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Unformatted text preview: Forensic and Investigative Accounting Forensic Chapter 5 Employee Fraud: The Misappropriation of Assets
© 2009 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com Employee Fraudsters
Lisa Eversole, in “Profile of a Fraudster,” lists the Lisa following characteristics of occupational fraudsters: following Egotistical Pressured to perform Risk taker Inquisitive Hard worker Rule breaker Greedy Under stress Disgruntled or a Financially needy Disgruntled complainer complainer Big spender Overwhelming desire Overwhelming Close relationship with Close for personal gain for vendors/suppliers vendors/suppliers
Chapter 5 Forensic and Investigative Accounting 2 Effects of Fraud Four-year class action lawsuit against Tyco. Fraud was $1 to $2 billion. PWC payment $225 million Tyco payment $2.975 billion Total $3.2 billion Chapter 5 Forensic and Investigative Accounting 3 Fannie Mae Forensic Probe BOD hired investigators who cleared the current BOD management of Fannie Mae of knowingly participating in any wrongdoing. participating The report took 17 months; 616 pages plus 2,000 plus The pages of supporting documents. pages Cost of $60 million to $70 million. The fraud was estimated to be $11 billion. Former N.H. Senator Warren Rudman used The Former Huron Consulting Group. Huron
Chapter 5 Forensic and Investigative Accounting 4 A Forensic Accounting Expert Witness Harvey R. Kelly led the investigation and testified against CEO Richard Harvey M. Scrushy (HealthSouth). M. He acknowledged turning up “nothing that had Mr. Scrushy’s name on it,” He that connected the former CEO to the fraud at HealthSouth, which inflated earnings by $2.7 billion. earnings “Our job wasn’t to figure out who all the bad guys were. Our job was to Our help the company get the right numbers and figure out how much the fraud was.” was.” He and his investigators sifted through millions of documents during their He millions documents 23,000-hours fraud investigation. PWC was paid about $9 million to 23,000-hours investigation PWC $9 conduct the forensic audit in 2003. conduct HealthSouth deleted old e-mails every 60 days. HealthSouth old Now with the NYC office of Alix Partners LLC, he was being paid about Now $700 an hour by the government for his testimony. $700 Source: Evelina Shmukler, “Scrushy Team Cross-Examines Forensic-Accounting Source: Witness,” WSJ, February 1, 2005, C-4. WSJ
Chapter 5 Forensic and Investigative Accounting 5 Governmental Fraud
Where Is $9 Trillion? The U.S. Federal Reserve can not account for $9 trillion in off-balance sheet transactions. Also, no one at the Federal Reserve has any idea what are the losses on its $2 trillion portfolio. On May 12, 2009, Inspector General Elizabeth Coleman could not explain the $1 trillion plus expansion of the Federal Reserve’s balance sheet since September 2008. While testifying before Congress, Coleman said the IG does not have jurisdiction to audit the Federal Reserve. If a U.S. business lost $9 trillion or created $9 trillion on their balance sheet, they would suffer severe penalties.
Source: Julie Crawshaw, “Federal Reserve Cannot Account for $9 Trillion,” Newsmax.com. May 12, 2009. http://moneynews.newsmax.com/financenews/feds_lost_nine_trillion/2009/05/12/213463. html Chapter 5 Forensic and Investigative Accounting 6 Employee Fraudsters
Bev Harris, in “How to Unbezzle a Fortune,” says Bev that fraudsters and embezzlers are the nicest people in the world: people
Wide-eyed mothers of preschoolers. Your best Wide-eyed friend. CPAs with impeccable résumés. People who profess deep religious commitments. Your partner. Loyal business managers who arrive early, stay late, and never take a vacation. And sometimes, even FAMILY MEMBERS. So if you’re looking for sinister looking, waxed mustache, and shifty eyes, you’re in for a surprise—scoundrels come in every you’re —scoundrels description. description.
Chapter 5 Forensic and Investigative Accounting 7 Careful With Property Tax Refund Checks Supervisor of the Real Property Tax Adjustment Unit in Supervisor Washington, D.C., Harriette Walters, used at least 92 payments to dummy corporations in a scam to obtain $31.7 million. dummy Fraud was never noticed by city officials, internal, or external Fraud auditors. Auditors never examined why the city’s property tax refunds were steadily rising. refunds Sham companies’ bank accounts were controlled by Walters’ Sham brother. brother. Many applications for refund were identical to prior ones. In a FBI raid of her house, 100 pieces of jewelry, a mink coat, 90 In designer purses, 68 pairs of shoes, designer luggage, Rolex watch, silver bar cart, and more were found. She had a $1.4 million in bills at Neiman Marcus on a $81,000 yearly government salary. bills
Chapter 5 Forensic and Investigative Accounting 8 Discrepancies That May Indicate Fraud Transactions that are not recorded in a complete Transactions or timely manner or are improperly recorded as to amount, accounting period, classification, or entity policy. entity Unsupported or unauthorized balances or Unsupported transactions. transactions. Last-minute adjustments that significantly affect Last-minute financial results. financial Evidence of employees’ access to systems and Evidence records inconsistent with that necessary to perform their authorized duties. perform
Chapter 5 Forensic and Investigative Accounting 9 Types of Misappropriations
Embezzlement Cash and check schemes – Larceny of cash – Skimming – Swapping checks for cash – Check tampering – Kiting – Credit card refund and cancellation schemes (continued on next slide) Chapter 5 Forensic and Investigative Accounting 10 Types of Misappropriations
Accounts receivable fraud – Lapping – Fictitious receivables – Borrowing against accounts receivable Inventory fraud – Stealing inventory – Short shipments with full prices (continued on next slide)
Chapter 5 Forensic and Investigative Accounting 11 Types of Misappropriations Accounts payable fraud
– Double billing – Shell companies Fictitious disbursements
– Doctored sales figures – Sham payments – Price manipulations: land flipping, pump Price and dump, and cybersmearing and – Money laundering – Bid rigging Chapter 5 Forensic and Investigative Accounting 12 Fighting Fraud
An organization may want to: Put in place a business ethics policy. Reflect the company’s position on fraud in Rules of Reflect Conduct. Conduct. Identify and assess primary potential risks faced by the Identify business. business. Determine adequate plans and procedures to deal with Determine fraud once it has been discovered. fraud Have a forensic accountant review and help to audit the Have company’s security measures. company’s Select and promote staff based on sound employment Select practices. practices.
Chapter 5 Forensic and Investigative Accounting 13 Preventing Employee Fraud
Have a fraud hotline. Institute a mandatory vacation policy. Rotate assignments of employees who handle Rotate cash, payables, and receivables. cash, Have a written and signed ethics policy. Have internal auditors do different Have procedures each time they audit a unit. procedures Observe and listen to employees; look for Observe lifestyle changes. lifestyle (continued on next slide)
Chapter 5 Forensic and Investigative Accounting 14 Preventing Employee Fraud
Really understand the business unit and Really what functions employees actually perform. what Do not allow employees or executives to Do get away with anything. get In a small business, the owner should In receive the monthly bank statements unopened. unopened. Bank statements should always be Bank reconciled. reconciled. (continued on next slide)
Chapter 5 Forensic and Investigative Accounting 15 Preventing Employee Fraud
Supervisors should try to think like Supervisors criminals. criminals. Do not assume employees behave honestly. Check employee references and résumés. Think outside the box. Bond employees. Use a positive pay system. Use a locked box system. (continued on next slide)
Chapter 5 Forensic and Investigative Accounting 16 Preventing Employee Fraud
Count the cash twice in one day. Count the cash at irregular intervals. Unannounced inventory counts. Have a fraud risk assessment. Beware of related parties. Avoid check-signing machines and Avoid signature stamps. signature Be careful allowing employees to make side Be agreements. agreements. Chapter 5 Forensic and Investigative Accounting 17 Proactive and Reactive Fraud Proactive Investigations Investigations
There are two major types of fraud There investigation: investigation: Reactive investigations occur after there is a Reactive reason to suspect fraud or after there is a significant loss. significant Proactive investigations occur as a part of Proactive normal operations even when there is no reason to suspect fraud. reason (continued on next slide)
Chapter 5 Forensic and Investigative Accounting 18 Proactive and Reactive Fraud Proactive Investigations Investigations
The threat of a future investigation reduces The the occurrence of fraudulent behavior from 75% to only 43%. 75% When the IRS began to require taxpayers to When list a social security number for dependents, the number of reported dependents dropped by 7,000,000 the next year. by Chapter 5 Forensic and Investigative Accounting 19 Steps to Consider Once Fraud Steps Is Detected Is
1. 2. 3. 4. 5. Call legal counsel. Get the insurance carrier involved as early as Get possible. possible. Take immediate steps to safeguard existing assets Take from further damage. from Quietly and confidentially gather evidence. Manage information on a need to know basis in Manage the early stages of discovery. the
(continued on next slide) Chapter 5 Forensic and Investigative Accounting 20 Steps to Consider Once Fraud Steps Is Detected Is
1. 2. 3. 4. Consider communications very carefully whether Consider they are to employees or those outside the company. company. Consider setting aside time immediately to scope Consider out an action plan. out Consider those who might assist in the crisis and Consider take steps to eliminate any conflict of interest issues. issues. Consider prosecution which acts as a deterrent for Consider future fraud. future
Chapter 5 Forensic and Investigative Accounting 21 Wells Report Measures
The 2004 Wells Report provides an excellent ranking of the The helpful measures for preventing fraud: helpful – Strong internal controls (3.66) – Willingness of companies to prosecute (3.44) – Regular fraud audit (3.40) – Fraud training for auditors (3.33) – Anonymous fraud reporting mechanisms (3.27) – Background checks of new employees(3.25) – Established fraud policies (3.12) – Ethical training for employees (2.96) – Workplace surveillance (2.89)
Chapter 5 Forensic and Investigative Accounting 22 Fraud in Not-for-Profit Organizations
The website of Clark, Schaefer, Hackett & The Company states the following reasons not-for-profit organizations become targets of fraud: organizations Many smaller not-for-profits just don’t have Many the personnel size required for a real segregation of duties. They often don’t require much approval for disbursements. And, when fraud is discovered, they frequently don’t prosecute it very aggressively Forensic and Investigativethe perceived because of Accounting Chapter 5 23 negative publicity. State and Local Government State Susceptibility Susceptibility
Government bankruptcy is an important issue Government for fraud prevention and detection because like business corporations and organizations, governments facing severe financial difficulties can be fertile ground for fraud. Government bankruptcy also may trigger an investigation in order to determine if fraud has contributed to such financial distress. has
Chapter 5 Forensic and Investigative Accounting 24 Uncovering Elusive Fraud
Analyze account records and trace funds. Research background and search for assets. Develop confidential sources. Interview/interrogate persons and find Interview/interrogate witnesses. witnesses. Conduct surveillance efforts. Guide undercover operations. Recognize and preserve physical evidence. Chapter 5 Forensic and Investigative Accounting 25 Game Theory and Strategic Reasoning Fraud risk assessment – Auditors who use long lists of fraud cues and Auditors fraud checklists are inaccurate in their fraud risk assessments. risk – Auditors generally overweight cues indicative Auditors of management’s character even though these cues are the most likely cues to be unreliable. cues – Audit standards should be designed to persuade Audit auditors to consider how management might manipulate their perceptions of fraud cues. manipulate
(continued on next slide) Chapter 5 Forensic and Investigative Accounting 26 Game Theory and Strategic Reasoning Audit planning – Auditors should develop audit strategies Auditors that are unpredictable, especially with regard to the nature of their evidence. regard – Audit plans are more predictable and less Audit effective at detecting fraud when auditors use procedures based on prior audits or standard audit programs. standard (continued on next slide)
Forensic and Investigative Accounting 27 Chapter 5 Game Theory and Strategic Reasoning Audit planning (cont’d) – Audit standards should require auditors to Audit engage in strategic reasoning by considering the types of fraud that management might perpetrate and how these frauds might be concealed from the audit. concealed – The goal of audit standards should be to The encourage auditors to gather new, unusual, or random audit evidence not easily anticipated by management. management.
(continued on next slide) Chapter 5 Forensic and Investigative Accounting 28 Game Theory and Strategic Reasoning Implementation of the audit – Learning from experience is critical to Learning effectively performing in a strategic setting. effectively – Auditors are often insensitive to new evidence Auditors regarding fraud risk and can more effectively learn from their interactions with the client. learn – Audit standards can improve learning by Audit requiring activities such as documenting and communicating the nature of their interactions with management. with
Forensic and Investigative Accounting 29 Chapter 5 Continuous Monitoring
Some benefits to continuous monitoring are: Independent testing of controls. Timely notification to management of controls Timely breakdowns. breakdowns. Fraud reduction and improved risk management. Improvements to efficiency and effectiveness. Extensibility to multiple end-to-end business Extensibility processes. processes.
Chapter 5 Forensic and Investigative Accounting 30 Some Forensic Techniques and Tools
Check, deposit, and Check, credit card spreads credit Timeline analysis Tracing schedule Link analysis Invigilation Genogram Proof of cash Entity charts Full- and-false Fullinclusion tests inclusion Net worth method Chapter 5 Forensic and Investigative Accounting 31 ...
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