fraud

What aroused Ben and Julia's suspicions? What type of audit test indicated that inventory was probably understated?

"I don't know why the price increased so much last year, but it's probably temporary.

What are the legal criteria that must be met to prove fraud has occurred?

- 4 elements ( must have all 4 or case will not hold up in court) 1. Material false statement 2. Knowledge that the statement was false 3. Reliance on false statement by victim 4. Damages from reliance on false statement

What privileges must an employee have to expose an organization to check

- Access to checks and bank statements - Ability to forge signatures - Access to a check signing machine

Where can cash larceny occur?

- Anywhere cash is involved

What are the four categories of corruption and how are they different? How are they trying to accomplish the same thing?

- Bribery (kickbacks), economic extortion, illegal gratuities, conflicts of interest( put our interests in front of the company's)

List false entries a fraudster can make to conceal receivables skimming. Are any "better" than the others to avoid detection?

- Cash A/R - discount, bad debt - Segregation of duties - custody , authorization, record keeping

What is receivables skimming? Why is this more rarely used?

- Cash 1000 A/R - paul 1000 Fred Cash 1000

Define "abuse" and list some examples? Do you agree with the text's list of items that constitute abuse?

- Deceitful act or corrupt practice or custom( treated with less severity) • Use equipment that belongs to the company • Surf the internet at work • Take a long break without approval • Come to work late or leave early • Use sick leave when not sick • Work under the influence of drugs or alcohol

How can the fraudster get fraudulent invoices approved?

- Employee that created the company has authority to approve payment, supervisor who "rubber- stamps" purchases ( stamps without looking at them), employee prepares/ attaches bogus supporting documentation,

What are some red flags that check tampering might be occurring?

- Excessive number of voided checks, especially if they are not on file - Missing checks/ duplicate checks ( same check number) - Non- payroll checks payable to employees - Altered or dual endorsements - Altered payee

What is the difference between a fictitious refund scheme and an overstated refund scheme?

- Fictitious refund - keep money for yourself but place product back in inventory - overstated refund: overstate the amount of legitimate refund and steal the excess money

What is check tampering?

- Form of fraudulent disbursement - Employee can physically prepare a check and make it payable to them self - Direct fraud - Can convert a check intended for someone else to their own use

What are the three main categories of payroll fraud?

- Ghost employees - fictitious person, often added without payroll deductions - Falsified hours and salary, incorrect paygrade - Commission schemes

What are the four elements of bribery?

- Giving or receiving, a thing of value, to influence, an official act or decision

How are shell companies formed and how are they used to defraud an organization? What type of "sale" is most often "made?"

- Going to court house and creating a company ( let them know you are DBA doing business as this fictitious company) , create a bank account, mailing location - Invoice for services

Define cash larceny.

- Intentionally taking of employers cash without their consent - Often just 1 person - Creates an out of balance condition - Easier to detect - Referred to as an "on-book" fraud

How can cash larceny be detected?

- Investigate shortages, even small amounts - Petty cash accounts - Look for missing or altered records, sales, receipts - 2 people verify deposits - Bank bags - control

What are the two classifications of bribery schemes? How are these used? How can they be mitigated?

- Kickback- undisclosed payment to the employee for the purpose of receiving a competitive advantage (included in price, inflate the price), Difficult to detect, employee has to have some type of authority to make purchase decision - Bid rigging- pre-solicitation (try to get the bid specifications so they favor us) solicitation- bid splitting, solicit bids from fake companies, submission( allow other people to see bids) Red flags- last bid slightly lower, few bidders, narrow contract requirements

What are the most common ways to conceal skimming?

- Lapping - Inventory padding

What are register disbursement schemes?

- Legitimate discharge of cash from a register ( void, refund)

How are these frauds concealed? What accounts are affected?

- Multiple transactions below a certain level / cutoff - Ex: voids over 25$ must be approved so they do several for 20$ - Destroy records - relaxed policies /controls

EDI or electronic payment may reduce the risk of check tampering. Do you agree? Why, or why not? What are the additional risks created by electronic transactions?

- No because people can still make fictitious accounts to pay out of - Could increase speed of transaction

How is cash larceny concealed?

- No best way to conceal because the transaction would be recorded - Steal small amounts

Explain what constitutes expense reimbursement fraud and be prepared to discuss four categories discussed in the text and how these are perpetrated. What are some controls that would be used to mitigate these types of fraud?

- Non business expenses - Overstate expenses - Duplicate expenses Controls- require original receipts, explanation why money was spent/business purpose, prior approval of amount/dates, comparison to other peoples expenses, letting people know there are controls in place

What are some additional "red flags" in the billing and disbursement area, not discussed previously, that should arouse suspicion that fraudulent activity might be occurring?

- Paying invoices quickly - High level approval of a low level transaction

In the "Spectrum Game" what types of strategies are companies using to gain a competitive advantage?

- Saying that they will use a portion of it for emergency services

How can businesses prevent and detect skimming? (see ""And one for me..."" for some ideas)?

- Segregate duties

What are some countermeasures that might assist in reducing losses from inventory larceny?

- Segregation of duties - Restrict access to certain inventory areas - Video cameras/ access logs - Access codes

What types of billing schemes are discussed in the following articles?

- Shell companies, pass throughs, pay and return invoicing, personal purchases

Be prepared to discuss what skimming is and how fraudsters can perpetrate this crime.

- Skimming is the theft of cash from a victim entity prior to its entry into the accounting system - Off book fraud - No audit trail - Books are in balance - Most common type of fraud

Detail the controls that make shell company and pass-through schemes harder to implement?

- Up-to- date approved vendor list ( should be hard to get approval for random vendor) - Process to approve vendor - Ensure legitimacy - Run credit check - Check web page - Compare prices based on industry trends

What are some red flags (signs that something is "not right") in relation to shell company schemes?

- Vendors address is a P.O Box - Employees address - Invoices appear contrived- round amounts, just below approval levels (Bill signs checks > 10000) - Unfamiliar vendors - who approves vendors? - Rapidly increasing purchases from one vendor - Vendor billing more than once a month

What control processes make this scheme more difficult?

- Video cameras - Training separate login codes

What are the main weaknesses in an internal control system that permit fraudsters the opportunity to commit cash larceny schemes?

- Weakness in controls over the cash process/ lack of segregation Cash receipts => deposit slip = bank - deposit slip - bank reconciliation

How does the ability to collude with another employee or outside vendor help?

- collusion within the organization ( purchasing -> cash disbursement -> Accounting)

What is the difference between criminal and civil fraud?

Civil- preponderance of the evidence Criminal- beyond a reasonable doubt that the person committed a crime

What is the effect of non-cash misappropriation on the financial statements?

-Directly impacts profitability because it decreases assets and eventually decreases stockholders equity

How does the costs incurred from Fraud and abuse in an organization differ from other "normal" costs (e.g., wages, taxes, rent..._)?

-Hidden, organization does not know about it

If you were planning review procedures to detect non cash misappropriation, just from using the financial statements, how would you proceed?

-Look at the relationships between sales, cogs, inventory, they should all go up or down by the same

How do perp's skim off-site sales?

-Off site sale - not at main location -Insurance scam - people selling insurance at homes -Remote sales person unsupervised making a sale

If we suspected skimming at the cash register, what should we examine?

-Place video cameras near registers or increase management time spent near registers

How is the cash register manipulated to conceal skimming?

-Under-ringing the sale and taking the difference in price

What are understated sales and unrecorded sales schemes?

-Understated = The transaction is posted to the books, but for a lower amount than the perpetrator collected from the customer. ( under- rings a sales total) -Unrecorded = off book sales ( much easier than others) -Theft of checks through mail -Short term skimming = lapping

How do "understated sales" schemes differ from "unrecorded sales?"

-Understated is a portion of the sale where unrecorded is the entire sale

What are some additional skimming techniques?

-Understated sales -Theft in the mailroom -Converting stolen checks (difficult)

What are some characteristics of Occupational Fraud and Abuse (OFA)?

1) Activity is clandestine/secret 2) Violates employers fiduciary duties to the organization 3) Committed for the purpose of direct or indirect financial benefit to the employee 4) Costs the employing organization assets, revenues, or reserves

What are the three broad types of activities from the Kranacher et al. text and the Report to the Nation on Occupational Fraud and Abuse that are used to define occupational fraud?

1. Financial statement fraud 2. Occupational 3. Asset misappropriation

What are the five principal methods used to commit check tampering? (look at check tampering word document)

1. Forged maker schemes 2. Forged endorsement schemes 3. Alterer payee schemes 4. Concealed check schemes 5. Authorized make schemes

2 ways to misappropriate (steal) an asset

1. Larceny 2. Misuse/abuse

What are the three basic steps to the fraud process?

1. Perpetrate the fraudulent act 2. Conversion 3. concealment

Through what process is the ghost employee actually paid?

1st - hours worked must be documented (timesheet/ card for hourly, salaried- pay set amount)

How is check tampering concealed?

A. The fraudster reconciling the bank statement B. Re-alteration of checks C. Falsifying the disbursements journal D. Coding the fraudulent checks E. Re-issuing intercepted checks F. Bogus supporting documents

Be prepared to discuss bribery prevention controls.

Don't take late bids, segregation of duties, put policies in place to prevent employees from bribery

Be prepared to discuss each of the following individuals major contributions to research on fraud and abuse:

Edwin H. Sutherland p62 - Given credit for the term "white collar crime" - Criminal acts of corporations - Individuals in corporate capacity - Theory of differential association - Crime is learned "nurture" not born criminals (learned from personal group peers) Donald R. Cressey p62 - The fraud triangle Richard C. Hollinger - Study in 1983 ( Hollinger- Clark) , asked questions about job satisfaction to 10,000 employees - Found out that theft Is driven by job dissatisfaction ( poor conditions, long hours, low wages) - The true cost was vastly understated ( a lot more fraud happening than realized) - Pay attention to young employees ( less likely to feel ownership/ apart of corporation so more likely to commit fraud) Albrecht p69

What are the two basic fraudulent disbursement schemes?

False refunds and false voids

How do organizations often treat fraud and abuse differently when punishment is needed?

Fraud = fire people Abuse = typically do not fire, just adjust wages or discuss matter with the individual

Be prepared to discuss the threat from personal purchases with company resources and countermeasures to discourage. - purchases seem legitimate

Hard to pull off because its hard to get approval to cash personal check

Define larceny, embezzlement, conversion.

Larceny - unlawful taking and carrying away of the property belonging to another with the intent to convert it to one's own use - 4 elements 1. Taking or carrying away 2. of money or property of another 3. without the consent of owner 4. With intent to deprive the owner of its possession or use Embezzlement- to willfully take or convert to one's own use another's money or property which the perpetrator acquired possession lawfully by reason of some office or employment or position of trust Conversion- the unauthorized assumption of a right of ownership over the goods of another to the exclusion of the owner's rights (take the asset and use it to the exclusion of the owner)

What are some characteristics of corrupt vendors?

Overly friendly, offering employees gifts

What is the difference between cash larceny and skimming? Which is more difficult to detect and why?

Skimming was defined as the theft of off-book funds. cash larceny involve the theft of money that has already appeared on a victim company's books - Skimming is more difficult because a record is never kept

How were Stanley and Phoebe finally detected?

Stanley's girlfriend tipped authorities off

What does it mean to breach one's fiduciary duty?

The person failed to use ordinary or reasonable care in the exercise of that duty

How do fraudsters gain access to check stock (blank unused company checks)?

They are typically the person with access to checks, find it in the trash

How do they differ from skimming and larceny, that also often require taking money from a register?

When money is take from the cash register, the removal of money is recorded on the register tape

Purchasing and receiving schemes

When purchasing and receiving (high risk area) segregate responsibilities ( mark shipment as being short or damaged goods)

Can offering a payment constitute a bribe, even if the illegal payment is never actually made? Why/why not?

Yes because the intent was to get them to do something

How can this missing inventory, "shrinkage" be hidden?

alter inventory records, force reconciliation/ count of inventory , AJE to inventory, fictitious sales : A/R, Write off A/R as bad debts. Scrap inventory and write off as obsolete, physical patching

What is a ghost employee?

fictitious person, often added without payroll deductions

Be prepared to discuss the others ways that payroll frauds are perpetrated, falsified hours and salary and commission schemes.

fill out timesheet in pencil, have another person clock you in/out, overstate rate of pay/ hourly - salary, overstate performance in commission schemes, increase sales to people with poor credit, claim sales made by other employees, pay based on sales not commission

What are some characteristics of corrupt employees? Talking points: "Greed is good", setting unrealistic expectations.

financial stress, living outside their means, always buying new things, make excuses for contractor

What steps might an organization take to protect outgoing bank deposits from cash larceny schemes?

have controls in place where the cash receipts = deposit slip = what gets in the bank

False shipments of inventory and other assets

inventory is sold but shipped to the wrong place on purpose

What controls can reduce fraud risk and/or increase detection?

limit access to checks, if you have access to checks you should never have access to the reconciliation, keep things locked up

What controls and/or tests would prevent and/or uncover payroll fraud schemes? Think about computer aided tests that might be particularly effective here

payroll preparation, disbursement, distribution, back reconciliation, who approves employees, make sure terminated employees get off payroll, check addresses to make sure there are not duplicate unless spouses, hand deliver checks to check for ghosts

Asset requisitions and transfers

request excess materials for job or project, take or steal excess amounts

What is a pass-through scheme and how does it differ from a Shell company scheme?

shell company buys product, then sells to employer at inflated rates and keeps excess ( insurance adjuster sends1500 invoice to CCS, Buffett insurance inflates it to 15000 before employer sees it, employer pays 15000, ccs keeps 13500)

Within a given organization, who is the individual most likely to add ghost employees to the payroll system?

someone with hiring authority, someone with access to payroll/records , decentralized location locations where work is done, leave a former employee in the system

Unconcealed larceny

stealing without attempt to cover it up, theft of inventory due to access

Misuse

using work materials for personal use