Keeping the Public’s Trust

1. Keeping the Public’s Trust How to Minimize Fraud & Embezzlement Risk Financial Management and Human Resources Forum Atlanta October 9, 2013

2. Agenda • Background (Dan) • Definitions/Overview/Context • Specific Nonprofit Challenges • Plan to Address These Challenges • Tone at the Top • Segregation of Duties • Perception of Detection • Control Vendor List • Tip Line • FiduciaSolutions.org Atlanta October 9, 2013

3. Background (Dan) PROFESSIONAL EXPERIENCE • Genworth Financial 9/05 – Present; Controller, Operations & Reinsurance • The Brink’s Company 11/03 – 9/05; Audit Manager (Acting Audit Director) • Carpenter Co. 2/00 – 11/03; AuditDirector   • Cendant Corporation 12/97 – 2/00; Senior Manager – International Audit • RCSB Financial 10/94 - 12/97; Corporate Audit - Senior Manager • HSBC Holdings plc. 12/88 – 12/94; Corporate Investigations Officer / Audit Officer • Public Accounting 9/87 – 12/88; “Big 8” Firm Internship & Staff Accountant • NONPROFIT EXPERIENCE • St Bridget Church Finance Council (10 years) • Historic Richmond Foundation – Treasurer (4 Years) • Genworth Foundation – Vice Chairman (former Treasurer) (6 Years) PUBLICATION • M2 Fraud Case Study – American Institute of Certified Public Accountants Atlanta October 9, 2013

4. Background (Dan) PROFESSIONAL EXPERIENCE • Genworth Financial 9/05 – Present; Director Operations & Controllership • The Brink’s Company 11/03 – 9/05; Audit Manager (Acting Audit Director) • Carpenter Co. 2/00 – 11/03; AuditDirector   • Cendant Corporation 12/97 – 2/00; Senior Manager – International Audit • RCSB Financial 10/94 - 12/97; Corporate Audit - Senior Manager • HSBC Holdings plc. 12/88 – 12/94; Corporate Investigations Officer / Audit Officer • Public Accounting 9/87 – 12/88; “Big 8” Firm Internship & Staff Accountant • NONPROFIT EXPERIENCE • St Bridget Church Finance Council (10 years) • Historic Richmond Foundation – Treasurer (4 Years) • Genworth Foundation – Vice Chairman (former Treasurer) (6 Years) PUBLICATION • M2 Fraud Case Study – American Institute of Certified Public Accountants Atlanta October 9, 2013

5. Background (Dan) Dan’s First Job After Grad School Atlanta October 9, 2013

6. Definitions/Overview/Context • I) Fraud • Wrongful or criminal deception intended to result in financial or personal gain. II) Embezzlement • The wrongful appropriation of money or property by a person to • whom it has been lawfully entrusted. Embezzlement implicitly involves a • breach of trust, it's not necessary to show a fiduciary relationship among • the parties. Atlanta October 9, 2013

7. Definitions/Overview/Context • Why Nonprofits Are Targeted • Opportunity - 1.3MM Nonprofits Worth Over $665B, Employing 12 Million • General Administration Efficiency Ratios / Finance Staffing Limitations • Misunderstanding of the Focus of CPA’s Annual Financial Audit • Lack of Controllership Skill Set Available In Community • Limited Resources Available for Staffing & Training • Poor Understanding of Risk Levels Atlanta October 9, 2013

8. Summary • Survey participants estimate that the typical organization loses 5% of its revenue to fraud & embezzlement each year. • The median loss caused by occupational fraud in the study was • $140,000. • Over 85% of embezzlers have no previous criminal record. • The fraud identified in the study lasted a median of 18 months before being identified. • The largest losses were suffered by the smallest organizations (which were likely not to have anti-fraud or anti embezzlement controls). Atlanta October 9, 2013

9. Can We Identify Who Is Most Likely to Embezzle ? Atlanta October 9, 2013

10. September 5, 2013

11. September 5, 2013

12. The Fraud Triangle September 5, 2013

13. The Fraud Triangle September 5, 2013

14. Plan to Address These Challenges • Must Reduce the Perceived Opportunity September 5, 2013

15. Plan to Address These Challenges The Big Five • Tone at the Top • Segregation of Duties • Perception of Detection • Control Vendor List • Anonymous Tip Line September 5, 2013

16. Plan to Address These Challenges The Big Five • Tone at the Top • Segregation of Duties • Perception of Detection • Control Vendor List • Anonymous Tip Line September 5, 2013

17. Plan to Address These Challenges The Big Five • Tone at the Top • Segregation of Duties • Perception of Detection • Control Vendor List • Anonymous Tip Line ENSURE THESE ARE PART OF YOUR ORGANIZATION September 5, 2013

18. Plan to Address These Challenges Tone at the Top September 5, 2013

19. Plan to Address These Challenges • Tone at the Top • “Tone at the Top” is a term that is used to define management’s leadership and commitment towards openness, honesty, integrity, and ethical behavior. • It is the most important component of the control environment. The tone at the top is set by all levels of management and has a trickle-down effect on all employees of the organization. • If the tone set by management upholds honesty, integrity and ethics, employees are more likely to uphold those same values. September 5, 2013

20. Plan to Address These Challenges How to Set Tone Ethical Expectations • Require new hire background investigations • Require new hire drug screens • Code of Conduct annual refresh meeting • Annual Code of Conduct questionnaire • Annual Code of Conduct sign-off on • Establish a anonymous “tip line” to attorneys/board • Set out clear consequences for ethical breach • Make sure to follow through – consequences • Leadership consistently display ethical behavior September 5, 2013

21. Plan to Address These Challenges • Segregation of Duties September 5, 2013

22. Segregation of Duties Dan’s Definition: Ensure that a single person does not have access to cash/checks/assets and the ability to update organizational accounting records. For Example – Do not to combine roles such as receiving checks (payment on account) and approving write-offs, depositing cash and reconciling bank statements, approving time cards and have custody of pay checks, adding new employees to payroll system and ability to input or change pay rate, have an employee that has a corporate credit card and can also be the person approving be the approver of expenses charged.

23. Segregation of Duties

24. Segregation of Duties Cash Inflows to Organization Donuts/Assets Cash & Receipt

25. Segregation of Duties Cash Inflows to Organization

26. Segregation of Duties Cash Inflows to Organization

27. Segregation of Duties Business receives cash Customer receives receipt Business receives receipt Customer receives goods

28. Segregation of Duties Typical Cash/Receivable Process (Simple)

29. Segregation of Duties

30. Segregation of Duties

31. Segregation of Duties

32. Segregation of Duties $1,000

33. Segregation of Duties $1,000

34. Segregation of Duties OK $1,000

35. Segregation of Duties OK $1,000

36. Segregation of Duties Segregation of Duties Work Flow Problem

37. Segregation of Duties OK $1,000

38. Segregation of Duties OK $1,000

39. Segregation of Duties RECALL Ensure that a single person does not have access to cash/checks andthe ability to update the organizations accounting records.

40. Segregation of Duties Receipt is not Necessary

41. Segregation of Duties How do we know the transaction was rung up on the register ? No Receipt

42. Segregation of Duties Cash/Receivable Embezzlement Scam #1 The Lapping Scheme

43. Segregation of Duties

44. Segregation of Duties - The Lapping Scheme

45. Segregation of Duties - The Lapping Scheme $500

46. Segregation of Duties - The Lapping Scheme $500

47. Segregation of Duties - The Lapping Scheme $500

48. Segregation of Duties - The Lapping Scheme $500

49. Segregation of Duties - The Lapping Scheme $500 $1,000

50. Segregation of Duties - The Lapping Scheme $500 OK $1,000