forensic accounting research chapter 10. types of value added services risk assessment of fraud and...
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Forensic Accounting
Research
Chapter 10
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Types of value added services
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, etc. All of these involve forensic accounting
or litigation support
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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.)
Fraud includes the following elements:A misrepresentation of a material fact
Known to be falseJustifiably relied uponResulting in a loss
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Types of frauds
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
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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
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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
Misappropriation of assets 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
Fraudulent financial reporting Fictitious revenues Asset overstatement Unrecorded liabilities Improper disclosure
Corruption Conflict of interest Bribery Illegal gratuities Economic extortion
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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
Two basic categories of fraud an auditor investigates when examining material misstatement risk assessment Fraudulent financial reportingMisappropriation of assets
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Overview of financial fraud examination
(contd.) Financial reporting fraud red flags
Incentive/pressuresHigh 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
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Overview of financial fraud (contd.)
Financial reporting fraud (contd.)Opportunities – flags
Highly complex transactionsMajor international operations
Deficiencies in internal controls
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Overview of financial fraud (contd.)
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
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Overview of financial fraud (contd.)
Misappropriation of asset risk factorsSusceptibility of assets to misappropriationLarge amounts of cash on hand
Easily convertible assets (bonds, diamonds)
Controls (lack of)
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Overview of financial fraud (contd.)
Steps of the fraud examinationIndentify issue/plan the investigation
Gather the evidence/the investigation phase
Evaluate the evidenceReport he findings to management?/legal counsel
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Computer technology in fraud investigation (contd.)
Data mining software Software tool that models a
database for the purpose of determining patterns and relationships among the data
SAS Enterprise Miner-modeling software
Wizrule – used for data cleaning (searching for clerical errors) or anomaly detection.
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Computer technology in fraud investigation
(contd.) 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.
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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 The Internet – KnowX, Instant
Checkmate, Zoominfo, etc.