FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-1

Today’s Topics

Organizational Fraud

Consumer Fraud

Bankruptcy & Tax Fraud

Money Laundering

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-2

Occupational Fraud

What is it? Fraud against companies other than

financial statement fraud Asset misappropriations Corruption Know the graphics on pps. 506, 514

& 516

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-3

Occupational Fraud Statistics

Median loss $159K; 25% > $1.0M; 1% > $1.0B Organizations with hotlines had 50% less

median loss Small business has higher median loss--$190K;

poor pro-active effort Executive involvement = $1.0M median loss 30% involved accounting dept.; 20% involved

upper and executive management Only 8% of fraudsters had prior convictions

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-4

Asset Misappropriations

Stealing receipts Employees, customers, collusion

Stealing assets on hand Employees

Stealing through disbursements Employees, vendors, collusion

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-5

Thefts of Cash

Larceny Skimming Fraudulent disbursements

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-6

Larceny

Theft of recorded cash w/o consent Cash “shortages” 14.2% of all misappropriation frauds Easy to detect

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-7

Skimming

“Sharing” cash receipts Sales not recorded Fraudulent discounts Customer payments and write-offs Lapping Collusion with customers

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-8

Fraudulent Disbursements

67% of all asset-related frauds Check tampering

Check modification, check forgery Register schemes

False refunds, false voids Inventory problems

Billing schemes Dummy cos., 2X paying, personal use

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-9

Fraudulent Disbursements,

continued Expense schemes

Cheating on your expense report Payroll schemes

Only 1.9% of all losses Ghost employees, false hours & rates,

commission scams and false worker compensation claims

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-10

Thefts of Assets

“Borrowing” for personal use Personal business on company time

Outright theft of assets Larceny involving inventory Unauthorized transfer of assets with

forged requisitions Diversion of assets in receiving

function

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-11

Corruption

Bribery Payoffs, kickbacks, bid rigging

Conflicts of interest Purchase and sales schemes involving

“related” parties Economic extortion Illegal gratuities

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-12

Consumer Fraud

Fraud against individuals Number one consumer fraud =

Identity Theft

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-13

Identity Theft

Involves over 42% of reported frauds

Use of name, address, SSN, band or credit card PINs to commit fraud

Prevention is the key

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-14

Identity Theft Conversion

Purchase of large-ticket items False car or real estate loans Creation of phone or cell accounts Counterfeit checks or debit cards Creation of new bank accounts False filing of bankruptcy False filing of police information Creation of new credit card accounts Change of mailing address

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-15

Identity Theft Cycle

Stage 1: Discovery Gain information Verify information

Stage 2: Action Document accumulation Action cover-up

Stage 3: Trial 1st – 3rd dimensions (gas station, store, new

account)

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-16

How to Steal Someone’s Identity

Obtaining info falsely Going through the trash Skimming credit cards Hacking Stealing wallets Outright theft from the home Stealing mail False change of address form Shoulder surfing Phishing or Pharming

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-17

How to Protect Yourself

Guard your mail Do not use pre-approved credit cards Guard SSN and PINs Guard all personal information Guard your trash Protect your wallet Protect and change your passwords Protect your home Protect your personal computers Use the Gramm-Leach-Bliley Act to opt out of having your

information sold

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-18

Post Event Activity

Report event promptly Collect evidential matter Contact FTC regarding identity theft Homeland security implications

FORENSIC ACCOUNTING - BA124 - 2010 Slide 12-19

Other Forms of Consumer Fraud

Foreign Advance-Fee Scams Work at Home Schemes (Multi-Level

Marketing Schemes) Bogus Mystery Shopping Scams Telemarketing Scams Investment Scams (Ponzi Scams)

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-20

Today’s Topics

Fraud, bankruptcy and divorce Tax fraud Bankruptcy overview Bankruptcy participants Bankruptcy schemes and concealment Divorce schemes and concealment Money Laundering

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-21

Why Fraud?

Hiding assets to prevent redistribution

The Devil’s Triangle Bankruptcy Divorce Fraud

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-22

CPAs Role

Examiner or trustee role Creditor committee representation Investigation assistance Recovery assistance Private investigation role

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-23

Tax Fraud

Criminal offense IRS staff trained to “look for fraud” Supported by tax law (p. 569) See cases on pps. 568-571 Careers in IRS Criminal Investigation

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-24

Types of B & D Frauds

Fraud causes B & D Partner wants out due to the fraud

B & D is used to perpetrate the fraud Fraudulent transfer of assets during

the “stay” or cooling off period B & D is used to conceal the fraud

Records destroyed as part of B & D which helps to conceal the fraud

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-25

Bankruptcy Overview

Chapter 7: complete liquidation Chapter 11: reorganization Chapter 13: individual reorganization Criminal cases prosecuted by U.S.

Attorney’s office Concealment: “knowingly and

fraudulently” See summary in text

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-26

Bankruptcy Overview, cont.

Embezzlement against the debtor’s estate Adverse interest or conduct Bankruptcy fraud: false filings or reps. Civil proceedings in U.S. Bankruptcy Ct.

Intentional deceit Fraudulent transfers

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-27

Bankruptcy Participants

Bankruptcy court U.S. Trustee: administrative role Court appointed Trustee: working

trustees Examiners: investigators Debtors: one who owes Creditors: one who is due funds Adjusters: field agents

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-28

Bankruptcy Frauds-the Bustout

Planned bankruptcy or the “bustout” (Soprano’s video)

Obtaining loans or merchandise and then failing to pay Either with new or established companies Red flags

P.O. box operation Vague data on owners Sudden change in management Bad credit references Order size increases Inventory disappears Unreasonably large discounts

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-29

Bankruptcy Fraud-Illegal Concealment of Assets

Common to divorce as well Methods

Cash receipts are diverted to another entity Inventory goes off-site or into gray market Asset ownership shifted Sales not recorded or understated Fraudulent vendor payments Records disappear Inadequate disclosure

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-30

Bankruptcy Fraud-Illegal Concealment of Assets,

cont. Red flags

Transfers of property to insiders Frequent bank transfers Cash transactions Large vendor payments Rapid reduction in assets Increase in losses Financial and tax inconsistencies Travel to tax havens Missing records

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-31

Fraudulent Transfers

Intent to hinder, delay or defraud Exchanged for less than fair value

FORENSIC ACCOUNTING - BA124 - 2012 Slide 23-32

Money Laundering

See diagram on p. 584 Recall the case of “Crazy Eddie”

Antar