The document discusses different types of employee fraud such as embezzlement, theft, and occupational dishonesty. It provides statistics on fraud including who commits it and how it is typically detected. The presentation also outlines common fraud schemes and recommendations for organizations to implement strong prevention controls and conduct effective fraud investigations.

1. Hidden in Plain Sight:
Discovering and Preventing Employee
Dishonesty and Fraud
Presented by:
Mary O’Connor, ASA, MRICS
Partner, Dispute Advisory Services

2. Agenda
• Distinctions among fraud, embezzlement, theft and occupational
dishonesty
• Uniform Occupational Fraud Classification System
• Interesting statistics
• Common fraud schemes
• Conducting a fraud investigation
• Prevention systems
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3. Distinctions Among
Fraud, Embezzlement, Theft and Occupational
Dishonesty
Fraud is a much larger legal concept specifically related to a criminal
act as defined in the law. Fraud is both a civil and criminal matter in
litigation.
Fraud has Four Elements:
• Material false statement
• Knowledge that the statement was false
• Reliance on the statement by the victim
• Damages
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4. Distinctions Among
Fraud, Embezzlement, Theft and Occupational
Dishonesty
Embezzlement is theft committed by a person who is trusted.
Theft is the act of stealing by a person who is unknown to the victim.
Occupational fraud, also known as employee dishonesty, is the use of
employment to commit fraud for personal enrichment through
deliberate misuse of misapplication of employer’s resources and
assets.
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5. Uniform Occupational Fraud Classification System
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6. Uniform Occupational Fraud Classification System
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7. But my Auditor Gave a Clean Opinion
• An unqualified audit opinion does NOT mean that there is no
employee dishonesty occurring in the organization
• Employee dishonesty can be significant and the books can still
balance
• SAS 99, professional skepticism and materiality
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8. Interesting Statistics
• Losses estimated at twice the annual budget
of the US Department of Defense
• Direct correlation between age of fraudster
and size of theft
• Direct correlation between job title of fraudster
and size of theft
• Overwhelmingly happens in small operations
• External auditors rarely identify
fraudulent activity
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9. Who is the Fraudster?
• Otherwise honest and responsible citizen
• Computes the likelihood of capture and believes it is worth the risk
• Tends to be middle-aged, of either
gender and well-regarded in the
organization
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10. Interesting Statistics
Initial Detection of Frauds
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11. Fraud Hot Spots
• Departments with Independent • Sensitive information on desks
Systems; Remote locations • Insecure checks
• Cash and cash registers • Mail handling
• Too many bank accounts • Deposit handling
• Accounts Payable • Deficient IT System; loose
• Voucher System controls on voids and restarts
• Reliance on part-time
employees
• Stop payments; Outstanding
checks
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12. Red Flags of Fraud/Occupational Dishonesty
• Independent IT Systems without proper interface
• Poor separation of duties; one person controls the accounting
system
• Outdated IT system with inadequate security
• Poor internal controls- no one is really looking
• Over-reliance on certain employees
• Extravagant lifestyles
• Missing documents; “special” procedures
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13. The Problem with Departmental Systems
Businesses are composed of numerous sub-units and many are
located remotely from the Central Administration. A manual interface
with the departmental system and the Finance Office is a major red flag
that requires investigation.
Manual
Interface
Dept System General Accounting
System
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14. The Problem with Department Systems
Departments often run autonomously and many collect significant
amounts of cash in total annually. However, the daily deposits to the
Finance Department may be small and seemingly immaterial. Cash
theft can easily occur and the entity’s books still balance. Note that theft
can occur and the department system can be accurate.
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15. Uniform Occupational Fraud Classification System
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16. Common Fraud Schemes
Corruption
• Conflicts of interest
• Schemes with and without vendor knowledge
• Bribery and kickbacks
• Bid rigging and Procurement Fraud
• Use of Shell Intermediary Companies
• Improper use of Minority Companies
• Multiple names for same Vendor
• Different rules for different Vendors
• Material Substitution
• Change Order Game
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17. Uniform Occupational Fraud Classification System
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18. Common Fraud Schemes
Financial Statement Fraud
• Fictitious revenues
• Concealed liabilities
• Journal entry fraud
• Expenditures contrary to law or policy
• This is the focus of the external auditor
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19. Uniform Occupational Fraud Classification System
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20. Common Fraud Schemes
Skimming and Lapping
• Recorded (lapping) and unrecorded (skimming) revenue
• Write-offs of receivables
• Voids and restarts
• Refunds
• Locus around cash
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21. Common Fraud Schemes
Fraudulent Disbursements
• Billing: Shell companies; pass through entities
• Payroll: Ghost employees, falsified time record, failure to
terminate
• Expense reimbursement
• Check tampering
• Bank reconciliations can miss the fraud
• Register disbursements: false voids, false refunds
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22. Common Fraud Schemes
Inventory Misappropriation
• False acquisitions and transfers
• Simple theft
• Conversion to personal use
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23. Conducting the Investigation – Why you need a
system in place for fraud incident investigation
Goals to this Process are:
• To follow-up on all credible tips and complaints
• To follow-up on all management letter issues to fraud
• Form a response team that preserves the secrecy of the
situation
• Avoid the “Dick Tracy” syndrome
• Create a plan that allows the organization to work together in the
future
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24. Conducting the Investigation
Goals (Continued)
• Preserve the evidence especially the computer record
• Deal with the administrative leave and other employment issues
• Deal with employee morale issues; manage emotions
• Keep the place going!!!!
• Work for restitution, insurance claim preparation and possible
criminal referral
• Learn from mistakes of the past and fix the problems
• Communicate effectively to stakeholders
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25. Reasons to Call in a Forensics Team
Know the Endgame – Its not only to prosecute!
• Preserve the relationship of audit team and staff
• Preserve management relationship with staff
• Tasks for the forensics team
• Surveillance
• Proof
• Security of computer evidence
• Interviewing
• Insurance Claim/Restitution
• Police/State’s Attorney Support
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26. A System to Prevent Employee Dishonesty
First and Foremost: Secure the IT System
• Passwords and encryption
• Laptops and cell phones
• Clean desk policy
• One system among departments
• Sufficient firewalls to prevent hacking
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27. A System to Prevent Employee Dishonesty
Create a Tone at the Top
• Clear policy and procedures
• Clear policy of punishment for malfeasance
• Lead by example
• Training, training, training
• Employee background checks and hiring practices
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28. A System to Prevent Employee Dishonesty
Install an Effective Whistle-Blowing System
• Anonymous
• No reprisals
• Off site answering service
• Must follow-up on tips
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29. A System to Prevent Employee Dishonesty
Internal Control System
• Separation of duties
• Authorizations; look at limits
• Computer passwords
• Independent and surprise checks
• Separation of Treasury and Accounting functions
• Think through each system – Where are the holes?
• Rotate and Cross-Train
• Look at how checks and cash functions are handled
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30. A System to Prevent Employee Dishonesty
Alert Vendors and Install Strict Controls
• Contract language to include right of audit
• Master vendor file
• Review addresses and relationships
• Physical verification
• Statistical analysis
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31. A System to Prevent Employee Dishonesty
Secure the Physical Assets of the Organization
• Clean Desk Policy
• IT policy related to laptops, desktops, phones, iPads
• Checks!!!!!!
• No passwords on computer screens!!!!
• Secure receiving dock
• Semi-annual inventory of major assets
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32. Questions?
Questions?

33. About Sikich
• Sikich is an accounting, advisory, technology and
managed services firm with eight offices in four
states and with clients throughout the United States
and internationally.
• A reputation for professional $70M in projected revenue in 2012
excellence, unsurpassed client service, and timely
and cost effective service delivery.
7,000 business clients
• We employ more than 400 people including 68
partners, all of whom devote their careers to a 7,500 individual clients
focused area.
153,882 square feet to serve clients
• Accounting Today ranks the Firm 47th nationally
among the Top 100 Accounting Firms and 12th
in the Top 100 Value Added Resellers (VAR). 400+ total personnel
• May 1, 2012 was our 30th anniversary. 68 partners
• In 1998, Sikich began expanding through merging 8 offices in 4 states
with firms already successful in target areas and
hiring talent and developing service areas from
scratch.
1 collaborative and positive culture

34. Honors & Recognitions
Accounting Technology
• #47 in Accounting Today’s • Top 1% of all ERP solution
2012 Top 100 Accounting partners in the world
Firms • 2012 Microsoft Dynamics Inner
• INSIDE Public Accounting’s Circle
Top 50 Accounting Firms in • 2012 Microsoft Dynamics
2012 President's Club
• INSIDE Public Accounting’s • #12 on Accounting Today's Top
All-Star Firms in 2012 100 VARs in 2012
• #13 on Bob Scott's Top 100
VAR List for 2012

35. Tracing Our Roots 2012
30th Anniversary
$80,000,000
$70,000,000 2008-2011
$60,000,000 Merges with 4
CPA firms and
1998 solidifies
$50,000,000 position in the
Top 50 with
Merges with Intelligent Computer
$40,000,000 1982 Solutions LLC and starts its
more than 375
employees
technology practice
Sikich Gardner & Co. was
$30,000,000 formed; takes up residence in
Aurora and Springfield
$20,000,000
$10,000,000
$0
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36. The Sikich Service Areas
Audit, Accounting & Tax Advisory
• Financial Reporting • Business Valuation
• Accounting Services • Dispute Advisory
• Tax Planning • Flex-Staff Solutions
• Human Resources
• Graphic Design & Marketing
Technology Managed Services
• Accounting & ERP Software • Outsourced Accounting
• CRM Software • Managed IT
• IT Infrastructure • Outsourced Human Resources
• Cloud & Hosting Solutions • Outsourced Marketing
• Strategic IT Planning
• Communication & Collaboration
• IT Consulting

37. Industry Expertise, Tailored Approach
• Agriculture
• Construction Deep industry
experience and
• Government longevity.
• Healthcare
• Higher Education
Cross sectional teams
• Non Profit with a depth and breadth
• Manufacturing & Distribution of experience to handle
the complete solution.
• Professional Services
• Real Estate
• Retail Solution centric and
product agnostic.

38. Contact Information
Mary O’Connor, ASA, MRICS Sean Hastings
Partner, Valuation and Dispute Advisory Services Director, Business Development
Sikich LLP Sikich LLP
T: 312.648.6652 T: 630.210.3055
M: 708.646.8737 Email: shastings@sikich.com
Email: moconnor@sikich.com
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