Special Investigative Unit

1. Special Investigative Unit Speaker: Lindsey Perry, CPA, CFE Special Investigative Unit Senior

2. Fraud Prevention Outline • Office Background • Current Trends and Statistics • Fraud Prevention Measures • Case Examples • Questions

3. Office of the Auditor General • A.R.S. gives OAG authority • Legislative agency • Audit and oversight of state entities • Up to 200 reports annually

4. Special Investigative Unit • Established 1988 • Staff credentials: CFE, CPA • Fraud, waste, and abuse of public monies • Conduct investigations • Issue reports • Assist law enforcement agencies • Serve as a resource for other divisions and governmental entities

5. The Investigation Process • Allegations • Citizens • Audit Teams • L.E. Referrals Reject Unit Investigation Initial Review Outsource Public Report Criminal Report Complaint Process Grand Jury Indictment Court System

6. Fraudulent Activity Reported, FYs 1991-2010

7. Current Trends and Statistics

8. Survey Respondents • October 2009 • 1,843 responses • 87 questions • More than half fraud examiners or internal auditors • 12% accountants • 7% law enforcement

9. The Cost of Occupational Fraud • Average organization = 5% revenues lost to fraud • $2.9 trillion globally • Estimate only (opinions of anti-fraud professionals)

10. Occupational Frauds by Category

11. Methods of Fraud

12. Control Weaknesses

13. Size of Victim

14. Perpetrators • Strong correlation between position of authority and losses caused by fraud • The higher the position, the longer to detect the fraud • Much higher median losses

15. Age

16. Department

17. Red Flags

18. What Causes Employees to Commit Fraud?

19. The Fraud Triangle Opportunity Rationalization Pressure

20. Simple Fraud Prevention Measures • Internal Controls and Procedures • Hiring good employees

21. Fraud Prevention in Hiring • Statements on job applications or contracts • Background checks

22. Reference checks (phone) • Did your district sign a separation agreement with Mr. X? “termination agreement” “release agreement” “settlement agreement” • Would you recommend Mr. X for this position? • Was Mr. X involuntarily released from his position? • Did Mr. X resign?

23. Simple Fraud Prevention Measures • Internal Controls • Hiring good employees • Pre-numbering; carbon copies

24. Case Example:City Police Department Administrative Assistant

25. Police Department • Old Police Chief retired • New Police Chief • Ordered internal audits • Compared impound fees received to impound fees deposited • Missing $7,350 • Report left on chief’s desk Friday • Suspect confessed Monday

26. Police Department • Referred from County Attorney • PD conducted limited investigation • Referred to our office for objectivity

27. Suspect • Administrative assistant • Worked for PD about 7 years • Various administrative duties • Team player; highly trusted • “Employee of the Quarter”

28. Police Department • Cash receipts: • Background checks • Fingerprint cards • Copies of reports • Bond payments • Impound fees

29. Cash Collection Process • No cash registers • Cashier collects payment • Cashier issues manual receipt • Cashier puts payment in sealed envelope with copy of receipt, in locked drop box • The next morning, admin assistant: • Opens box /envelopes • Prepares deposit • Takes deposit to city finance

30. Stays in Book Deposit Customer

31. Stays in Book Deposit

32. Stays in Book

33. Receipt Book City Ledger 3/4/2007 Received from: Thelma $150 Ted $150 Total: $300 3/4/07101 Louise $150 3/4/07100 Thelma $150 3/4/07102 Bill $150 3/4/07 103 Ted $150

34. Receipt Book 3/4/07101 Louise $150 3/4/07100 Thelma $150 $300 Stolen 3/4/07102 Bill $150 3/4/07 103 Ted $150

35. Conclusion • Total embezzled: $10,546 • Grand Jury Indicted on 3 felony counts: theft, misuse, and fraudulent schemes • Plea Agreement: one count theft, one count attempted fraudulent schemes

36. Simple Fraud Prevention Measures • Internal Controls • Hiring good employees • Pre-numbering; carbon copies • Segregation of Duties • Job Rotation

37. Case Example:School District Student Activities Secretary

38. Suspect Information • Graduated from district high school • Hired as secretary • Assisted Business Manager with accounts payable and invoice processing • Promoted to Student Activities Secretary 2 years later

39. Suspect’s Responsibilities • Prepared Cash Boxes • Collected Receipts • Made Bank Deposits • Approved & Issued Checks • Monthly Bank Reconciliations • Monthly Board Reports

40. How Theft Was Discovered • No call, no show • $7,900 in desk drawer - 10 month old checks! - $1,343 lost from stale dated checks • Confession & Resignation • $11,000 Repaid by Suspect

41. Determining Theft Amount • Missing deposit records • Missing Student Activities files • Incomplete recordkeeping

42. Board Report vs. Bank Statement 2/9/06 Bank Balance $21,761 Difference 15,530 Less: $ in Desk 7,899 Recorded Theft Amount $7,631

43. Resolution • Indicted on Fraud Schemes, Theft, Misuse of Public Monies, Tampering with Public Record • Pled Guilty to Fraud Schemes & Tampering • 4 years Supervised Probation • 400 Hours of Community Service • $1,343 Restitution in addition to the $11,000 already paid back (stale dated checks)

44. Internal Control Solutions • Biggest issue: lack of segregation of duties and supervision • At a minimum: cash-handling separate from recording • Could have assigned business manager to reconcile bank account • Could have assigned other employees (AP clerk, secretary) a portion of the duties • Prepare deposit • Record receipts

45. Simple Fraud Prevention Measures • Deterrence • Employee Education and Training (Recurring)

48. Fraud Alerts

49. Simple Fraud Prevention Measures • Deterrence • Employee Education and Training (Recurring) • Fraud Awareness Policies

50. Eye Catching?