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Day 5:

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Day 5: Fraud Detection. Fraud Detection vs Fraud Investigating. Detection. Discovery of Fraud. Answers the Question: Is it likely that a fraud exists? Provides ... – PowerPoint PPT presentation

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Title: Day 5:


1
Day 5
  • Fraud Detection

2
Fraud Detection vs Fraud Investigating
  • Detection
  • Discovery of Fraud
  • Answers the Question
  • Is it likely that a fraud exists?
  • Provides predication
  • Investigation
  • Preceded by Detection
  • Proving a Fraud
  • Answers the Questions
  • How? Who? Why? What? Where? When a fraud took
    place?
  • Follows up on predication

3
How is fraud detected?
  • Overall Small
  • Tip 39.6 38.6
  • Internal audit 23.8 18.5
  • Accident 21.3 24.3
  • Internal controls 18.4 14.8
  • External audit 10.9 16.9
  • Law enforcement 0.9 0.5

4
How is fraud detected?
  • Public Private Govt NFP
  • Tip 42.4 29.8 48.5 48.1
  • Internal audit 28.8 18.7 32.4
    11.5
  • Accident 9.8 33.9 14.7
    25.0
  • Internal controls 30.3 14.6
    11.8 15.4
  • External audit 6.1 14.0 5.9
    13.5
  • Law enforcement 0.8 0.6
    1.5 1.9

5
  • Most fraud goes undetected!

6
Who should be detecting fraud?
  • Internal auditors
  • External auditors
  • Fraud examiners
  • Management
  • Employees

7
The Five Step Approach to Fraud Detection
  • 1. Know the risks
  • 2. Know the symptoms
  • 3. Be alert for symptoms
  • 4. Build audit programs to look for symptoms
  • 5. Follow through on all symptoms observed
  • red flags

8
Ways to Detect Fraud
  • Re-Active Approach
  • Luck--just stumbling upon the fraud
  • Observation follow up on symptoms
  • Internal control weaknesses
  • Symptoms in the accounting records
  • Analytical symptoms
  • Lifestyle symptoms
  • Behavioral symptoms
  • Tips/complaints

9
Ways to Detect Fraud
  • Pro-Active Approach
  • Inductive methods
  • Go on safari!
  • Includes data mining
  • Deductive methods
  • Figure out logically first
  • Includes SAS 99

10
The key is being able to identify symptoms!
11
Symptoms of Fraud Against Organizations
  • Weak internal controls
  • Accounting anomalies
  • Analytical anomalies
  • Lifestyle anomalies
  • Behavioral clues
  • Tips and complaints

12
Weak Internal Controls
13
We know this stuff!
  • Lack of segregation of duties
  • Lack of physical safeguards
  • Lack of independent checks
  • Lack of proper authorization
  • Lack of proper documents and records
  • Overriding of existing contents
  • Inadequate accounting system
  • And so forth

14
Accounting Anomalies
15
1. Document Irregularities
  • Unusual appearance
  • Photocopies
  • Sequence problems
  • Altered documents
  • Multiple endorsements
  • Missing documents
  • Common names or addresses
  • Funny signatures
  • No storefront or no phone number

16
2. Irregular journal entries
  • No supporting documents
  • End of period
  • Beginning of period
  • Out of balance
  • Backwards entries
  • Credits to expense
  • Debits to revenue
  • Incompatible accounts

17
  • Peculiar entries
  • Credit to A/P, debit not expense
  • Debit to A/P, credit is not cash
  • Credit to A/R, debit not cash
  • Debit to A/R, credit not revenue

18
3. Unbalanced ledgers
  • Assets are gone, no concealment
  • Count is different that ledgers
  • Inventory
  • Cash
  • Supplies
  • Fixed assets
  • Assets are gone, concealment not yet done
  • Sub-ledgers ? General ledger
  • Suspense accounts

19
Analytical Anomalies
20
What are these?
  • Event or relationship that looks strange or
    unexpected
  • Remember analytical procedures
  • Have expectation
  • Compare actual to expectation
  • Since anomalies can occur anywhere, you have to
    know a lot about everything

21
They are
Too...
Odd...
  • Times
  • Places
  • People
  • Procedures
  • Policies
  • Practices
  • Large
  • Small
  • Often
  • Rare
  • High
  • Low
  • Much
  • Little

22
Does It Make Sense?
  • Cadillac Cars Repaired by Oldsmobile Dealer
  • Body Damage but no Claim
  • Expenditures Every Month
  • Same Amount Each Month

23
BE ALERT FOR UNUSUAL RELATIONSHIPS, EVENTS,
RECORDS, OR CIRCUMSTANCES.
Why hasnt Cash increased when Net Income has
increased?
This Year
Net Income
Cash
Last Year
Last Year
This Year
24
Examples
  • Change in account balance
  • Change in account balance, no change in related
    account
  • Rapid increases/decreases
  • Changes in ratios
  • Increases in old receivables
  • Increases in scrap/shrink
  • Revenue up, inventory not up

25
  • Revenue up, cash flow not up
  • Revenue up, A/R not up
  • Expenses down, fixed assets up
  • Poor economy, reserves up
  • Good economy, reserves down
  • Extreme (impossible) inventory levels
  • Performance inconsistent with industry

26
  • Shifting purchases to vendor with high prices
  • Shifting purchases to vendor with high scrap
    levels
  • Increases in credit memos after years end
  • Most credit memos issued by same person
  • Recurring reconciling items
  • Suspense accounts

27
  • Multiple employees with same name, address or SSN
  • Multiple vendors with same name, address, or
    phone number
  • Employees with same name or address as vendors
  • Duplicate reimbursement requests
  • Credit card purchases late at night or on weekends

28
  • Credit card purchases for inappropriate items
  • Patterns of purchases or expenses
  • Round numbers
  • Pattern of bid timing and bid winner
  • Large number of transactions just below an
    approval threshhold
  • Incorrect digit frequency (Benfords Law)

29
  • Benfords Law In randomly occurring events,
    associated numbers digits do not have an equal
    chance of occurring

30
  • Digit 1st digit freq 2nd digit freq
  • 0 n/a .120
  • 1 .301 .114
  • 2 .176 .109
  • 3 .125 .104
  • 4 .097 .100
  • 5 .079 .097
  • 6 .067 .093
  • 7 .058 .090
  • 8 .051 .088
  • 9 .046 .085

31
Lifestyles Anomalies
32
Lifestyle ? Compensation
  • New Cars
  • Expensive Clothes
  • New or Remodeled House
  • Expensive Recreational Toys
  • Boats
  • Cabins
  • Motor Homes

33
Behavioral Clues
34
Personal Behavior System
Once a person commits a crime (especially
first-time offenders) he or she becomes enveloped
by emotions of fear and guilt. These emotions of
fear and guilt express themselves in an extremely
unpleasant sensation called stress. He or she
then exhibits unusual behavior patterns to cope
with this stress. These behavior patterns are
recognizable.
GUILT
FEAR
STRESS
BEHAVIOR
35
Examples
  • Defensive/secretive
  • Wont look you in the eye
  • Tense/smokes a lot
  • Alcoholism/Drug abuse
  • Changes are the key

36
Also
  • Never takes vacation
  • Never takes sick leave
  • First one in/last one out
  • Other

37
Tips and Complaints
38
Tips and Informants
  • Employees
  • Customers
  • Suppliers
  • Family
  • Friends

Youre being DEFRAUDED!!
39
  • Very few crimes are committed where someone
    doesnt know about it.
  • Witness crime
  • See evidence of crime
  • Hear someone talking about the crime
  • People want to tell

40
  • So why dont they?
  • Not sure if fraud
  • Scared of consequences
  • Intimidated
  • Taught not to tattle

41
  • Although tips and complaints do not always
    represent fraud, they frequently do.

42
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43
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