what’s up with fraud? ficpa july 28, 2011€¦ · · 2016-06-18what’s up with fraud? ficpa...

10/16/2009

What’s Up With Fraud?FICPA July 28, 2011

Dr. Lynn H. Clements CPA CMA CFM Cr.FA CFE

Objectives• Current events:

– RTTN– Madoff update– Frauds during economic downturn

• Case Study: Midwest University• CFE or CFF?• Discussion questions

2010 Report to the Nations: Overview

• Compiled from a study of 1,843 cases of occupational fraud that occurred worldwide between January 2008 and December 2009

• 106 nations represented, 40% outside the U.S.

• Previous reports: 2002, 2004, 2006, 2008 (2010 is the first to include cases outside the U.S.)

http://www.acfe.com/rttn/2010-rttn.asp

2010 Report to the Nations: Findings• The typical organization loses

5% of its annual revenue to fraud

• Median loss = $160,000• Nearly 25% of frauds are in

excess of $1 million• Before detection, frauds lasted

a median of 18 months• Most common fraud: asset

appropriations (but they are the least costly)


2010 Report to the Nations: Findings (continued)

• Financial statement frauds are the most expensive

• Occupations frauds are most often detected by tips

• Smaller organizations are most vulnerable

• Industries:– Banking/financial services– Manufacturing– Government/public administration



• High-level perpetrators caused the greatest damage

• Six departments (80%):– Accounting– Operations– Sales– Executives/upper management– Customer service– Purchasing



• 85% of the fraud perpetrators had no previous charges/convictions

• Behavioral red flags:– Living beyond their means– Financial difficulties


2010 Report to the Nations: Conclusions

• Global• Hotlines

– Anonymity– Confidentiality– Eliminate fear of reprisal

• Overreliance on audits• Employee education is

the key to prevention AND detection


2010 Report to the Nations: Conclusions (continued)

• Surprise audits– Effective– Underused

• Internal controls are insufficient to prevent fraud

• Behavioral warning signs are not identified by traditional controls

• Page 80: Fraud prevention checklist


2010 RTTN: What is it to ME?• Free copy:http://www.acfe.com/rttn/2010-rttn.asp

• Page 80, “Fraud Prevention Checklist”– Only 11 questions– A good start to the company’s

discussion about fraud

Bernie Madoff Update• “Why the SEC Missed Madoff”• “Madoff’s Ghost Still Haunts

SEC”• “Madoff ‘Winners’ Beware: Irv

Picard Hasn’t Gone Away”• “House Votes to Repeal

Exemption on SEC Secrecy”• “Back in Court: Whether

Madoff’s Kids Should Have to Pony Up”

Frauds Specific to the Economic Downturn

• “Fraud committed against companies by their own employees has surged this year, new data suggest, providing fresh evidence that the recession is fuelling a rise in crime.” Financial Times

• http://www.fbi.gov/scams-safety/fraud• Foreclosure Fraud• ATM Skimming• Others

(www.fib.gov/news/stories/story-index/white-collar-crime)

• “Fraud committed against companies by their own employees has surged this year, new data suggest, providing fresh evidence that the recession is fuelling a rise in crime.” Financial Times

• http://www.fbi.gov/scams-safety/fraud• Foreclosure Fraud• ATM Skimming• Others

(www.fib.gov/news/stories/story-index/white-collar-crime)

Case Study

Midwest University

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CFE or CFF?

CFE• CPA is probably

qualified (points)• Exam (4 parts)• Preparation for

exam• Fee• CPE

CFF• CPA working in

forensic/fraud is probably qualified (points)

• EXAM• Fee depends on

AICPA/FVS status• CPE

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CFE ExamFour sections of 125 questions each:Financial transactionsLegal elements of fraudFraud investigationCriminology and ethics

Source: http://marketplace.cfenet.com/cfe/CertByExam.asp

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CFE Exam: Financial Transactions

“This section tests your knowledge of the types of fraudulent financial transactions incurred in accounting records. To pass this section, you will be required to demonstrate knowledge of these concepts: basic accounting and auditing theory, fraud schemes, internal controls to deter fraud and other auditing and accounting matters.”


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CFE Exam: Legal Elements of Fraud

“This section ensures that you are familiar with the many legal ramifications of conducting fraud examinations, including criminal and civil law, rules of evidence, rights of the accused and accuser and expert witness matters.”


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CFE Exam: Fraud Investigation

“This section includes questions in the following areas: interviewing, taking statements, obtaining information from public records, tracing illicit transactions, evaluating deception and report writing .”


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CFE Exam:Criminology and Ethics“The purpose of this section is to test your knowledge of criminological concepts and to evaluate your understanding of the underlying ethics of the fraud examination profession. This part includes administration of criminal justice, theories of crime causation, theories of fraud prevention, crime information sources, and ethical situations.”


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CFE ExamPreparing for the examOn your own using the Fraud Examiners ManualCFE Exam Prep Course Computer requirements

Timing of the examGrading of the examPass guaranteeExam fees


Fraud Detection Techniques• Red Flags• The Elements of

Fraud• Fraud Triangle• Fraud Pentagon?

The Elements of Fraud (Albrecht)– A representation– About a material point– Which is false,– And intentionally or

recklessly so,– Which is believed– And acted upon by the

victim– To the victim’s damage

Source: Conducting Internal Investigations, Association of Certified Fraud Examiners, 2003

Red Flags• No Company Policy Manual• Feeling of disorganized

bookkeeping, purchasing, receiving, and/or warehousing departments

• Missing documents• Unrecorded transactions• No bank reconciliations• Subsidiary ledgers out of

balance• No physical inventory counts• Checks written to cash• Large related party loans• Excessive other revenue• Negative operating cash flow• Downward earnings trend

• Handwritten checks• Extensive fund transfers• Unusual transactions

(inconsistent)• Deficient hiring policies and

procedures• Employees’ lifestyles

inconsistent with salaries• Employees who don’t take

vacations• SPEs• Excessive insider sales of

stock• Unexplained resignations of

upper management• Excessive debt/equity ratio• CPA switching• Strange account titles

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Fraud Triangle

Perceived Pressure

Perceived Opportunities Rationalization

Source: Fraud Examination 2ed, Albrecht etal

Crowe Fraud Pentagon• “Today’s fraudster is more independent-

minded and armed with more information and access to corporate assets than was the perpetrator of Cressey’s era.”

• “Corporations have evolved to rely more heavily on outsourcing, global partnerships, and the technology that links them together.”

• “…greater autonomy…”• “Global reach”• “Performance-based pay”• From CEO as businessman -> CEO as

celebrity• From businesses led by owners ->

businesses led by managers & directors

Souce: Playing Offense in a High-risk Environment, www.CroweHorwath.com

• Opportunity• Pressure• Rationalization• Competence• Arrogance

Crowe Fraud Pentagon

Souce: Playing Offense in a High-risk Environment, www.CroweHorwath.com

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The following slides are short questions for

discussion and are not in the handout

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Discussion Question #1

During the audit of a major client, you notice that revenues increased dramatically from the third to the fourth quarter and especially over the previous periods of the last year. You’ve received tips alleging that the company is overstating its revenues.

What steps would you take to examine the legitimacy of management’s assertions regarding its reported revenue?

Source: Fraud Examination, Albrecht, Thomson-Southwestern, 2003

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Thomas is the CEO of a business that just went public. He is feeling intense pressure for the business to succeed because all of his relatives have invested heavily in his company. Since going public, sales have been flat, and Thomas is worried about not meeting analysts’ and even relatives’expectations.

Which financial statement accounts might Thomas attempt to manipulate in order to meet analysts’ projected earnings?

Source: Fraud Examination, Albrecht, Thomson-Southwestern, 2003

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What change in auditing may have caused Enron, WorldCom, Xerox, and the other

fraudulent situations?

Source: Crumbley, Heitger, & Smith (2005). Forensic and Investigative Accounting 2e. CCH

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What two fieldwork stages gather audit evidence?


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Are the GAAS audit standards designed to catch fraud other than financial

statement fraud? What is the expectation gap? Did SAS No. 99 close

it?


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What are some of the main points of SAS No. 99?


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What are some of the requirements for audit committees under the Sarbanes-

Oxley Act?


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What are red flags with respect to earnings?


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Donald Company shows the following:Average receivables $ 700,000Cost of goods sold 2,900,000Sales 8,000,000Average inventory 1,100,000Net credit sales 1,200,000Operating income 900,0001. What is the inventory turnover?2. What is the operating margin?


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What is meant by each of the following?1. Cooking the books2. Off-balance-sheet financing3. Channel stuffing4. Bid rigging5. Big bath

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ABC Company has a 25 percent gross profit margin during a year when there is a skimming scheme resulting in $1,200,000 LESS in Net Income for the year.

How much must gross revenue increase to replace those monies lost to fraud?


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What is meant by each of the following?– Skimming– Kiting– Lapping– Kickbacks

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What are the three conditions for misappropriation of assets in SAS No. 99?

1. Incentives/pressures2. Opportunity3. Attitudes/rationalizations


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What are some ways to steal cash?

What can help to prevent cash and check thefts?


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Why do fast food restaurants have two windows at the drive through lanes?


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What audit steps help to detect kiting?


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Should forensic accountants engage in covert surveillance?


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An anonymous e-mail is sent to an internal auditor that there is fraud in the inventory/warehousing cycle. Suggest some appropriate steps to detect the fraud.


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Do deviations from GAAP always indicate financial statement fraud?

Source: Hopwood, Leiner, & Young (2008). Forensic Accounting. McGrawHill

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What are earnings management, earnings manipulation, and earnings smoothing?

Are they ethical?

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What are the effects of financial statement fraud on the following?

1. The stockholder2. The corporation3. The corporation’s executives/directors4. The market as a whole5. Society in general


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Can the use of depreciation methods be used to perpetuate asset fraud? If so, how?


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Why are most employee frauds not reported and prosecuted?


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How does internal control relate to the fraud triangle?


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How can a company identify an employee who is swapping cash for bad checks in a cash box?


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What is the key common element in all sales skimming schemes?


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What should a company do when a customer claims to have been shortchanged by a company cashier?


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What is meant by each of the following?1. Short shipments2. Balance due billing3. Substandard goods4. Fraudulent cost-plus billing


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Which of the following is usually true about data theft?

A. It is easier to prevent than to identify and prosecute

B. It is easier to identify than to preventC. It is easier to prosecute than to

identifyD. It is easier to prosecute than to

prevent or identifySource: Hopwood, Leiner, & Young (2008). Forensic Accounting. McGrawHill

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Who usually sabotages a company?

References for more information

• Report to the Nations on Occupational Fraud and Abuse, 2010 Global Fraud Study, Association of Certified Fraud Examiners,http://www.acfe.com/rttn/2010-rttn.asp

• Albrecht, Albrecht, & Albrecht (2005). Fraud Examination 2e. Southwestern.

• Crumbley, Heitger, & Smith (2005). Forensic and Investigative Accounting 2e. CCH.

• Hopwood, Leiner, & Young (2008). Forensic Accounting. McGrawHill.

• Playing Offense in a High-risk Environment, www.Crowe Horwath.com

• In-house fraud cases surge BY ROBERT COOKSON IN LONDON, Financial Times May 2009


Questions?Dr. Lynn H. Clements

CPA CMA CFM CFE Cr.FAProfessor of AccountingFlorida Southern College

(863) [email protected]

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