Transcript Fraud and Other Investigative Techniques

Chapter 10
Fraud and Other
Investigative
Techniques
Learning Objectives
The definition of fraud
 Different types of fraud
 Components of the Fraud Triangle
 Utilization of ACL and i2 Analyst
Notebook in fraud investigation
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Learning Objectives (contd.)
 Overview
of fraud examination and
business investigation
 Use of computer technology and fraud
examination/investigations
Types of value added services
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Risk assessment of fraud and illegal acts
Legal counsel asks you to investigate embezzlement
scheme involving hidden assets
Vendor kickback determination
Fact-finding for alleged frauds involving bribery,
wire fraud, securities fraud…….
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All of these involve forensic accounting or litigation
support
Fraud defined
Intentional deception, simply lying,
cheating, or stealing
 A generic term, embracing all multifarious
means which human ingenuity can devise,
and which are resorted to by one individual
to get advantage over another by false
suggestions or by suppression of truth. It
includes surprise, trickery, cunning,
dissembling, and any unfair way by which
another is cheated.
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Fraud defined (contd.)
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Fraud includes the following elements:
 A misrepresentation of a material fact
 Known to be false
 Justifiably relied upon
 Resulting in a loss
Types of frauds
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Fraudulent financial reporting
(management fraud)
 Actions whereby management attempts
to inflate reported earnings or other
assets in order to deceive outsiders
 Overstating assets/revenues, price fixing,
contract bidding fraud, understating
expenses/liabilities
Types of frauds (contd.)
 Misappropriation
of assets (employee
fraud)
 Actions
of individuals whereby they
misappropriate (steal) money or other
property from their employers
 Embezzlement, theft of company
property, kickbacks
Types of fraud (contd.)
Employee embezzlement – fraud in which
employees steal company assets either directly
– stealing cash or inventory –or indirectly –
taking bribes or kickbacks
 Management fraud – deception by top
management of an entity primarily through the
manipulation of the financial statements in
order to mislead users of those statements
 Investment scams – the sale of fraudulent and
often worthless investments (telemarketing and
Ponzi scheme type frauds)
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Types of fraud (contd.)
Vendor fraud – fraud resulting from
overcharging for goods purchased, shipment
of inferior goods, or non-shipment of
inventory even when payment has been
received
 Customer fraud – fraud committed by a
customer by not paying for goods received or
deceiving the organization in various ways to
get something for nothing
 Miscellaneous fraud – all others – altering birth
records or grade reports, etc.
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Examples of fraud activities
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Misappropriation of assets
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Skimming
Forgery
Kiting
Phony refunds
Larceny
Fraudulent disbursements
Lapping
Fictitious write-offs
Duplicate payments
Nonexistent vendor
Kickbacks
Misdirected shipments
Theft
Unauthorized personal use of
assets
Fictitious burglary
Phantom employees
Falsified time cards
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Fraudulent financial reporting
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Fictitious revenues
Asset overstatement
Unrecorded liabilities
Improper disclosure
Corruption
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Conflict of interest
Bribery
Illegal gratuities
Economic extortion
The Fraud Triangle
Three factors in the triangle (usually all 3 exist
in a fraud)
 Motivation (perceived pressure or incentive)
 Perceived opportunity
 Rationalization
 Effective internal controls limit fraud
 If an organization can contain any one of the
three elements, fraud will most likely not occur
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Overview of financial fraud
examination
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Two basic categories of fraud an auditor
investigates when examining material
misstatement risk assessment
 Fraudulent financial reporting
 Misappropriation of assets
Overview of financial fraud
examination (contd.)
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Financial reporting fraud red flags
 Incentive/pressures
 High
degree of competition or market
competition in conjunction with declining profit
margins
 Perceived or real adverse effects of reporting
poor financial results
 Personal guarantees by management or board
members of entity debt
Overview of financial fraud
(contd.)
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Financial reporting fraud (contd.)
 Opportunities – flags
Highly complex transactions
Major international operations
Deficiencies in internal controls
Overview of financial fraud
(contd.)
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Financial reporting fraud (contd.)
 Attitudes/rationalization flags
Ineffective communication or
enforcement of ethical standards
Excessive interest by management in
maintaining or increasing the entity’s
earnings trend
Overview of financial fraud
(contd.)
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Misappropriation of asset risk factors
 Susceptibility of assets to
misappropriation
Large amounts of cash on hand
Easily convertible assets (bonds,
diamonds)
 Controls (lack of)
Overview of financial fraud
(contd.)
 Steps
of the fraud examination
 Indentify
issue/plan the investigation
 Gather the evidence/the investigation
phase
 Evaluate the evidence
 Report he findings to
management?/legal counsel
Computer technology in fraud
investigation (contd.)
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Data mining software
 Software tool that models a database for the
purpose of determining patterns and
relationships among the data
 Wizrule – used for data cleaning (searching
for clerical errors) or anomaly detection.
 Financial Crime Investigator – systematic
approach for investigating, detecting, and
preventing contract and procurement fraud
Computer technology in fraud
investigation (contd.)
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Data mining software (contd.)
 IDEA (Audimation Services, inc) – allows user to
display, analyze, manipulate, sample or extract data
 Monarch – allows investigator to convert
electronic editions of reports into text files
 ACL for windows – data inquiry, analysis, and
reporting software
 Analyst’s notebook – assists investigators by
uncovering, interpreting, and displaying complex
information in easily understood charts.
Public records – see figure 10-7
Courthouse records – lawsuits, judgments,
property filings, bankruptcy filings
 Company records – SEC filings, Dun and
Bradstreet has private company data, D/B/A
filings with state or county, real estate filings
 Online databases – lexis nexis, dow jones, etc
 The internet – knowX – fraud searches,
switchboard – white and yellow page listing,
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