Forensic Accounting-Corruption
Economic Extortion
-"Pay up or else" corruption scheme -one person demands payment from another. Refusal to pay the extorter results in some harm such as a loss of business
Conflict of Interest
-A conflict of interest occurs when an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the organization -involve the exertion of an employee's influence to the detriment of his employer. But whereas in bribery schemes a fraudster is paid to exercise his influence on behalf of a third party, in conflict of interest scheme, the perpetrator engages in self-dealing
Preventing Kickbacks
-Assign an employee independent or the purchasing department to routinely review buying patterns -make sure that all contracts have a "right to audit" clause -establish written policies prohibiting employees from soliciting or accepting any gift or favor from a customer or supplier -expressly forbid any employee from engaging in any transaction, on behalf of the company, in which he or she has an undisclosed personal interest -implement an ethics policy that clearly explains what improper behavior is and provides grounds for termination if an employee accepts a bribe or kickback
Schemes at the Solicitation Phase
-Bid pooling: this is a process by which several bidders conspire to split up contracts and ensure that each gets a certain amount of work -fictitious suppliers: bids are solicited from fictitious suppliers -restricting the time for submitting bids -soliciting bids in obscure publications where the bids are unlikely to be seen by other vendors -publicizing the bid during holiday periods (when suppliers not "in the know" are unlikely to be looking for potential contract.)
Other Conflict of Interest Schemes
-Business diversions -Resource diversions -Financial disclosures
Business diversions
-Conflict of interest scheme -an employee starts his own business to compete directly with his employer. then starts siphoning off clients of the victim company to the employees own business
Preventing and Detecting Conflicts of Interest
-Implement, communicate, and enforce an ethics policy that addresses conflicts of interest offenses -Require employees to complete an annual disclosure statement -Establish an anonymous reporting mechanism to receive tips and complaints -Compare vendor address and telephone files to employee address and telephone files for matches
Kickback Schemes
-Involve submission of invoices for goods and services that are either overpriced or completely fictitious -involve collusion between employees and vendors -in a kickback scheme, a vendor submits a fraudulent or inflated invoice to the victim company, and an employee of that company helps make sure that a payment is made on the false invoice -almost always attack the purchasing function of the victim company
Bribery Schemes
-Kickbacks schemes -Bid-rigging schemes
Purchasing Schemes
-Overbilling schemes -Turnaround sales
Turnaround Sales
-Purchasing scheme -the employee knows that the company is seeking to purchase a particular asset and purchases it himself -turns around and sells it to the company at an inflated price
Other Kickback Schemes
-Slash funds: every bribe is a 2-sided transaction; when a vendor bribe a purchaser, someone on the vendor's side of the transaction is making an illicit payment. Briber must find a way generate funds. Diversion of money into a slush fund. Funds can be paid from other accounts or paid as "consulting fees".
Illegal Gratuities
-Something of value is given to an employee to reward a decision rather than influence a decision -in this scheme, a decision is made that happens to benefit a certain person or company. this decision is not influenced by any sort of payment. the party who benefited from the decision then rewards the person who made the decision -most company ethics policies forbid employees from accepting unreported gifts from vendors
Bribery
-The offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in charge of a public or legal duty -Most occupational fraud schemes involve Commercial bribery -note: offering a payment can constitute a bribe, even if the illicit payment is never actually made
Sales Schemes
-Underbillings -Writing off sales
How does fraud occur in the Submission Phase
-a supplier pays a bribe to get help (from an employee of the purchasing company) or preparing the bid. -a supplier pays a bribe to see the other competitor's bids before submitting his bid. ex: - Gifts & cash payments were given to a majority owner of a company in exchange for preferential treatment during the bidding process. The supplier who paid the bribes was allowed to submit his bids last, knowing what prices his competitors had quoted, or, alternatively, was allowed to actually see his competitor's bids and adjust his own accordingly. -employees of the purchaser may also be bribed to falsify the bid log, to extend the bid opening date, and to control opening bids
Bid-Rigging Schemes
-all bidders are expected to be on an even playing field-bidding on the same specifications -each vendor submits a confidential bid stating the price at which they will complete a project according to the specifications -the more power a person has over the bidding process, the more influence he or she can exert over the selection of the winning bid -employees involved in bid-rigging schemes tend to have a good measure of influence or access to the competitive bidding process.
Corruption
-an act done with an intent to give someone advantage inconsistent with official duty and the rights of others -any scheme in which a person uses his or her influence in the business transaction to obtain and benefit contrary to a persons duty to an organization -the person will use his position to gain some personal advantage at the expense of the organization
Overbilling schemes
-bill originates from a real company in which the fraudster has an undisclosed economic or personal interest. -fraudster uses influence to ensure the victim company does business with this particular vendor -does not negotiate in good faith or attempt to get the best price for the employer
Resource diversions
-conflict of interest scheme -diverting funds and other resource for the development of the employee's own company
Financial Disclosures
-conflict of interest scheme -inadequate disclosures of related-party transactions to the company -management has an obligation to disclose to the shareholders significant fraud committed by officers, executives, & other positions of trust. management does not have the responsibility of disclosing uncharged criminal conduct of its officers & executives
Trends indicating a need recognition scheme is occurring
-higher requirements for stock and inventory levels -writing off large numbers of surplus items to scrap -defining a need that can only be met by a certain supplier -failure to develop a satisfactory list of backup suppliers
Detecting Kickbacks
-normal controls may not detect kickback schemes -look for price inflation -monitor trends in cost of goods sold and services purchased -monitor trends in cost of goods sold and services purchased- often start small but increase over time -look for excessive quantities purchased -investigate inventory shortages -look for inferior goods purchased -compare actual amounts to budgeted amounts
Writing off sales
-purchases are made from the victim company and credit memos are later issued.
Underbilling
-sales scheme -goods are sold below fair market value to a customer in which the perpetrator has a hidden interest
Specification Scheme: methods used to restrict competition in the bidding process include:
-use "pre-qualification" procedures to eliminate certain vendors (this is not illegal unless the procedures are placed in the specifications as a result of a bribe) -sole-source or noncompetitive procurement justifications -deliberately writing vague specifications requiring amendments at a later date. this allows the supplier to raise the price of the contract when the amendments are made -bid splitting -vendor pays an employee of the buyer for the right to see the specifications before his competitors get the specs
Kickback Schemes- Diverting business to vendors
-vendor pays the kickbacks to ensure a steady stream of business from the purchasing company -example: a travel agency provided free travel & entertainment to the purchasing agent of a retail company. in return, the purchasing agent agreed to book all corporate trips through the travel agent
Overbilling Schemes
1. Employees with approval authority -most kickback schemes begin as overbilling schemes. here, vendor submits inflated invoices to the victim company -overstates the cost of actual goods or services or reflects fictitious sales -ability to authorize purchases is key to the scheme.
Types of Bid-Rigging Schemes
1. The Pre-soliciation Phase 2. Solicitation phase 3. Submission phase
Example of Illegal Gratuities
A city commissioner negotiated a land development deal with a group of private investors. After the deal was approved, the commissioner and his wife were rewarded with a free international vacation all expenses paid. While the promise of this trip may have influenced the commissioner's negotiations, this would be difficult to prove. However, merely accepting such a gift amounts to an illegal gratuity, an act that is prohibited by most government and private company codes of ethics.
Example of bid splitting
A manager of a federal employer who split a repair job into several component contracts in order to divert the jobs to his brother-in law. Federal law required competitive bidding on projects over a certain dollar value. The smaller projects were below the mandatory bidding level. The brother-in law got the entire contract while avoiding competitive bidding
Specification scheme example
A supplier paid an employee of a public utility to write contract specifications that were so proprietary that they effectively eliminated all competition for the project. For 4 years, the supplier won the contract, which was the largest awarded by the utility company. The fraud cost the utility company more than $2 million.
Example of Economic Extortion
An employee demanded payment from suppliers and in return awarded those suppliers subcontracts on various projects. If suppliers refused to pay the employee, the subcontracts were awarded to rival suppliers or were held back until fraudster got his money
Example of overbilling scheme- Employees with approval authority
An employee with complete authority to approve vouchers from a certain vendor authorize payment on over 100 fraudulent invoices in which the vendor's rates were overstated. Over $300,000 worth of inflated billings were authorized in less than 2 years
Submission Phase
Competitive bids are confidential; they are also supposed to remain sealed until a specified date when all bids are opened and reviewed by the purchasing company. the person who has access to sealed bids are often the targets of unethical vendors who are seeking an advantage in the process
Overbilling Schemes without Employee authority
Employees lacking approval authority can still orchestrate kickback schemes by -circumvent purchasing controls -may prepare false vouchers to make it appear that the invoice is legitimate -may forge an approval signature or have access to a restricted password in a computerized system -in a less sophisticated scheme, corrupt employee might take a fraudulent invoice and slip it into a stack of prepared invoices before they are put into the accounts payable system. -in general, kickback schemes are very difficult to detect since the victim company is being attacked from two directions. Internally and externally
The Solicitation Phase
Fraudsters attempt to restrict the pool of competitors to choose. a corrupt vender pays the employee of the purchasing company to ensure that one or more of the vendor's competitors do not get to bid on the contract.
Detecting Bid-Rigging Schemes
Look for -unusual bidding patterns -low bids followed by change orders -a very large unexplained price difference among bidders -contractors who bid last and repeatedly receive the contract - a predictable rotation of bidders -losing bidders who become subcontractors -vendors with the same address and phone number -fewer bidders than expected for the project -projects that have been split into smaller ones
How do you distinguish between bribery and conflict of interest?
The motive! -if an employee approves payment on a fraudulent invoice submitted by a vendor in return for a kickback, this is bribery -but if the employee approves payment on invoices submitted by her own company (and if the ownership is undisclosed), this is a conflict of interest. Here, the employee is using his influence to benefit a company in which he has a hidden interest.
Bribery, illegal gratuities, and economic extortion cases are similar in that they all involve an illicit payment from one party to another, either to influence a decision or as a reward for decision already made
True
Pre-Solicitation Phase
at this stage, bids have not yet been officially sought, there are two types of schemes at this phase. 1. Need recognition schemes 2. Specifications schemes
Need recognition schemes
in the pre-solicitation phase -employee of the purchasing company is paid to convince his company that a particular project is necessary -has the specifications tailored to the strengths of a particular supplier -the result is that the victim company purchases unnecessary goods or services from a supplier at the direction of the corrupt employee
Commercial bribery
similar to the traditional definition of bribery except that something of value is offered to influence a business decision rather than an official act of government
Specifications schemes
the specifications of a contract are tailored to the strengths of a particular supplier -an employee of the buyer sets the specifications to a particular vendor's capabilities
Example of Economic Extortion 2
•A plant manager for a utility company started his own business on the side. Vendors who wanted to do work for the utility company were forced by the manager to divert some of their business to his own company. Those who did not "play ball" lost their business with the utility.
