fruad presentation part4

7/31/2019 Fruad Presentation Part4

http://slidepdf.com/reader/full/fruad-presentation-part4 1/78

Types of Fraud

Embezzlers,

likemagicians,usedeception



Embezzled funds are typically coveredup in one of three ways.

1. Diversion of the entire transaction.

2. Creating phony expenses.3. Creating phony assets for the debit which should

have gone to cash.

Types of Fraud



1. Diversion of the entire transaction —

Hiding both the debit and the credit.

Toughest to detect but easiest to prevent by division

of duties. Keep separate cash and AR functions.

Types of Fraud



3. Creating phony assets for the debit

which should have gone to cash.

Typically bury it in inventory.

Can overstate a receivable. Individual customers will call if over-billed. The best

place to hide the debit is in accounts receivablefrom credit card companies, such as MasterCard orVisa.

Loans to officers or related entities that will never berepaid.

Types of Fraud



Types of Fraud

In a study by Glass, Lewis and Co., acorporate governance research firm:

• Broke down data into 12 error categories: – the most common by far being expense recognition, which accounted

for nearly 450 restatements, or 25 percent of the total. – More than 50% of 2004 expense-recognition errors stemmed fromimproper lease-accounting practices.

• The next most common restated items (according to thestudy) were financial-statement misclassifications.

• Equity-related errors, comprised 18 percent of restatementissues (13 percent of all identified errors).

Source: “Restatements Surged in 2005, Says Study” Stephen Taub, CFO.com March 03, 2006



Fraud by Major Category

Source: ACFE’s 2004 Report to the Nation on Occupational Fraud and Abuse. Page 12.

Chart reprinted with the permission of the ACFE.

Types of Fraud



Source: ACFE’s 2004 Report to the Nation on Occupational Fraud and Abuse. Page 13.Chart reprinted with the permission of the ACFE.

Asset Misappropriation by Type

Types of Fraud





Cash Misappropriation by Type

Types of Fraud



Fraudulent Disbursements by Type


Types of Fraud



Billing Fraud• Former CEO and CFO involved in an estimate $12 million billing scheme at

a Milwaukee-area home builder.

• Also involved were employees of a at least vendors, one of which suppliedthe home builder with about 20% of its annual gross revenue.

• Business is a closely-held run primarily by family members. (CEO was firstoutsider in management)

• Fraud went on for over 4 years and former CEO pocketed about $10 million.

• Vendor inflated bills for bona fide work done.

• Vendor billed company for work done by CEO personally.• A shell company was established by a vendor to bill home builder for

services that were not provided.

• A background check did not discover that the former CEO had twobankruptcy filings in VA and court-ordered supervision.

• Higher employee turnover since perpetrator promoted to CEO.

• Owners indicated that “gut” told them something wasn’t right.

Source: “A Thief Among Us: Lessons form Bielinski Bros.” Wisconsin Law Journal by Tracy L. Coenen 12/28/05.

http://www.wislawjournal.com/archive/2005/1228/coenen-122805.html



Improper Disclosure

• Tyson Foods made misleading disclosures of perquisites and personal benefitsprovided to its former Chairman/CEO in proxy statements filed with the SEC duringthe period 1997 to 2003.

• The perquisites and benefits were provided to the individual prior to and after his

retirement as senior chairman in October 2001.• Tyson Foods agreed to pay a $1.5 million penalty.

• The former Chairman/CEO agreed to pay a $700,000 penalty.

• During the period 1997 to 2001, the company provided approximately $3 million ofperquisites and personal benefits the individual, his wife, his daughters, and three

personal friends.• According to the SEC, the $3 million included:

– Purchases of oriental rugs, antiques, a London vacation, and a horse.

– Personal use of company-owned homes in the English country side and Cabo San Lucas.

– Over $1 million to cover his personal income tax liability related to benefits received.

• SEC found and alleged that due to internal control failures at Tyson, many of theperquisites described were neither raised with nor authorized by the company’scompensation committee or its board of directors.

Source: SEC Press Release No. 2005-68 “SEC Sues Tyson Foods and Former Chairman Don Tyson for MisleadingDisclosure of Perquisites.” http://www.sec.gov/news/press/2005-68.htm



Ponzi Scheme and Check Kiting

The Foundation for New Era Philanthropy (continued)

Bennett created Human Services Systems (HHS) to assist

non-profits give their money away. Shifted funds between New Era and HHS.

Partners at HHS included Richard Ohman, CEO ofColonial Penn Insurance, and William Thatcher Longstreth,

five-time Philadelphia city council member. HHS contracted to provide mental health services for Bell

Telephone, Playtex Products, and the Federal ReserveBank of Philadelphia.

Used check from New Era to cover expenses at HumanServices Systems (HHS). New Era checks bounced sinceno funds to support payments.

Sources: Frankensteins of Fraud. Joseph T. Wells. Chapter 8 “Loaves and Fishes: John Bennet”



Ponzi Scheme and Check Kiting

The Foundation for New Era Philanthropy (Continued)

Bennett founded the Bell Institutes for Non-ProfitExcellence with a grant from Bell Telephone.

Bell Institute created to teach people to work in charityworld.

Lectures on business planning, organizationaldevelopment, board development, and fundraising.

Monies ear-marked by Bell Telephone for Bell Institutewent for the owner’s HSS consulting time, teaching, andfundraising work.

The Executive Vice President who identified the transfersconfronted the owner. When the owner changed the doorlocks, the Executive Vice President resigned.

Sources: Frankensteins of Fraud. Joseph T. Wells. Chapter 8 “Loaves and Fishes: John Bennet”



This stuff just really makes you wonder



Financial Statement Fraud

Adelphia Communications

Adelphia is the sixth largest cable television

provider in the United States.From at least 1998 through March 2002, the

Company excluded $2.3 billion in bank debt

from its financial statements.In July 2004, the company founder, John Rigas,

and his son, Timothy, were convicted of

conspiracy, bank fraud, and securities fraud.Each faces 30 years in prison.



Adelphia Communications (continued)

Debt was transferred to the books of off-balance

sheet, unconsolidated affiliates.Sham transactions backed by fictitious

documents were created to give the false

appearance that Adelphia had actually repaiddebts.

The financial statements included footnotes thatcreated the false impression that liabilities listedincluded all outstanding bank debt.




Crazy Eddie’s

Crazy Eddie’s Electronics Emporia commanded

the New York/New Jersey/Connecticut area marketfor stereos, TVs, appliances, and computers.

In June 1993, Eddie Antar was found guilty of 17

counts of fraud.In February 1997, Eddie Antar was sentenced to 6

years and 10 months in a federal penitentiary.

By 1999, the SEC set losses at $145.9 million.

Source: Frankensteins of Fraud. Joseph T. Wells. Chapter 7 “The Antar Complex: Eddie Antar”




Crazy Eddie’s (continued) Inventory figures altered to show more inventory than

actually counted. During the audit, the warehouse manager climbed on the

product stacks and called down the numbers. (If theauditor climbed up, the product manager held the auditor’snote book and recorded the count.)

Received vendor shipment at year end; however, vendorheld bill until after year end.

Merchandise received at year end was paid for in the nextyear or returned after the audit. (borrowed inventory)





Crazy Eddie’s (continued)“Pulling this stuff off is like playing with kids. The big firms use their audit detail as atraining ground. It’s not their fault, but these auditors, they’re kids just out of

college…. The person who served as our primary auditor had only been at his firm foreight months. He had never participated in a retail audit. The kid who came in andworked on the Accounts Payable he was going to testify to – he worked on our booksabout three days. His supervisor reviewed the papers for less than a day….

(The auditors) only took inventories of about a third of the stores anyway. And I

helped them decide which stores to look at. We had, at the height, about 30 stores; Ishowed them a list of ten stores, and they chose 8 of those and added 2 more thatthey picked on their own….

This one guy in 1986, he hands one of our warehouse clerks a sheet of paper andsays, ‘Make a copy of this, will you?’ The paper listed the test counts, showing which

parts of the inventory the auditors planned to do tests on and where they’d just takerough counts. Of course we made a copy for ourselves. We knew where they werecounting and where we could do what we pleased.”

- Sam Antar, Chief Executive Officer

Financial Statement Fraud(With a little help from the auditors)

Source: Frankensteins of Fraud. Joseph T. Wells. 3.




Crazy Eddie’s (continued)

For products returned to the manufacturer, theamount for the refunded cost of returnedmerchandise was inflated.

Manipulated family international bankingconnections to bring money into company andinflate sales figures. (Family had accounting with Isreali

bank. Opened an account with affiliated bank in Panama using false

names. Used Panama account to forward money to the franchise.)




Worldcom, Inc. Materially overstated income by $7.2 billion.

Liable for civil penalties amounting to $2.25 billion. Filed for bankruptcy under Chapter 11 of the US Bankruptcy Code.

Misled investors by overstating income from early 1999 through the firstquarter of 2002.

Restated financial statements for each quarter in 2001 and the firstquarter of 2002.

Former CEO Bernard Ebbers sentenced to 25 years in federal prison.

Former CFO and Controller arrested for securities fraud and conspiracy.


Source: SEC Litigation Release No. 17753, September 26, 2002 and SEC Litigation Release No. 18219, July 7, 2003.




Worldcom, Inc (continued) One of WorldCom’s major operating expenses is “line costs.” Line

costs represent fees WorldCom paid to third parties for the right toaccess the third party networks.

Under GAAP, these expenses must be expensed and may not becapitalized.

Senior management directed the transfer of line costs to capitalaccounts in sufficient amounts to keep earnings in line with analyst’sestimates.





Worldcom, Inc (continued) In 2001, lines costs were actually $17.94 billion.

In 2001, WorldCom, Inc reported line costs of $14.74 billion.

In 2001, actual results were a $662 million loss.

In 2001, WorldCom, Inc reported earnings of $2.39 billion.




Fraud Prevention

Do background checks.

Insure the purity of your employees.



Fraud Prevention




Fraud Prevention

Create an environment

of honesty and integrity



Fraud Prevention

The owner should always

receive bank statementsand review them.

???



Fraud Prevention

Let employees knowsomebody is watching.

Do periodic reviews of

the internal controls.



Fraud Prevention




Fraud Prevention

Emphasize controls and division of duties



Fraud Prevention

Employee Hotline





Fraud Prevention

Cross train employees to cover vacation time



Fraud Prevention

Perform a

certified audit?????



Fraud Prevention





Fraud Prevention

Do periodic inventories



Fraud Prevention

Physically secure the premises of the business



Fraud Prevention

Review the company’s computer security



Fraud Prevention

In thirty years of public accountingexperience, this CPA has developed a fool

proof methodology to preventembezzlement.

Every embezzlement I have ever seencould be prevented by following this simple

rule.



Fraud Prevention

Only hire mean, grouchy,miserable people as employees.

Hire people who you do not like,and therefore would never trust!

Th Id l E l !



The Ideal Employee!

The Approaches to Fraud



ppPrevention/Detection

• Directive – Don’t Steal. We prosecute those who are caught.

• Preventive – Screen out potential thieves. (i.e., Background checks)

• Detective – Establish and monitor internal controls.

• Observation – Monitor employees, inventory.

• Investigative – Follow-up on allegations and inventory variances.

• Insurance – Buy enough fidelity insurance to cover any theft loss.

Adopted From: Fraud Auditing and Forensic Accounting: New Tools and Techniques. Bologna and Lindquest. Page 140.




Detection Techniques - Proactive• Internal controls/separation of duties.

• Financial and operational audits.

• Intelligence gathering – employee life styles, personal habits.

• Logging of exceptions to policies and procedures.

• Review of variances (standards, goals, budgets).

Source: Fraud Auditing and Forensic Accounting: New Tools and Techniques. Bologna and Lindquest. Page 137





Detection Techniques - Reactive

• Allegations or complaints of employees, suppliers, vendors.

• Intuition of supervisors/managers.

• Suspicion of supervisors/managers.

Source: Fraud Auditing and Forensic Accounting: New Tools and Techniques. Bologna and Lindquest. Page 137

Prevention/Detection




Overcoming Resistance to Controls• Goals, standards, controls should be realistic.

• Controls should be fair, rational, and needed for orderly procedures.

• Involve employees in control setting process.• Implement controls only where necessary and prudent.

• Administration and monitoring of controls should be at the appropriate level – management should not be seen as police.

• Output controls should be favored over behavioral controls.

Adopted From: Fraud Auditing and Forensic Accounting: New Tools and Techniques. Bologna and Lindquest. Page 139- 140





Curiosity andskepticismare important





Fraud Prevention/Detection Requires Acknowledging:• Fraud may exist.

• An organization can be either a victim or perpetrator.

• Certain internal control weaknesses can be conducive to fraud.

• Certain human character weaknesses can be conducive to fraud.

• Certain internal control tests can provide insight to the possibility of fraud.

• Certain tests of an organization’s motivational environment can provideinsight to the possibility of fraud.

• Auditing for fraud requires seeing both the doughnut and the hole.

Adopted From: Fraud Auditing and Forensic Accounting: New Tools and Techniques. Bologna and Lindquest. Page 130.

http://www.daylightdonuts.com/


What To Do When A Fraud



is Uncovered

Source: ACFE’s 2004 Report to the Nation on Occupational Fraud and Abuse page 37.




is Uncovered

Terminate Employee

Settlement/Restitution

Suspension/Probation

Litigate Criminal Prosecution

Civil Lawsuit

Do Nothing




Contributory and Comparative Negligence

A plaintiff’s own negligence that played a part in

causing the plaintiff’s injury and that is significantenough (in a few jurisdictions) to bar the plaintifffrom recovering damages.

In most jurisdictions, this defense has been superseded by comparativenegligence.

Under comparative negligence, the amount recovered is reducedproportionately by the plaintiff’s own negligence.

Source: Black’s Law Dictionary page 434.

is Uncovered






Employment Actions Taken

is Uncovered

The sum of the percentages exceeds 100% as some actions fell into multiple categories.

What To Do When A Fraudi U d



Criminal Prosecution



is Uncovered







is Uncovered







is Uncovered

What To Do When A Fraudis Unco ered



Civil Lawsuits



is Uncovered

What To Do When A Fraudis Uncovered



Civil Lawsuits



is Uncovered




No Legal Action



is Uncovered

The sum of the percentages exceeds 100% as some actions fell into multiple categories.




No Legal Action



is Uncovered

The sum of the percentages exceeds 100% as some perpetrators fell into multiple categories.




Loss Recovery



is Uncovered

An Ounce of Prevention



An Ounce of Prevention

• Careful Selection of Clients

• Formal Engagement Letter

• In-house/On-site Procedures

• Other

An Ounce of Prevention(Careful Selection of Clients)



(Careful Selection of Clients)

• Develop a risk assessment form to screen and reviewthe risk of clients. For example*:

– Rate the following criteria for each client with 1 being poorand 4 being the best. (Client should score minimum 20)

• Honesty and integrity 0-4

• Within our expertise 0-4

• Management reputation 0-4• Economic risk 0-4

• Adequacy of controls 0-4

• Economic growth outlook 0-4

• Profitability 0-4

* Source: Reducing Liability Exposure for Non-Audit Work by Donald Klein (National Public Accountant 5/1/94)

An Ounce of Prevention(Careful Selection of Clients)



• Rate clients annually to ensure they continue to

meet the criteria.• Discuss client with the predecessor accountant.

(Careful Selection of Clients)

An Ounce of Prevention(The Engagement Letter)



(The Engagement Letter)

• Ensure at least the following are included: – Design a letter geared toward the specific client and particular engagement.

– Address the letter to whomever hired the accountant. (owner, managingpartner, etc.)

– Explicitly state the services to be provided. (compilation, review, tax prep.) – Indicate any agreed upon procedures to be performed.

– Ensure only those services requested by the client are included in the letter.

– Indicate the limited responsibility to detect errors, irregularities, and illegalacts.

– Indicate that the financial statements are a representation of management andthe responsibility of management.

– State that you will be providing limited (no) assurance and expressing noopinion for the financial statement review (compilation).

– Indicate the expected report language. (Include any expected statementsconcerning management’s desire to exclude substantially all disclosures.)

– Describe completely all pertinent information concerning fee arrangements.

An Ounce of Prevention(The Engagement Letter)



• Ensure all information in the letter is thoroughlyexplained to the client’s management.

• Require the client’s management to sign anddate the letter acknowledging that theyunderstand the information provided.

(The Engagement Letter)

An Ounce of Prevention(In-house/On-site Procedures)



(In house/On site Procedures)

• Adopt firm policies and procedures forperforming all engagements, including reviewsand compilations.

• Maintain degree of professional skepticism.

• Document all tests performed.• Document any discussions with client

management. (include: date, location, person

talked to.)

An Ounce of Prevention(In-house/On-site Procedures)



( )

• Ensure staff is adequately trained andsupervised.

• Ensure all workpapers are reviewed by AIC andaccounting firm management.

• Develop an in-house quality review program.

• When performing compilations and reviews,never use the term “audit” in communicationswith clients & third parties or in workpapers.

An Ounce of Prevention(Other)



( )

• Know your competency level. (If you don’t havethe necessary experience, don’t perform the

engagement.)• Maintain good client service.

• Know when to withdrawal.

• Hire a good malpractice attorney.

• Maintain malpractice insurance. (Clients suebecause they lose money - regardless of how

good your service is.)

Final Observations



• Most frauds are identified through accident or a tip;therefore, establishment of a fraud hotline is essential forreducing loss.

• Improved business ethics and corporate culture areimportant ingredients for reducing fraud.

• Ensure employees understand the consequences for

committing fraud.• Even granny may steal under the proper circumstances.

• Obtain fidelity insurance just in case.

• 75% to 100% recovery of fraud loss occurs about 30% ofthe time.

Final Observations



• Always perform an engagement with a degree ofprofessional skepticism.

• Professional standards do not protectaccountants who do shoddy work.*

• Accountants are judged against whatprofessional peers are doing for similar

engagements. *• The public expects more than literal compliance

with accounting rules. (GAAP, GAAS, GAGAS,

SSARS, etc.)• Accountants get sued when people lose money.

* Source: Reducing Liability Exposure for Non-Audit Work by Donald Klein (National Public Accountant 5/1/94)

Final Observations



• Engagement letters clearly describing the responsibilitiesof each party must be executed for each compilation orreview.

• Workpapers should clearly indicate all tests performedand all discussions with client management.

• If an agreement has been made for agreed uponprocedures, the accountant will be held liable if the

procedures are not performed.• Courts generally are unforgiving in situations where the

accountant actually knew (or should have known) abouta discrepancy and failed to disclose it to the client’s

management.

Questions?



???????

Source List



Articles:– BBC News (April 3, 2006). “Dentist Jailed After Record Fraud.”

http://news.bbc.co.uk/1/hi/england/humber/4872562.stm.

– Coenen, Tracy, L. (December 28, 2005). “A Thief Among Us: Lessons from BielinskiBros.” Wisconsin Law Journal.

http://www.wislawjournal.com/archive/2005/1228/coenen-122805.html.– Klein, D. (1994). Reducing liability exposure for non-audit work. The National Public

Accountant, 39(5), pp. 35-39.

– Taub, Stephen (March 3, 2006). “Restatements Surged in 2005, Says Study.” CFO.com.

Books:– Albrecht, W. S., Ph.D., CPA, Romney, M. B., Ph.D. CPA, Cherrington, D. J., DBA,

Payne, I. R., Ph.D., and Roe, A. V., Ph.D. (1988) How to Detect and Prevent BusinessFraud. London. Prentice-Hall, Inc.

– Bologna, G.J., B.B.A., J.D., CFE, and Lindquist, B. COMM., C.A., CFE, (1995) FraudAuditing and Forensic Accounting: New Tools and Techniques. New York. John Wiley

& Sons, Inc.– Schilit, Ph.D., CPA. (1993) Financial Shenanigans: How to Detect Accounting

Gimmicks and Fraud in Financial Reports. Boston. McGraw-Hill

– Wells, J.T. (2000) Frankensteins of Fraud: The 20th Century’s Top Ten White-CollarCriminals. Austin, TX. Obsidian Publishing Company.

Source List



Security and Exchange Commission (www.sec.gov):– SEC Litigation Release No. 33-7945 January 29, 2001

– SEC Litigation Release No. 17753, September 26, 2002

– SEC Complaint 18205 June 30, 2003.

– SEC Litigation Release No. 18219, July 7, 2003.– SEC Litigation Release No. 18919, October 6, 2004

– SEC Press Release No. 2006-19. “AIG to Pay $800 Million to Settle Securities Fraud

Charges by SEC.”

Source List



Other:

– “2004 Report to the Nation” Association of Certified Fraud Examiners website: www.cfenet.com.

– Garner, B.A. Editor-In-Chief. (1996). Black’s Law Dictionary (Pocket

Edition.). Dallas, TX: West Publishing Co.– Madray, J.R. New Fraud Guidance.

http://www.aicpa.org/pubs/jofa/jan2006/madray.htm.

– ExecutiveCaliber – Lease Training: FIN 46. http://executivecaliber.ws/sys-tmpl/fin46/ .

– Accounting and Review Services Committee Issues New Standards.http://www.aicpa.org/pubs/tccpa/sept2005/accounting.htm.

– FASB: Summary of Statement 146.http://www.fasb.org/st/summary/stsum146.shtmi.

– PPC Reference Library – AICPA Professional Standards. American Institute of

Certified Public Accountants.

fruad presentation part4

Documents