1st day of class

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1st day of class

• Professor Kevan Jensen
• Fraud Examination
• Spring Semester, 2005

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Class Business

• Review Syllabus
• Introduce Self
• General Background
• Professional Background
• Educational Background
• Family
• My expectations for the class

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Case 1

• You are a new intern working for a major
  professional services firm. During your lunch
  break each day, you and a fellow intern, Owen,
  eat at a local sandwich shop. One day Owens
  girlfriend, Sarah, joins you for lunch. When the
  bill arrives, Owen pays with the company credit
  card and writes the meal off as a business
  expense. Owen and Sarah continue to be treated
  to lunch for several days. You know that Owen is
  well aware that a recent memo from management
  stated that casual lunches are not valid business
  expenses. When you ask Owen about the charges, he
  says, Hey, were interns. Those memos dont
  apply to us. We can expense anything we want.

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Case 2

• Jason was the star football player on the college
  team. During the off season (?) Jason was working
  as a cashier at a local clothing store. One of
  the perks of Jasons position was a 20 discount
  for he and his immediate family on the purchase
  of any non-sale items. Jasons family did not
  live in town and was seldom able to take
  advantage of the discount. However, Jason had
  many friends (he was NFL bound, what would you
  expect). Often, they would shop at the store and
  Jason would give them the discount at the
  register, even though this was technically a
  violation of the discount privilege. He felt that
  it was OK because if his family lived nearby,
  they would have been taking the discounts anyway.

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Case 3

• Kendra was the general manager of one of the
  fifteen warehouses owned by a large wholesaler of
  plumbing supplies in the western US. She had
  worked for this company for many years even
  though she always felt that the company was
  underpaying her. One day, Kendra realized that
  she could make things more fair by popping an
  occasional case of small inventory parts in her
  car at the end of the day, taking it home and
  selling it directly to Jumao, a plumbing
  subcontractor near her home. While the amounts
  involved were not material to her employer, the
  extra dollars sure came in handy. Kendra still
  considered herself a good employee.

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Case 4

• The town had been growing rapidly and its only
  high school was overcrowded. This problem was
  well-known in the community and with the
  prospects of a new school being built, many
  contractors dropped by to get to know the
  superintendent and school board members. Jerod,
  owner of Jerods Construction, secretly gave
  several thousand dollars to a member, Lauren, to
  assist in the bidding process. On the last day
  of the bidding process, Lauren called Jerod and
  told him what the lowest bid was. She didnt
  think it really mattered who got the contract.
  Jerod then won the contract by bidding slightly
  lower than that bid. In order to turn a profit,
  Jerod then used substandard materials in building
  the new school.

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Case 5

• Katie was the controller of one of the divisions
  of a large publicly traded company. Katie noticed
  that her normal bonus for the year was going to
  be lower than normal because sales were down for
  the quarter. Unfortunately, Katie had already
  spent the bonus money. Since she was the
  controller, she just told the accountants to keep
  the books open for a few days after the end of
  the quarter to capture additional sales from the
  next quarter. She felt like she could do this and
  then be more frugal in her personal life during
  the next few months to make up for the lower
  bonus that would result next quarter.

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Case 6

• Reema was a very clever purchasing manager, but
  she was very bitter that she had been passed over
  for promotion several times. Once she realized
  that she was the person responsible for
  controlling the master vendor list, she placed
  several fictitious vendors on the list. After a
  few days, she began to submit phony invoices from
  these phony vendors for various consulting
  services. Accounts payable sent the payments to
  Reema (of course they didnt know it was her)
  after checking the master vendor list. Reema was
  particularly clever because she realized that if
  her phony vendors provided inventory instead of
  services, it would lead to shortages in the
  inventory records, which might lead to her being
  caught. The invoice amounts totaled the
  difference between her current salary and what it
  would have been with the promotions.

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Case 7

• Bree waited tables at a local restaurant. What
  she made at the restaurant was not enough to pay
  for her drug habit. Once she became savvy with
  the cash register, she began to skim a little
  off the top for herself. The way she would do
  this is when a customer paid in cash, she would
  sometimes ring up no sale on the register and
  then slip the cash into her apron. Bree realized
  that when she did this, the cash in the drawer
  would always match the register tape, and no one
  would ever know. Bree didnt feel bad about what
  she was doing because the restaurant was upscale
  and charge really high prices for its food.

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Case 8

• The economy had entered a recession and it looked
  like the company was not going to meet earnings
  forecasts for the quarter. Chris (the CEO) and
  Chad (the CFO) were concerned about the hit
  their stock price would take if this occurred.
  They believed that things were going to improve
  during the next quarter and such a hit was
  unnecessary. Something needed to be done to
  protect them, the company, and the investors.
  Chad instructed Casi, the new accounting manager
  to review the maintenance expense records for the
  last three month and find some large expenses
  to capitalize as fixed assets. Casi did so and
  booked an adjustment that made earnings come out
  exactly as forecast. Although she was nervous
  about doing this, she shrugged it off, thinking
  that Chad must know what he was doing.

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Case 9

• Kevan and Eileen bought something that looked
  really cool on TV (The Magic Bullet mixer and
  juicer) from Homeland Housewares in Pacoima,
  California. When it arrived, it did not work at
  all as shown on TV. Although they advertised that
  refunds were available, they refused to give us a
  refund, even when I said I would use them as an
  example of consumer fraud in my fraud class.
  Although consumer fraud is not a focus of this
  course, I thought it was important that you make
  note of this company and product and share it
  with as many people as possible, including your
  family and friends.

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What is Fraud?
All multifarious means which human ingenuity
can devise and which are are resorted to by an
individual to get an advantage over another by
false suggestion or suppression of the truth,
and includes all surprise, trick, cunning, or
disassembling, and any unfair way by which
another is cheated. -Webster
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What is Fraud?

• A deception that includes 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 victims
  damage
• -Albrecht

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A. Employee Fraud

• Sometimes called occupational fraud,
  embezzlement, fraud against an organization
• Includes Asset Misappropriation and Corruption

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Asset Misappropriation 1

• Skimming (taking assets before they are recorded)
• Larceny (taking assets after they are on the
  books)
• Disbursement schemes (include billing, payroll,
  reimbursement, check tampering, register
  disbursement schemes)

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Asset Misappropriation 2

• Assets are generally categorized as
• - Cash
• - Other Assets
• Includes either taking or using assets

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Corruption

• Conflicts of Interest (purchase, sales schemes)
• Bribery (kickback, bid-rigging schemes)
• Illegal Gratuities
• Extortion

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B. Management Fraud

• Sometimes called financial statement fraud or
  fraud on behalf of an organization
• May involve overstatement or understatement

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Recent Management Frauds

• Enron
• WorldCom
• Adelphia
• Global Crossing
• Xerox
• Qwest
• HomeStore
• Sunbeam
• Many others (Cendant, Lincoln Savings, ESM,
  Anicom, Waste Management, Tyco, etc.)

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Since things were fixed

• US Foodservice
• Nortel
• Fannie Mae
• Krispy Kreme
• Others

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Other types of Fraud

• Vendor Fraud
• Customer Fraud
• Investment Scams
• Consumer Fraud
• Tax Fraud
• Bankruptcy and Divorce Fraud
• Identity Theft

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These Are Interesting Times

• Number and size of management frauds seems to
  have surged recently
• Number and size of employee frauds also appear to
  be increasing
• Some recent frauds involve multiple
  individualsas many as 20 or 30 (indicates moral
  decay)
• Because investors lost confidence in the
  credibility of financial statements and corporate
  reports, we now have SarBANEs-Oxley.

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Fraud Statistics

• Organizations Lose Between 1 and 6 of Revenues
  to Fraud
• Insurance Fraud in 1999 was 120 Billion
• General Motors had 436 Million Fraud
• Large Bank in 1996
• 6200 Customer Frauds
• 2100 Employee Frauds

• Dishonesty Is Increasing
• 12 in 1961
• 31 in 1986
• ?? In 2000
• Retail Losses
• 30 Customers
• 70 Employees
• 9 Per Employee Per Day

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Why Dishonesty Is Increasing!

• Bad Modeling/Lack of Good Modeling
• Makes Up The News
• Focus of TV/Movies
• Dishonest Leaders
• Good Models Are Rare

• Lack of Positive Labeling
• Home.Average Family Spends 10 hours less time
  together a week
• Vocabulary of Kindergarten children
• Schools
• Churches

Modeling
Labeling
Honesty
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Ernst Young Fraud Study2002 (Europe)

• One in five workers are aware of fraud in their
  workplace
• 80 would be willing to turn in a colleague but
  only 43 have
• Employers lost 20 cents on every dollar to
  workplace fraud
• Types of fraud
• Theft of office items37
• Claiming extra hours worked16
• Inflating expenses accounts7
• Taking kickbacks from suppliers6

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Expense Report Cheating
Cheating on an expense report 58 Working
second job on company time 50 Rushing deals
through accounting before closed 36 Listing
Strip bar as a restaurant on expense 33 Giving
a kickback to a customer 19 USA Today
2/15/01
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The typical U.S. organization loses 6 of its
annual revenue to fraud660 billion!
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Why Fraud is a Costly Business Problem that must
be addressed by corporate executives

• Fraud Losses Reduce Net Income for
• If Profit Margin is 10, Revenues Must Increase
  by 10 times the losses to Recover the Affect on
  Net Income
• Losses.100 Million
• Revenue..1 Billion

• Fraud Robs Income

Revenues 100 100 Expenses 90 90 Net
Income 10 10 Fraud 1 Remaining
9 To restore income to 10, need 10
more dollars of revenue to generate 1 more
dollar of income.
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Fraud Cost.Two Examples

• General Motors
• 436 Million Fraud
• Profit Margin 10
• 4.36 Billion in Revenues Needed
• At 20,000 per Car, 218,000 Cars

• Bank
• 100 Million Fraud
• Profit Margin 10
• 1 Billion in Revenues Needed
• At 100 per year per Checking Account, 10
  Million New Accounts

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Financial Statement Fraud

• Financial statement fraud causes a decrease in
  the market value of a stock of approximately 500
  to 1,000 times the amount of the fraud.

2 billion drop in stock value
7 million fraud
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Where does fraud occur?

• Type Median Loss
• Private company 42 123,000
• Public company 30 100,000
• Government 16 38,000
• Non-profit 12 100,000

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Where does fraud occur?

• No of employees Median Loss
• 1-99 46 98,000
• 100-999 21 79,000
• 1000-9,999 20 88,000
• 10,000 13 106,000

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Where does fraud occur?

• Industry of cases Median Loss
• Manufacturing 13 125,000
• Banking 11 101,000
• Service 11 139,000
• Government 11 45,000
• Other 9 145,000
• Insurance 9 173,000
• Retail 8 36,000
• Health Care 7 105,000

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Where does fraud occur?

• Industry of cases Median Loss
• Education 6 31,000
• Construction 3 145,000
• Transportation 3 225,000
• Oil Gas 3 102,000
• Communication 3 150,000
• Utility 3 30,000
• Real Estate 2 385,000
• Agriculture 1 1,080,000

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Fraud InternationallyTransparency Intl

• 1. Finland
• 2. Denmark
• 3. New Zealand
• 4. Iceland
• 5.Singapore
• 5. Sweden
• 7. Canada
• 7. Luxembourg
• 7. Netherlands
• 10. United Kingdom

• 11. Australia
• 16. United States
• 18. Germany
• 20. Japan
• 31. Italy
• 59. China
• 71. Russia
• 96. Indonesia
• 101. Nigeria
• 102. Bangladesh

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What do these frauds look like?

• 10,000-100,000 36
• 100,000-1,000,000 36
• 1,000,000 15

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What do these frauds look like?

• Asset Misappropriation 93 93,000
• Corruption 30 250,000
• Financial Statement 8 1,000,000

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Who is doing itgender?

• Males 53 160,000
• Females 47 60,000

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Who is doing itage?

• 31-40 34 80,000
• 41-50 32 173,000
• 51-60 15 250,000
• 60 2 527,000

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Who is doing iteducation?

• Graduate 9 325,000
• Bachelor 42 150,000
• High School 49 50,000

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Who is doing itmarital status?

• Married 72 150,000
• Separated 9 50,000
• Divorced 8 80,000
• Single 11 54,000

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Who is doing itposition?

• Employee 68 62,000
• Manager 34 140,000
• Owner/Executive 12 900,000

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Who is doing ithistory?

• Prior convictions 12
• Charged never convicted 5
• Never previously charged 83

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Who are the victims?

• Owners
• Managers
• Investors
• Employees
• Families
• Customers
• Clients
• There are always victims!!!!!!!!!

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Who Are The Fraud Perpetrators?

• Employees
• Managers
• Colleagues
• Friends
• Suppliers/Customers
• Contractors
• Neighbors
• Bishops/Ministers

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Who Commits Fraud?
Bank Robbers
Normal Citizens
Fraud Perpetrators

Sample
Sample
Sample
Major Differences
No Significant Differences
While people who commit rape, murder, bank
robbery and other property offenses have
distinguishing characteristics, fraud
perpetrators look more like more citizens than
criminals!
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Who Commits Fraud--Psychological Characteristics

• Optimistic
• High Self-Esteem
• Achieving
• Family Harmony
• Socially Conforming
• Self Control
• Kind
• Sympathetic

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Who Commits Fraud -Demographics

• Married
• Active Church Members
• Children
• Good Education
• First-Time Offenders
• Good Employees
• Dont Abuse Alcohol

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Conclusion

• Fraud perpetrators look exactly like you and me!

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And thats why you need this class!
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Career Opportunities

• Government
• FBI, IRS (CID), GAO, Postal Inspectors, State
  Agencies, Treasury, etc.
• Forensic Accounting
• Big 4
• Smaller firms
• Boutiques
• Corporations (internal audit, security, in-house
  legal)

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Career Opportunities

• Law firms (prosecuting and defending fraud)
• Consultants (prevention, detection, etc.)
• Expert witnessing
• And dont forget those of you who own your own
  businesses

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Whats Hot in Accounting--7 Sizzling Areas

• Assurance services--Elder care
• Consulting services
• Information technology services
• Forensic accounting
• Environmental accounting
• International accounting
• Tax and financial planning

This information comes from the American
Institute of CPAs
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Wanted More Schools for Security Pros

• The U.S. alone will face a shortfall of between
  50,000 and 75,000 security professionals in the
  next few years.
• Al Decker, CEO of Fiderus, Information Security
  Consultants