Chapter 18 Power Point - Forensic and Investigative...

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Unformatted text preview: Forensic and Investigative Accounting Forensic Chapter 18 Forensic Accounting in Action © 2009 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com Questions Answered by Fraud Investigation Who had the opportunity to commit fraudulent Who activity? activity? How and when was the fraud committed? What was taken (how much money was lost)? Where were the assets moved (how were the Where assets converted to the benefit of the perpetrator)? assets Why was the activity intentional, rather than Why accidental, or the result of mistake or misunderstanding? misunderstanding? Forensic and Investigative Accounting 2 Chapter 18 Accounting Anomalies Accounting anomalies often signal the presence of fraud. Examples of accounting anomalies include: Irregularities in source documents (e.g., missing Irregularities documents, excessive voids or credits, common names or addresses of customers, increases in past due receivables, increased reconciling of items, etc.). receivables, Faulty journal entries. Inaccuracies in ledgers. Chapter 18 Forensic and Investigative Accounting 3 Internal Control Weaknesses Lack of segregation of duties Lack of physical safeguards Lack of independent checks Lack of proper authorization Lack of proper documents and records Overriding of existing controls Inadequate accounting system Chapter 18 Forensic and Investigative Accounting 4 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic What Was Taken? $6 million USD of inventory missing from the $6 Shanghai warehouse. Shanghai $6 million USD cash associated with sales to $6 customers. customers. $5 million USD of accounts receivable (70% of $5 which was for sales that were claimed never to have occurred) associated with customers claiming never to have ordered any inventory. claiming Chapter 18 Forensic and Investigative Accounting 5 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic Who Had the Opportunity? Hong Wu, the sales manager in Shanghai who was Hong responsible for sales. responsible Daqing Yang, the logistics manager for the Daqing Shanghai warehouse. Shanghai Xiang Chu, accounting manager who made Xiang accounting entries and deposits. accounting Alex Richards, Wu’s and Yang’s supervisor. Grant Williams, Chu’s supervisor. Chapter 18 Forensic and Investigative Accounting 6 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic How Were the Assets Moved? Individuals—likely not actual customers—picked Individuals—likely up inventory from the warehouse, sometimes without the need for required documentation. without Logistics manager released inventory to Logistics individuals (supposedly customers) for cash. individuals Cash was transferred from Yang to Wu. Chapter 18 Forensic and Investigative Accounting 7 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic How Was the Theft Concealed? Wu attributed all/some of cash received by Wu legitimate customers to other customers—some of which would have been used as down payments for other fictitious/improper sales. for Part of cash received from individuals for Part inventory used to account for actual sales and part of cash withheld by Yang and Wu. of (continued on next slide) (continued Chapter 18 Forensic and Investigative Accounting 8 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic How Was the Theft Concealed? (continued) Sales made to future customers could have been Sales made for amounts below those approved by TruGloss Shanghai JV. TruGloss Yang and Wu could have involved Chu, Richards, Yang and/or Williams to help ensure that fraud was not detected. detected. Chapter 18 Forensic and Investigative Accounting 9 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic How Were the Assets Converted? Inventory sold to individuals (who are not actual Inventory customers) at below market prices for cash—not possible to trace payments originating from certain customers to accounting transactions (because of the nature of a cash transaction). (because Yang and Wu may have laundered cash. Lapping of accounts receivable enabled turnover Lapping to occur until fraud detected. to Chapter 18 Forensic and Investigative Accounting 10 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic What Were the Red Flag Symptoms? Better than expected growth relative to local competition. Lack of proper separation of duties for operations, custody, Lack accounting, and monitoring of assets. accounting, Insufficient oversight of operational employees. Above average performance for one segment of the joint Above venture, involving only a few individuals. venture, Sales of inventory for cash at the warehouse, often without Sales necessary documentation. necessary High concentrations of repeat customers for one segment High of the joint venture. of Increase in accounts receivable aging. Chapter 18 Forensic and Investigative Accounting 11 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic What Pressures and Rationalization Might Have Motivated What the Frauds? the None—perpetrators could be sociopathic fraud None—perpetrators perpetrators—TruGloss Shanghai happens to be the latest victim. victim. Financial pressures on any individual: Wu, Yang, Chu, Financial Richards, and/or Williams. Richards, Pressure to achieve growth targets in a new market. Competitive pressure among sales or logistics managers. Belief that other competitors are conducting business in Belief the same fashion. the Culturally acceptable to conduct sales based on cash Culturally transactions at warehouse locations, regardless of internal controls imposed by partner from the United States. controls Chapter 18 Forensic and Investigative Accounting 12 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic What Key Internal Controls Could Have Prevented or What Detected the Fraud? Detected Background checks of managers at TruGloss Shanghai JV. Proper oversight by General Manager (Richards) and Proper Finance Manager (Williams). Finance Completion of required monitoring mechanism (i.e., Completion internal audits) as required by policy. internal Insistence by accounting managers that no transaction be Insistence recorded without proper documentation and approval. recorded Periodic and diligent comparisons of the joint venture to Periodic local competition and other international joint ventures— local are the results at TruGloss Shanghai “too good to be true”? (continued on next slide) (continued Chapter 18 Forensic and Investigative Accounting 13 TruGloss Shanghai JV: Unusual or Unusual Unrealistic Procedures and Relationships Unrealistic What Key Internal Controls Could Have Prevented or What Detected the Fraud? (continued) Detected Periodic monitoring and follow-up for aged accounts Periodic receivable. receivable. Required physical counts of inventories and mandatory Required reconciliations. reconciliations. Periodic analysis of gross margins and any other key ratios Periodic based on recorded amounts. based Mandatory vacations for all management positions. Chapter 18 Forensic and Investigative Accounting 14 Questions to answer with respect to the potential or Questions likely fraud circumstances in this case: likely Tallahassee BeanCounters: ProblemBased Learning to Ask the Right Based Questions Questions Who could have committed a fraud? How could the fraud have been committed? Evidence of intent (which can be shown by repeated Evidence instances of taking). instances Economic impact (difference in reported and actual Economic revenue, plus (if negative) underpaid sales tax (to the state) and arena rent (to the stadium owner) must be included as total loss due to theft. total Evidence of conversion tracing funds to “dummy” (usually Evidence bank) account of employee suspect under a different, or possibly assumed, name. possibly Forensic and Investigative Accounting 15 Chapter 18 Tallahassee BeanCounters: The Fraud Schemes The Ghost employee fraud Ticket fraud Equipment purchase fraud Chapter 18 Forensic and Investigative Accounting 16 ...
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This note was uploaded on 05/03/2011 for the course ACCT 574 taught by Professor Gardner during the Winter '11 term at Keller Graduate School of Management.

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