taking unfair advantage of the company?
Suppose someone who worked at the company
decided to steal or commit fraud. How could he
or she do it and get away with it?
34. Even More Questions
In your opinion, who is beyond suspicion when
it comes to committing fraud at this company?
Did you ever think about stealing from the
company even though you didn’t go through
with it?
Is there any information you wish to furnish
regarding possible fraud in this company?
35. Investigation of Probable Fraud
Undercover police work
Physical/electronic surveillance
Informants
Lab analysis
Interviews
Public records checks
– County recorder’s office
– Subscription database
Checks of other databases
Analytical procedures
36. The Forensic Accountant (CFE)
After a hypothesis or allegation has been made,
the forensic accountant seeks to support or refute
it
Goals:
– Independent confirmation
– Presentation of conclusive evidence
– Determine motive, co-conspirators
– Trace funds to their final location
37. Methods of Investigation
Documents and Records of the Victim
– How the scheme was devised
– What areas were compromised/corrupted
Witness Interviews
– How it was carried out
– Why it was done
Public and Business Sources
– Can provide a variety of data
38. Financial Analysis for Fraud Detection
Horizontal analysis—trends in like items over time
Vertical analysis—relations between items of the same
set financial statements
Actual v. Budget
Compare to competitors or trade-group data
Double-entry analysis
Review G/L, journal entries
Review contracts, agreements
39. ―To Do‖ List
Implement a ―Fraud Risk Management‖ program
covering Prevention, Detection and Response
Where are you at risk for fraud?
Consider internal and external opportunities
Develop a written Plan of Ethics and Code of Business
Conduct that is communicated ―from the top‖
40. ―To Do‖ List
Basic things to implement –
– Segregate financial and accounting duties
– Duplicate sensitive tasks, such as requiring two
signatures on checks over a certain amount
– Require employees to take annual vacations
– Reconcile all bank accounts
41. ―To Do‖ List
Basic things to implement –
– Use passwords and IDs on computer files
– Restrict unauthorized access to offices and computer
– Train supervisors and managers to spot fraud, and
– Perform internal and external audits that include
fraud prevention measures