Letchworth Controls. Nonprofit Fraud Prevention

Letchworth
Controls
Fraud & Embezzlement Prevention

Fraud Awareness & Prevention
Daniel P. Healy, CPA
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; Audit Director
• Cendant Corporation 12/97 – 2/00; Senior Manager – International Audit
• RCSB Financial 10/94 - 12/97; Corporate Audit - Senior Manager
• HSBC 12/88 – 12/94; Corporate Investigations Officer / Audit Officer
• Public Accounting 9/87 – 12/88; “Big 8” Firm Internship & Staff Accountant

EDUCATION
• University of Rochester- MBA Finance
• Canisius College – BS Accounting

PUBLICATION
• M2 Fraud Case Study – American Institute of Certified Public Accountants

Embezzlement Definition
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.

Control/Efficiency Balance

Efficiency

Controls

•The More Control Steps the Longer the Process Takes
•The Less Control Steps the More Exposed to Fraud

Control/Efficiency Balance

Controls

Efficiency

To Decide on Balance Must Have Understanding of Risk

Recent Area Non-Profit Embezzlements
1 Catholic Diocese of Richmond Priest 1,000,000

2 Richmond Metropolitan Youth Soccer Treasurer 480,000
3 Skating Club of Staunton President 350,000

00
4 National Kidney Foundation of VA Accountant 170,000

,0
5 Santa Pal - Christmas Program Kids Director 75,000

17
6 Bacon District Volunteer Fire Dpt. Volunteer 70,000

$1
7 Portmouth Firefighters/Paramedics Union Treasurer 44,000

ss
8 Land America Financial Group Employee 34,000
9 Big Island Emergency Crew Volunteer 31,000

10
L
Arthur Ashe Jr. Elementary School PTAo President 20,000
11

ag e
St. Michael's Episcopal School Teacher 17,500

er
12 Jacob Adams Elementary School PTA Treasurer 15,000

Av
13 Charity for Grand daughter Jackie Parent 10,500

14 Tuckahoe Football & Cheerleading Assoc. President 8,900

15 Shady Grove United Methodist Church Office Mgr 5,000

16 Clover Hill High School Band Booster Club President 4,900
17 Blandford Elementary School PTA President 4,000
18 Radford Iron Foundry Union Official 3,100
19 Peabody Middle School PTA President 2,500

20 Mary Washington College Student Gov. President _______
1,800

2,347,200
Richmond Times Dispatch

Recent Area Non-Profit Embezzlements
1 Catholic Diocese of Richmond Priest 1,000,000

2 Richmond Metropolitan Youth Soccer Treasurer 480,000
3 Skating Club of Staunton President 350,000

00
4 National Kidney Foundation of VA Accountant 170,000

,0
5 Santa Pal - Christmas Program Kids Director 75,000

17
6 Bacon District Volunteer Fire Dpt. Volunteer 70,000

$1
7 Portmouth Firefighters/Paramedics Union Treasurer 44,000

ss
8 Land America Financial Group Employee 34,000
9 Big Island Emergency Crew Volunteer 31,000

10
L
Arthur Ashe Jr. Elementary School PTAo President 20,000
11
e
Consistent National Average for Embezzlements
ag
St. Michael's Episcopal School Teacher 17,500

er
12 Jacob Adams Elementary School PTA Treasurer 15,000

Av
13 Charity for Grand daughter Jackie Parent 10,500

14 Tuckahoe Football & Cheerleading Assoc. President 8,900

15 Shady Grove United Methodist Church Office Mgr 5,000
Clover Hill High School Band Booster
16 Club President 4,900
17 Blandford Elementary School PTA President 4,000
18 Radford Iron Foundry Union Official 3,100
19 Peabody Middle School PTA President 2,500

20 Mary Washington College Student Gov. President _______
1,800

2,347,200
Richmond Times Dispatch

2009 Area Embezzlements
Local JetBlue manager guilty to $338,000 embezzlement
Published: March 21, 2009

Woman guilty in swindle Ex-JetBlue terminal boss pleads to stealing $338,000 from
airline. The former manager of JetBlue Airways' terminal operations in Richmond
pleaded guilty yesterday to swindling the airline of more than $338,000.

Investigators discovered $800 worth of pizza, $8,000 in sports club memberships for
family members and their friends, $104,000 in travel expenses, $45,000 in clothing and
the costs of a trip taken by the James River High School Robotics team.

Carol Davidson, 43, of Midlothian, pleaded guilty to 13 felony charges for embezzlement,
forgery or uttering bogus checks, all in a matter of months in 2007 and 2008. She forged
employee names on JetBlue checks and used a company credit card for her own
expenses.

Woman embezzled $300,000 from church
Published: May 1, 2009

ISLE OF WIGHT -- A former secretary has admitted embezzling more than $300,000
from a Smithfield church. Debra Lee Epps pleaded guilty yesterday in Circuit Court to
eight counts of embezzlement and one count each of forging and uttering checks. The
51-year-old Epps apologized to the congregation of Christ Episcopal Church.

Commonwealth's Attorney Wayne Farmer says Epps took the money over a 10-year
period beginning in 1998. Farmer says Epps told investigators she used the money to
pay school tuition and credit card debt, and to pay for horseback riding lessons and
her
family's annual trip to Florida. Epps faces 180 years in prison when she's sentenced.
-- The Associated Press

Ex-bookkeeper guilty of embezzling
Published: February 26, 2009

A former bookkeeper for an arts program at Shady Grove United Methodist
Church in western Henrico County is facing up to 40 years in prison in June
when she is sentenced on two embezzlement convictions.

Henrico Circuit Judge Burnett Miller III found Lisa H. Pauley, 49, guilty
yesterday of stealing nearly $1,000 through two checks she wrote on church
accounts linked to an arts program at the church.

The thefts turned up when questions were raised about unaccounted for
funds and church officials looked more closely at the church's loose payroll
and check-writing controls.

Pauley was convicted of swindling a realty firm of nearly $5,000 in 2003 and
received a suspended sentence. She has made restitution in both cases.
Sentencing is scheduled for June 3. -- Bill McKelway

Former Farm Bureau lawyer gets 15 years
Published: February 4, 2009

A former Virginia Farm Bureau lawyer will spend 15 years in prison for stealing at
least $2 million from the organization from 1996 through last summer.

Judge Timothy K. Sanner yesterday sentenced Lawrence H. Bidwell in Goochland
County Circuit Court to 30 years in prison but suspended half of that term, said
Goochland Commonwealth's Attorney Claiborne Stokes.

Sanner also ordered Bidwell to pay $2,103,737 in restitution. Bidwell, 49, of the
Farmville area, pleaded guilty Nov. 14 to five embezzlement charges and a forgery
count. Authorities say Bidwell had been stealing money since 1996, a pattern
that was discovered in August.

In 1996, the Farm Bureau had learned Bidwell had been disbarred in Tennessee,
where he earned his law degree, Stokes has said.

Chesterfield County Woman Faces 20 Years
Drytac Corporation Embezzlement

Faye G. Barksdale, 48, faces up to 20 years in prison or, at the discretion of the court, 12 months
in jail and a fine of up to $2,500 for embezzlement after she pleaded guilty yesterday to stealing
$151,000 over five years from her employer, Drytac Corp., where she worked as the accounts
payable clerk for nearly a decade.

Henrico prosecutor David Stock said Drytac might not have ever discovered the theft had
Barksdale not left one of her counterfeit checks in the company's copying machine on the Friday
before she went on vacation last year.

"Another employee checked the copier [the following] Monday and sees a check on the copier
that's got Faye Barkdsale's name and address taped over" the name of the recipient, Stock said.
"They never would have caught her [otherwise]."Her employer manufactures and sells heat-
activated and pressure-sensitive mounting adhesives, over laminating films and inkjet media, as
well as other products. The company has a local office on Glen Alden Drive in Henrico.

President of Chesterfield Group Jailed Embezzlement
The former president of the Providence Athletic Association will spend three months in
jail for stealing nearly $2,000 meant to benefit sports-minded children.

Pulliam, who has two other theft convictions in the past two years, originally was
charged with stealing about $5,000 from the athletic association in March and April
of last year.

Lastly, Pulliam created a phony bill from the Internal Revenue Service that said the
Association needed to pay $300 to keep its tax-exempt status. "She struck off a check
for that and it ended up in her own pocket," Hogan said.

Newport News detective charged embezzling from group
NEWPORT NEWS — A Newport News police detective is on administrative leave after
being charged with embezzling from a fraternal group.

Thomas David Crouch of Portsmouth is charged in Norfolk with using a credit card from the
Police Emerald Society for personal use between late 2007 and mid-2008.

Norfolk police spokesman Chris Amos says the 45-year-old Crouch was an officer for the
society. Crouch turned himself in at the Newport News police headquarters yesterday. He
remains free on $1,000 bond.

Newport News police spokesman Lou Thurston says Crouch has been placed on
administrative leave and the department is conducting an internal investigation

Va. law-office worker charged with embezzlement

FAIRFAX -- Fairfax County police say a former law-office administrator
has been charged with stealing tens of thousands of dollars from the
office.

Police announced last week that 36-year-old Lisa Mylan McCormick of
Sterling has been charged with four counts of felony embezzlement.

Police say that after McCormick stopped working for lawyer Kevin
Fitzpatrick, he discovered the thefts and reported them.

The thefts allegedly occurred between 2006 and 2008. McCormick
was questioned by police and surrendered this month.

-- The Associated Press

Lee County woman guilty of embezzling
Published: January 29, 2009

A Lee County woman faces up to 120 years in prison after pleading guilty
to embezzling nearly a half-million dollars from the bank where she
worked.

Rebecca Dawn Long likely will receive a much shorter sentence, however,
because she reached a plea agreement with prosecutors, said U.S.
Attorney Julia C. Dudley.

Long, 35, of Jonesville, pleaded guilty Tuesday in U.S. District Court in
Abingdon to all five counts against her: bank fraud, bank embezzlement,
money laundering, making a false statement on a loan document and
engaging in a monetary transaction with criminally
derived property.

Long was an employee of The Peoples Bank in Lee County between 2004
and 2008 when she established a line of credit under a fictitious name,
then withdrew $487,685 under the name, according to prosecutors. The
withdrawals occurred over her four years of employment.

Do We Need to Act Now ?

yes

Embezzlement Triangle

Pressure/Need Opportunity

Rationalization

Reduce Fraud Opportunity

1. Tone at The Top / Leadership
2. Segregation of Employee Duties
3. Instilling a Perception of Detection

Fraud Fact
Small Organizations 100X More Fraud Risk

• Basic accounting controls often lacking

• Small organization often have one employee write &
sign checks, reconcile the bank statement & keep the
books.

• Level of trust exists due to entity's size,

• Small companies were less likely to be audited.
FBI & Association of Fraud Examiners

Fraud Fact
The U.S. Department of Justice reports that more
than one-third of all thefts from organizations
are by employees.

It is imperative for today’s organizations to build
a company culture of integrity and honesty.

U.S. Department of Justice

Fraud Fact
Fraud levels are expected to continue rising

Almost 90 percent of respondents said they expect
fraud to continue to increase during the next 12
months. Additionally, the fraud most expected to
increase is embezzlement.

2008 ACFE Report on Occupational Fraud

Fraud Fact
Employees pose greatest fraud threat currently
When asked which, if any, of several categories of fraud
increased during the previous 12 months, the largest
number of survey respondents (48 percent) indicated that
embezzlement was on the rise.


Fraud Fact
Layoffs affecting internal control systems.

Nearly 60 percent of CFEs who work as in-house fraud examiners
reported that their companies had experienced layoffs during the past
year. Among those who had experienced layoffs, almost 35 percent
said their company had eliminated some controls, while 44.2 percent
said the layoffs had no effect on controls and only 3.2 percent said
their company had increased controls.


Tone at The Top

(The Organization’s Control Expectation)

Tone at The Top
• Steps taken by leadership to set expectations
• Foundation for all other forms of control
• Set’s ethical tone for organization
• Leadership integrity, ethical values, competence

Ask Yourself:
1. Is Ethical Behavior Demanded in Your Organization ?
2. Do Your Organizational Leaders Project Ethical Values ?

Tone at The Top
How to Set 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
Set out clear consequences for ethical breach
Make sure to follow through – consequences
Leadership consistently display ethical
behavior

Tone at The Top

Questions ?

Fraud Fact

Most fraud is uncovered as a result of tips and
complaints from other employees. To deter and
detect fraud and abuse, many experts believe
a 1-800 employee hotline is the single most
cost-effective measure.

Segregation of Duties
Ensure that a single person does not have
access to cash/checks and the ability to
update organizational accounting records


Cash & Receipt Donuts/Assets


Customer
Places Order,
Pays & Receives Receipt

Business receives cash
Customer receives receipt

Customer
Places Order,
Pays & Receives Receipt

Business receives receipt
Customer receives goods

Customer
Receives Donuts


Typical Cash/Receivable Process


OK

$1,000


Work Flow Problem

RECALL
Ensure that a single person does not have
access to cash/checks and the ability to
update the organizational accounting
records


Customer
Places Order,
Pays & Receives Donuts

Customer Pays for Week of Daycare
Customers Account is Updated to Reflect Payment


ce ip t
Re
No
How do we know the transaction was rung up on the register ?


Cash/Receivable
Embezzlement Scam #1

Lapping

Embezzlement - Lapping Scam
Day 2

$500

OK

$1,000


Embezzlement Scam #2

False Debit

Embezzlement – False Debit Scam

$500
OK

$500


Recommended Structure


OK

A

Disbursements/Accounts Payable Process

A

Disbursements/Accounts Payable Process

Typical Disbursement Process


Department 1

Order Invoice
Finance
Department 2
Director Vendor ACCOUNTING
Director
APPROVES Asset 20,000
A/P 20,000

Department 3 Check

ACCOUNTING
A/P 20,000
Cash 20,000

Kay Lemon - Story

Association of Certified Fraud Examiners

Kay Lemon - Story
Kay Lemon, a seemingly prim-and-proper grandmother,
stole $416,000 from a small Nebraska lighting store
where she had been employed for 20 years as a
bookkeeper.

Then spent three years in the Nebraska Women's
Correctional institute after confessing that she'd been
hitting the books for eight years and had blown all the
loot on herself and her family.


Kay Lemon - Story
Lemon's crime is typical of the risk to small business: The
lighting store's CPA only prepared the company's tax
returns, so the business was not audited.

Lemon also acted as the store's "accounting department."
She made deposits, signed checks and reconciled the
store's bank account.

Although any entry-level accountant could recognize this
situation as an accident waiting to happen, the store's
owner did not.

Kay Lemon - Story
After 12 years of unrelenting temptation, Lemon finally
gave in. Thereafter, for years, she systematically stole
money from the lighting store using the same method.

She would make out a company check to herself (in her
own true name), sign it and deposit the proceeds in her
personal checking account.

Kay Lemon - Story
To cover the theft, Lemon would do three simple things:

• First, she'd enter "void" on the check stub when she
wrote the check to herself.
• Second she would add the amount of the theft to the
check stub when she paid for inventory. For example, if
she took $5,000 and was paying a vendor $10,000,
she would show $15,000 on the vendor's check stub.

• Third, when the checks paid to Lemon were returned in
the bank statement, she would tear them up and throw
them in the trash

Kay Lemon - Story
Lemon chose the most logical (and common) method for covering a
cash embezzlement: the false debit. When Lemon credited the bank
account for the checks she made out to herself, the corresponding
debit was false. Still, from the standpoint of the accounting equation,
the books were in balance.

Lemon and other embezzlers have two choices concerning the false
debit: The transaction can be allocated to an asset account or an
expense account. In Lemon's case, she added her thefts to the
inventory account--an asset. A false debit will stay on the books until
some action is taken to remove it. In this situation, the lighting store's
inventory was overstated by $416,000 over eight years, as the store
never performed a physical count of its inventory. As a result, when
Lemon's crime came to light, a huge writeoff was necessary, almost
bankrupting the store.

Kay Lemon - Story
A less obvious move would have been for Lemon to charge
the false debit to an expense account, which is written off
every year. It doesn't matter what the expense is, although
these are some favorites: advertising, legal expense,
consulting fees and other "soft expenses." Here, the
expense for fraud gets written off annually.

If the fraud perpetrator can conceal the fraud long enough
for the account to be closed to profit and loss, he or she
has gone a long way toward avoiding detection—at least
on a current basis.



•Annual Budget Proposed by Department Heads & Senior Management
•Approved by Board of Directors


• Annual Budget Proposed by Department Heads & Senior Management
• Approved by Board of Directors

• Budget Variances Brought to Board of Directors Attention Monthly Meetings


Should Have a Process Where Vendor’s Are Approved and Lists Maintained

Kicked Back

Rec
NO

In Order
Department 1

Exec Director
Budget
Rec
Approved
ExDir
Finance
Department 2 Director Vendor
Approved

Rec Yes Approved
Purchase
Order
Department 3 Vendor
Invoice


Questions ?

Perception of Detection
One of the most important anti-fraud steps
is to convince employees & venders that
there is no way a fraud or embezzlement will
go unnoticed & if noticed will be prosecuted

Select a small number of disbursements
each period and request supporting
documentation including approvals.

Vary requests, large dollar then small dollar,
hit each department, select all checks with a
employee as a payee, demand support.

Enlist the Board of Directors to perform spot
reviews on some key aspects of control quarterly.

Have the results of quarterly reviews reported to
Board regularly.

Should consider inviting a CPA or Internal
Auditor to join the Board (See Last Page)


Potential Quarterly Board Testing

Cash Inflows


OK


1

1

OK


1

1

OK

2

2


1

1

OK 3

2

2


Potential Quarterly Board Testing

Cash Outflows


Board of Directors

Early Warning Signs
Skimming
• Decreasing cash to total current assets.
• A decreasing ratio of cash to credit card sales.
• Flat/declining sales with increasing cost of sales.
• Increasing A/R compared to cash.
• Delayed posting of A/R payments.
• Unexplained cash discrepancies.
• Altered or forged deposit slips.
• Customer billing and payment complaints.
• Rising "in transit" deposits during bank reconciliations.

Early Warning Signs
Fraudulent Disbursements
• Increasing "soft" expenses (like consulting, advertising).
• Employee home address matches a vendor's address.
• Vendor address is a post office box or mail drop.
• Vendor name vague business purpose. "JTW
Enterprises").
• Excessive voided, missing or destroyed checks.

Early Warning Signs
Signs an employee may be inclined toward
theft
• Holds a grudge against the organization
• Living beyond their means
• Experiencing extraordinary medical expenses
• Spouse has lost his/her job
• Divorced and/or separated
• Other financial struggles, (lawsuits, foreclosures)
• Short vacations
• Defensive behavior overly nervous when questioned
• Over-devotion to the job – working a lot of overtime
• Missing documents and support data

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