DZH Phillips Fraud Risk Management Services

Assisting Businesses and Not-for-Profits Manage the Risk of Theft, Embezzlement or Fraud in the Workplace

Why DZH Phillips Provides Fraud Risk Management Services

In October 2013, the Washington Post reported that employee embezzlement had occurred at over 1,000 not-for-profit organizations as disclosed on their 2011 Form 990.  According to the Association of Certified Fraud Examiners (ACFE), reported occupational frauds lasted a median of 18 months before the fraud was detected.

DZH Phillips is passionate about assisting our clients manage the risk of occupational fraud or abuse because we have seen first-hand the operational disruption, financial instability, shaken company morale and reputational risk created by the agonizing discovery that a significant fraud may have occurred.  As a firm where our clients’ interests come first, our goal is to assist each of them fulfill their organization’s mission, and that includes working with them to protect their financial and operational assets from theft or abuse.  We have the relevant experience and expertise having worked with Boards and senior management deal with the unwanted consequences of occupational fraud or abuse.

How DZH Phillips Can Help You

DZH Phillips provides fraud risk management services to businesses and not-for-profit organizations desiring one or a combination of the following:

  1. Fraud Risk Assessment

Fraud Risk Assessment aims to proactively identify and address an organization’s vulnerability to occupational fraud.  Based on our experience dealing with the painful consequences of occupational fraud, we strongly suggest that every organization conduct a fraud risk assessment and build procedures to keep the assessment process current and relevant.

  • Click dzhphillips.com/dzhp to access the free DZH Phillips Fraud Risk Self-Assessment tool.
  • After you receive your score, you can determine whether you want to complete the fraud risk assessment process.

Through the fraud risk assessment process, DZH Phillips can help you identify which areas are of greatest risk for fraud (e.g., is it Purchasing and Cash Disbursements, or Sales and Cash Receipts?).  Conducting a fraud risk assessment will help your organization:

  • Improve communication and awareness about fraud
  • Identify where your company is most vulnerable to fraud and what activities put it at the greatest risk
  • Know who puts your organization at the greatest risk
  • Develop plans to mitigate fraud risk
  • Develop techniques to investigate and determine if fraud has occurred in high-risk areas
  • Assess internal controls
  • Comply with regulations and professional standards

Informing employees that your business is performing a fraud risk assessment may in itself deter would-be fraud perpetrators.

  1. Fraud Prevention Program

Once you become aware of which processes present fraud risks, you can put plans in place to reduce or mitigate those risks by devising a fraud prevention program.  DZH Phillips can assist you in developing a fraud prevention program that includes developing a system of internal controls to address your company’s fraud risks, developing policies and a code of conduct, and setting up reporting and accountability procedures, among other things.

  1. Fraud Detection Program

Since the risk of fraud can never be entirely eliminated, DZH Phillips can help your organization design effective detective controls as an enhancement to the fraud risk management program.

  1. Fraud Response

If fraud at your organization is already suspected or has been discovered, DZH Phillips can conduct an investigation of the suspected fraud and assist in confirming and quantifying the loss, preparing the Proof of Loss required by your insurance carrier, communicating with the appropriate authorities if called upon, and remediating the control weaknesses that allowed the fraud to occur.

Why Does Occupational Fraud or Abuse Occur?

Theft, embezzlement or fraud occurs in the workplace when the components of the so-called “fraud triangle”[1] co-exist:  Pressure, Rationalization and Opportunity.

Pressure and Rationalization pertain to the would-be perpetrator’s internal workings.  Pressure relates to the individual’s perception of a financial need that he/she can’t fill through legitimate means (e.g., inability to pay one’s bills or a gambling addiction).  Rationalization relates to that person’s justifying the act (e.g., “I was underpaid; my employer was unfair.”)  Given an “opening” or Opportunity, the third component, Pressure and Rationalization together have proven to lead to fraudulent behavior and, consequently, financial losses to the employer.

pressure

DZH Phillips has the talent, judgment and relationships to be relevant to your needs and understand your perspective.  For information about our fraud risk management services, please contact:

Lawrence B. Wood
Direct: 415|624|2233
Email: lwood@dzhphillips.com


See Fraud in the News

http://www.pbs.org/newshour/bb/nation-july-dec13-stephens_10-27/

How Can You, the Employer, Avoid Occupational Fraud?

Opportunity is the only component in the fraud triangle that you, the employer, can control.  Without the opportunity to commit the fraud, the would- be fraudster is usually out of luck.  The opportunity to commit occupational fraud is minimized or eliminated through establishing and maintaining strong and effective internal controls and monitoring those controls.  Keep in mind, however, that even the best internal controls may not eliminate fraud, especially if a member of management overrides the controls.  Your goal is to avoid the creation of a fraud triangle or break an existing fraud triangle.

rationalization

[1] Donald R. Cressey, Other People’s Money (Montclair: Patterson Smith, 1973) p. 30

Some Highlights on Occupational Fraud

  1. According to the Association of Certified Fraud Examiners in its 2014 Report to the Nations on Occupational Fraud and Abuse:
  • External audits should not be relied upon as an organization’s primary fraud detection method
  • Anti-fraud controls are associated with reduced fraud losses and reduced duration of a fraud
  • The typical organization loses 5% of its revenue to fraud each year (which could be a material amount relative to net income)
  • 77% of all frauds are committed by individuals working in one of the following departments:
    • Accounting
    • Operations
    • Sales
    • Executive/upper management
    • Customer Service
    • Purchasing
    • Finance
  • The threat of detection is one of the most powerful ways to prevent fraud because it helps to remove the fraudster’s perceived opportunity.
  • The smallest organizations are the most frequent victims and suffer disproportionately large losses due to occupational fraud
  • Vast majority of occupational fraudsters are first-time offenders
  • Asset misappropriation is the most common occupational fraud – accounting for 85% of cases
  • Proactive detection methods (hotlines, management review procedures, internal audits and employee monitoring mechanisms) are vital in catching frauds early and limiting losses.
  • Common behavioral red flags that are often associated with fraudulent conduct include:
    • Living beyond means (43.8%)
    • Financial difficulties (33%)
    • Unusually close association with vendors or customers (21.8%)
    • Control issues, Unwillingness to share duties (21.1%)
  • Over 85% of small businesses victimized by fraud did not have formal fraud risk assessments.
  • Occupational fraud is more likely to be detected by a tip by an employee than by any other method.
  • Proactive detective efforts such as surveillance/monitoring, account reconciliation, IT controls, internal audits, and management review result in the shortest duration of fraudulent activity and lowest losses
  • Businesses victimized by fraud that had formal fraud risk assessments had 44% smaller losses and were 48% shorter in duration than those without that control.
  • 58% of victim organizations do not recover any losses they suffer due to fraud
  1. Types of Occupational Fraud:
  • Skimming Schemes
  • Cash Larceny
  • Check Tampering
  • Cash Register Schemes
  • Purchasing and Billing Schemes
  • Payroll Schemes
  • Expense Schemes
  • Theft of Inventory and Equipment
  • Theft of Proprietary Information
  • Corruption
  • Conflicts of Interest
  • Fraudulent Financial Reporting