The Department of Accounting

1
The Department of Accounting Information
Systems at North Dakota State University
presents

• ACCT 410/610 Fraud Examination
• Class 1 August 28, 2002
• A course developed taught by
• Thomas Buckhoff, Ph.D., CFE, CPA
• EideBailly Professor of Forensic Accounting

2
Sherlock Holmes, meet Enron

• Not since Gangster Al Capone was nabbed for tax
  evasion have forensic accountants been so
  squarely in the public eye. The bloodhounds of
  bookkeeping sniff out fraud and criminal
  transactions in corporate financial records.
• Source U.S. News World Report (February 18,
  2002)

3
Agenda for Today

• Definitions
• Case Study
• Preview Syllabus
• Prevalence of fraud
• Differentiate between
• Financial auditing
• Fraud auditing
• Fraud examination
• Types of financial crimes
• Exercise 1

4
What is forensic accounting?

• The application of accounting principles,
  theories, and discipline to facts or hypotheses
  at issue in a legal dispute and encompasses every
  branch of accounting knowledge.
• Source AICPA

5
Occupational Fraud and Abuse (hereafter referred
to as fraud)

• The use of ones occupation for personal
  enrichment through the deliberate misuse or
  misapplication of the employing organizations
  resources or assets.

6
Case study BHS

• Fraud perpetrator
• Bookkeeper for small health care facility
• Fraud methodology
• Theft of checks
• Fraud facilitator
• Inadequate controls
• Fraud loss 320,000

7
(No Transcript)
8
What is fraud examination?

• Fraud examination encompasses
• Fraud detection
• Fraud investigation
• Fraud prevention
• Skills required of forensic accountants
• Financial expertise
• Fraud knowledge
• Knowledge of legal system
• Ability to work with people

9
The Corporate Cop

• In 1986 Donald Cressey suggested to Joe Wells
  that the world needed a new kind of cop which
  combined criminal justice expertise with
  accounting expertise. Such was the genesis of
  the Association of Certified Fraud Examiners.

10
Preview of Course

• Course Syllabus
• Read Course Policies
• Review Course Calendar
• IVN Considerations
• Before speaking, identify yourself and location.
• Keep microphones clear.
• www.ndsu.nodak.edu/ndsu/
• buckhoff/courses/ACCT410610

11
Prevalence of Fraud
12
The Cheater Principle

• Businesses across the country are reporting an
  upturn in old-fashioned cheating Bypassing toll
  booths, sneaking onto golf courses, stiffing
  restaurants, and driving away from the pump
  without paying.
• Source Wall Street Journal

13
ACFE Fraud Survey (2002)

• 600 billion lost to fraud annually
• Median losses by type of scheme
• Asset misappropriations 80,000
• Corruption 530,000
• Fraudulent statements 4,250,000
• Small businesses are the most vulnerable to
  fraud
• 11.5 of schemes detected during
  external audits

14
KPMG Fraud Survey (1998)

• Why did most of the frauds occur?
• Poor or non-existing internal controls
• 62 of respondents reported that they had
  suffered losses due to fraud during the past
  year.
• Median loss per incident 116,000.
• Only 4 of frauds were discovered during
  financial statement audits.

15
Average Fraud Losses by Type of Scheme
16
Why Dont Auditors Detect Fraud?

• Asset-Theft Fraud
• Financial statements are fairly presented
• Financial Statement Fraud
• Financial statements are not fairly presented
• Auditors focus on outcomes of transactions rather
  than the reasons underlying them.

17
Fraud Research Conclusions

• Fraud is a serious problem.
• Smaller organizations are most vulnerable to
  fraud.
• Few frauds are discovered during audits.
• Rate of fraud will likely rise.

18
Criminal of the Day Video

• The Utah State Auditors couldnt figure out how
  sales tax money was escaping from a locked box.
  So they installed a surveillance camera.

19
The Legal Elements of Common Financial Crimes

• Prosecuting financial crimes requires an
  understanding of the legal elements of common
  financial crimes.

20
Financial Crimes

• Fraud Falsely representing a fact to get
  another person to surrender something of value.
• Tax evasion Fraud committed in conjunction with
  failure to file or pay taxes.

21
Financial Crimes

• Bribery Something of value is used to influence
  the action of others.
• Embezzlement Conversion of an organizations
  assets/funds for personal use.

22
Financial Crimes

• Larceny Person wrongfully takes anothers money
  or property with the intent of stealing.
• Forgery Person passes a false or worthless
  instrument with the intent to defraud the
  recipient.

23
Financial Crimes

• Extortion Person illegally obtains property
  from another by threat or force.
• Kickback Person who sells an item pays back a
  portion of purchase price to the buyer.

24
Financial Crimes

• Racketeering Running an illegal business for
  personal profit (e.g. drug trafficking).
• Money Laundering Transfer of money from illegal
  sources into legitimate channels.

25
Exercise 1 Statute Contruction on p. 1.8 of the
Student Workbook

• Whoever, knowingly and with intent to defraud the
  United States, or any agency thereof, possesses
  any false, altered, forged, or counterfeited
  writing or document for the purpose of enabling
  another to obtain from the United States, or from
  any agency, officer, or agent thereof, any sum of
  money, shall be fined not more than 10,000 or
  imprisoned not more than five years, or both.
• List the elements of the above statute.

26
Statute Construction Exercise

• Elements of the fraud statute
• Intent to defraud
• Suspect knowingly used
• false documentation
• to get money

27
Summary

• Fraud is a growing problem.
• Forensic accounting is a specialization of
  accounting currently in high demand.
• Forensic accountants need to know and understand
  the types of financial crimes commonly committed
  in business today.

28
Fraudwise, LLC

• Specializing in fraud detection, investigation,
  and prevention consulting services
• Senior Investigators
• Thomas Buckhoff, Ph.D., CFE, CPA
• Thomas OHalloran, MBA, CFE, EA
• 2974 Southgate Drive
• Fargo, ND 58103-3524
• 701-231-8512
• www.fraud-wise.com