Susan Mondello, CPA, CIA Georgia State University University Auditing and Advisory Services November 14, 2007

1. Susan Mondello, CPA, CIA Georgia State University University Auditing and Advisory Services November 14, 2007

2. 2 How to Identify andCatch a Thief in the WorkplaceIntroduction

3. 3 How to Identify and Catch a Thief in the WorkplaceObjectives You will learn about occupational fraud� Why you should be concerned How fraud occurs How to identify and catch a thief in the workplace How likely is it that a highly publicized fraud will occur on our campus

4. 4 What is Fraud? Fraud � intentional misrepresentation of fact causing victim to lose money or property Occupational fraud � fraud committed in the course of one�s occupation White-collar crime � a variety of nonviolent crimes committed in commercial situations for financial gain

5. 5 Why Should You be Concerned? Fraud is more likely than ever to happen in your department because it is: Generally more lucrative than other types of crime such as property crime In U.S., reported cases of property crime are down 50%, possibly because more criminals are turning to fraud Of all property thefts in U.S. in 2004, 75% were worth less than $249. By contrast, median loss was $159,000 per study of 1134 occupational fraud cases by the Association of Certified Fraud Examiners (ACFE)

6. 6 Why Should You be Concerned? Fraud is more likely than ever to happen in your department because it is: Generally less risky in terms of penalty than other types of crime Increasingly part of organized crime

7. 7 Why Should You be Concerned? You should also be concerned about fraud because of Federal Sentencing Guidelines Organizations must make reasonable effort to prevent/detect criminal activity You are responsible for due diligence in your area

8. 8 Who Commits Occupational Fraud? Some of our best personnel - Per the ACFE study: Majority of perpetrators were long-serving, middle-aged, male executives and managers Positive correlation exists between size of loss and perpetrator�s authority level, tenure, education level, age, and male gender

9. 9 Who Commits Occupational Fraud? Perpetrators by position: 61% owners/executives/ managers; 39% lower level employees Owners/executives median loss was $1 million or 5X manager and 13X employee median loss

10. 10 Who Commits Occupational Fraud? Perpetrators by tenure: 64% over 5 years Median loss for those with 10+ years was $263,000 compared to $45,000 for someone with less than 1 year

11. 11 Who Commits Occupational Fraud? Perpetrators by education level:

12. 12 Who Commits Occupational Fraud?

13. 13 Who Commits Occupational Fraud?

14. 14 Who Commits Occupational Fraud? Note: The typical fraud perpetrator is among the most highly regarded and trusted personnel in most organizations Therefore: Controls should be held constant for everyone, regardless of position and reputation

15. 15 Who Commits Occupational Fraud? Example of accomplished and highly regarded fraud perpetrator: Donna Stroup, PhD, program director at Centers for Disease Control � convicted in July 2006 of falsifying 107 receipts totaling $7,516

16. 16 Who Commits Occupational Fraud? Tom Coughlin, formerly 2nd highest ranking Wal-Mart executive, pleaded guilty in January 2006 to falsifying expense statements and obtaining unauthorized gift cards � his purchases were as varied as snakeskin boots, hunting trips, and Bloody Mary mix

17. 17 Who Commits Occupational Fraud? Attention fundraisers - Beware donor fraud: University of Missouri removed Wal-Mart heiress�s name from brand new sports arena amidst allegations of cheating her way through another school. Her billionaire parents had donated $25 million for naming rights.

18. 18 Who Commits Occupational Fraud? Those having: Pressure - Usually caused by financial need or desire for lavish lifestyle Opportunity � Typically arises from weak controls or too much independence/ control given to someone Ability to rationalize � Criminals make excuses and do not think of crime as stealing

19. 19 How Does Occupational Fraud Occur? Billing � Employee submits invoice for payment to bogus vendor or for personal expenses Non-cash � Employee steals office supplies, stamps, business services, identity of students/staff, etc. Expense reimbursement � Employee files expense report claiming personal travel, nonexistent meals, etc. Skimming � Employee accepts payment from customer but does not record Payroll � Employee takes unreported annual/sick leave, claims overtime for hours not worked, adds ghost employee to payroll

20. 20 How is Occupational Fraud Detected?

21. 21 How is Occupational Fraud Detected? Fraud detected via tips:

22. 22 How is Occupational Fraud Detected? Another method to detect fraud - Undeclared income � Examples: Al Capone and Bill Campbell convicted of income tax evasion

23. 23 Could Starbucks Fraud Happen Here?

24. 24 Could Starbucks Fraud Happen Here? Starbucks fraud � Rosemary Heinen: Was hired November 1999 as Starbucks IT Manager Created contract with bogus company, RAD Consulting � forged signature approval of VP Created, approved, and sent RAD invoices to Accounts Payable with instructions to hold checks for her to pick up Said consultants rarely came to office or had just left when management questioned their whereabouts Began charging dormant project accounts to hide RAD payments from management

25. 25 Could Starbucks Fraud Happen Here? Starbucks fraud (cont.) � Ms. Heinen: Had stolen more than $3.7 million via 200 invoices over 10-month period by the time supervisors called authorities Claimed she had shopping addiction � items purchased included 2 homes, 34 cars, 2 motorcycles, 3 boats including 47� yacht, 3 Steinway pianos, 600 Barbie dolls Was sentenced to 4 years in prison Auction was held; Starbucks recovered some of its loss

26. 26 Could Starbucks Fraud Happen Here? Issue � Heinen was hired despite shady past. Georgia State � We likely would have detected her past due to policy of checking credit/criminal background before hiring personnel with access to cash, keys, or kids. A weakness is that we only check criminal background in the state of Georgia; crimes committed in other states are not detected. Auditor recommendation � Criminal background checks should be expanded to nationwide scope.

27. 27 Could Starbucks Fraud Happen Here? Issue � Heinen forged signature approval on RAD Consulting contract. Georgia State � Not much can be done to prevent forgery. However, we have improved controls by emphasizing that a manager is not to authorize others to sign manager�s name, use rubber stamp of manager�s signature, or use manager�s Spectrum password to approve transactions. Auditor recommendation � For those complying, keep up the good work! All others, please start complying.

28. 28 Could Starbucks Fraud Happen Here? Issue � Heinen had too much control over the payment process - she served as initiator and approver of payments to RAD Consulting. Georgia State � Starbucks could possibly have avoided the fraud by following our procedures: a) two people who can verify business integrity must be involved in every transaction; b) someone other than the initiator must approve the transaction. Auditor recommendation � For those complying, way to go! All others, please start complying.

29. 29 Could Starbucks Fraud Happen Here? Issue � Accounts Payable held checks for Heinen to pick up. Georgia State � Heinen would have had more difficulty perpetrating fraud due to our policy that checks may not be held for pick-up; they must be mailed to the vendor. Auditor recommendation � For those complying, keep enforcing those good controls! All others, please start complying.

30. 30 Could Starbucks Fraud Happen Here? Issue � Poor management oversight of expenditures. Georgia State � Starbucks fraud would likely have been detected much sooner by following our policy of monthly expenditure review. Auditor recommendation � Thanks to those who diligently review expenditures! All others, please be advised of the importance of your cooperation and compliance.

31. 31 Conclusion Hopefully, you now have a better understanding of occupational fraud: Why we should be concerned How occupational fraud occurs How to identify and catch a thief in the workplace How we are working to prevent the Starbucks and other types of fraud We must all work together to counteract the growing threat of fraud. Please contact the Fraud Hotline, my department, or University Police if you have any questions or suspicions of fraud.

32. 32 Conclusion Thanks for your attention and interest today. Questions?

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34. 34 Bibliography (continued) CNN.com Law Center (2006, June 13). Atlanta�s former mayor sentenced to prison. Retrieved July 19, 2006, from www.cnn.com/2006/LAW/06/13/mayor.sentenced/index.html. Torpy, Bill; Scott, Jeffry; and Warren, Beth (2006, March 11). The Bill Campbell verdict: split decision: ex-mayor cleared of public corruption; conviction on income tax evasion charges could lead to prison time. Ajc.com. Retrieved July 19, 2006, from www.ajc.com/saturday/content/epaper/editions/saturday/ news_442157bf34eb81e20027.html. Torpy, Bill (2006, July 15). CDC official fined, put on probation. Atlanta Journal Constitution. Retrieved August 14, 2006, from http://www.tobacco.org/news/228264.html. Department of Justice (2006, May 17). High ranking CDC official pleads guilty to theft. Retrieved August 14, 2006, from www.usdoj.gov/usao/gan/press/2006/05-17-06b.pdf. Kabel, Marcus (2006, January 31). Ex-Wal-Mart exec pleads guilty to fraud. Retrieved August 14, 2006, from www.mindfully.org/Industry/2006/Wal-Mart-Coughlin-Fraud31jan06.htm. Reuters (2006, August 11). Former Wal-Mart exec sentenced. Retrieved August 14, 2006, from news.yahoo.com/s/nm/20060811/bs_nm/retail_walmart_dc_3. Farzad, Roben (2005, July 15). Wal-Mart accuses second executive in fraud. Retrieved August 14, 2006, from www.wakeupwalmart.com/news/20050715-nyt.html. ESPN.com news services (2004, November 24). Paige Sports Arena to be given new name. Retrieved April 26, 2006, from http://sports.espn.go.com/ncb/news/story?id=1931214.