Focus on Fraud: 2019

It’s common knowledge that internal controls are important for preventing and detecting fraud. Separation of duties, multiple layers of review, two check signers for large disbursements, and written policies and procedures to formalize everything; these are all good elements for a strong internal control system. But poor tone at the top can undermine the whole puzzle.

To see the importance of tone at the top, we can examine this fraud in Lincoln County, West Virginia. The unfolding story involves a CEO of a not-for-profit medical facility who was charged with making personal purchases on a company credit card to the tune of $100,000.

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When it comes to fraud, it is true that we live in a technological age of cyber-threats, such as ransomware and account hacking.  However, one should always remember that the opportunity to commit fraud can be as simple as not having basic internal controls.

This fraud story comes to us from Brownsville, Pennsylvania and involves a treasurer for a volunteer ambulance organization who seems to have taken advantage of an internal control oversight. The treasurer was tasked with writing checks for the nonprofit and sending the financial records to the independent accounting firm.

The problem? He allegedly wrote or deposited 132 checks into his own personal account or to the account of his own business.

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Occupational fraud doesn’t always translate to hard cash leaking out of the company’s bank account. This article from the Rochester Democrat & Chronicle discusses an ongoing case about the alleged employee theft of over $2 million worth of diabetes test strips, illustrating how noncash fraud can be very lucrative in the right circumstances.

Enabling Factors

First of all, for a noncash fraud scheme like this to work, there has to be a market for the stolen goods. If the product is too bulky or can only be sold to a limited group of buyers, the risks of this type of fraud reduce.

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As an auditor, I’ve seen my fair share of fraud attempts. But personally, I had not experienced such an attempt against an organization I was volunteering with – until now. I have the dubious distinction of being among the hundreds of thousands who have received a social engineering phishing email (i.e., solicitation of information by posing as a trustworthy person).

Here’s the scenario: I’m the board treasurer for the local chapter of an association. The fraudsters likely found the board listing online and set up an AOL account (board.pres@aol.com) under the board president’s name. They then used that email address to send me the following email:

Subject: General Expenditures

Victoria,

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