Title: Day 5:
1Day 5
2Fraud 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
3How 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
4How 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!
6Who should be detecting fraud?
- Internal auditors
- External auditors
- Fraud examiners
- Management
- Employees
7The 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
8Ways 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
9Ways to Detect Fraud
- Pro-Active Approach
- Inductive methods
- Go on safari!
- Includes data mining
- Deductive methods
- Figure out logically first
- Includes SAS 99
10The key is being able to identify symptoms!
11Symptoms of Fraud Against Organizations
- Weak internal controls
- Accounting anomalies
- Analytical anomalies
- Lifestyle anomalies
- Behavioral clues
- Tips and complaints
12Weak Internal Controls
13We 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
14Accounting Anomalies
151. 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
162. 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
183. 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
19Analytical Anomalies
20What 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
21They are
Too...
Odd...
- Times
- Places
- People
- Procedures
- Policies
- Practices
- Large
- Small
- Often
- Rare
- High
- Low
- Much
- Little
22Does It Make Sense?
- Cadillac Cars Repaired by Oldsmobile Dealer
- Body Damage but no Claim
- Expenditures Every Month
- Same Amount Each Month
23BE 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
24Examples
- 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
31Lifestyles Anomalies
32Lifestyle ? Compensation
- New Cars
- Expensive Clothes
- New or Remodeled House
- Expensive Recreational Toys
- Boats
- Cabins
- Motor Homes
33Behavioral Clues
34Personal 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
35Examples
- Defensive/secretive
- Wont look you in the eye
- Tense/smokes a lot
- Alcoholism/Drug abuse
- Changes are the key
36Also
- Never takes vacation
- Never takes sick leave
- First one in/last one out
- Other
37Tips and Complaints
38Tips 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(No Transcript)
43End