Fraud Examination Spring 2006 Dr Kevan Jensen

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Fraud ExaminationSpring 2006Dr Kevan Jensen
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Course objectives

• To develop a broad understanding of the different
  types of fraud, and to know how and why fraud
  occurs.
  
• To understand the fundamentals regarding fraud
  prevention and fraud detection
  
• To know how to conduct simple fraud
  investigations
  
• To know what is required of auditors regarding
  fraud.

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along the way

• Skill development
• Careers in fraud

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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, Chad,
  eat at a local sandwich shop. One day Chads
  friend, Tara, joins you for lunch. When the bill
  arrives, Chad pays with the company credit card
  and writes the meal off as a business expense.
  Chad and Tara continue to be treated to lunch
  for several days. You know that Chad is well
  aware that a recent memo from management stated
  that casual lunches are not valid business
  expenses. When you ask Chad 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

• Charles was the star football player on the
  college team. During the off season (?) Charles
  was working as a cashier at a local clothing
  store. One of the perks of Charles position was
  a 20 discount for he and his immediate family on
  the purchase of any non-sale items. Charles
  family did not live in town and was seldom able
  to take advantage of the discount. However,
  Charles had many friends (he was NFL bound, what
  would you expect). Often, they would shop at the
  store and Charles 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

• Kristen 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, Kristen 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 Zhenhua, a plumbing
  subcontractor near her home. While the amounts
  involved were not material to her employer, the
  extra dollars sure came in handy. Kristen still
  considered herself a good employee and an honest
  person.

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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. Joel,
  owner of Joels Construction, secretly gave
  several thousand dollars to a member, Robyn, to
  assist in the bidding process. On the last day
  of the bidding process, Robyn called Joel and
  told him what the lowest bid was. She didnt
  think it really mattered who got the contract.
  Joel then won the contract by bidding slightly
  lower than that bid. In order to turn a profit,
  Joel then used substandard materials in building
  the new school.

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Case 5

• Jillian was the controller of one of the
  divisions of a large publicly traded company.
  Jillian noticed that her normal bonus for the
  year was going to be lower than normal because
  sales were down for the quarter. Unfortunately,
  Jillian 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

• Eva 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 Eva (of
  course they didnt know it was her) after
  checking the master vendor list. Eva 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

• Kimberly 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. Kimberly
  realized that when she did this, the cash in the
  drawer would always match the register tape, and
  no one would ever know. Kimberly 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. Tim (the CEO) and
  Tyler (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.
  Tyler instructed Kelly, 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. Kelly 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 Tyler 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
  (err, Kevan and Eileen) 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 disass
embling, and any unfair way by which another is c
heated. -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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Different types of Fraud

• Employee Fraud (Embezzlement)
• Management Fraud (Financial Statement Fraud)
• Vendor Fraud
• Customer Fraud
• Consumer Fraud

• Investment Scams
• Tax Fraud
• Bankruptcy and Divorce Fraud
• Identity Theft
• Cheating/Plagiarism
• Other

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These Are Interesting Times

• Number and size of all types of fraud seems to be
  on the increasewhy?
  
• Some recent frauds involve multiple
  individualsas many as 20 or 30 (indicates moral
  decay)
  
• Congress has fixed the problem with
  Sarbanes-OxleyNot!

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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.)
  
• Note These are just the famous ones!

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Since things were fixed

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

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Fraud Statistics

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

• Dishonesty Is Increasing
• 12 in 1961
• 31 in 1986
• ?? In 2006
• 80 of college students have cheated
• Retail Losses
• 30 Customers
• 70 Employees

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More of the Same
Cheating on an expense report 58
Working second job on company time 50 Rushi
ng deals through accounting before closed 36
Listing Strip bar as a restaurant on expense 3
3 Giving a kickback to a customer 19 U
SA 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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What does this mean for me?

• I need to understand fraud or I will get caught
  up in it.
  
• My focus as external auditor shifting to finding
  fraud.
  
• I have donkeys new fraud-related career options.
• Maybe this class can help me out

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End of Day 1Have a nice weekend!