The Department of Accounting

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

• ACCT 410/610 Fraud Examination
• Class 6 October 2, 2002
• A course developed taught by
• Thomas Buckhoff, Ph.D., CFE, CPA
• EideBailly Professor of Forensic Accounting

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Justice Dept. charges Andrew Fastow

• Enrons former CFO was charged today (10/02/02)
  with securities, wire and mail fraud, money
  laundering, and conspiring to inflate Enrons
  profits and enrich himself at the companys
  expense.

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Fraud Investigations Legal Considerations
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Admissibility of Evidence

• In order to be admissible in court, evidence
  must be
• Relevant
• Relates to the issue
  being litigated.
• Material
• Significant enough to influence the
  outcome of the litigation.

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Relevant Evidence

• Items considered relevant include
• Motive for an offense
• Ability of the defendant
• to commit the offense
• Opportunity
• Threats

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Relevant Evidence

• Means of committing the offense
• Physical evidence linking the suspect
• Attempts to conceal or destroy evidence

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Material Evidence

• Evidence is material if its inclusion would
  affect clients decisions concerning the matter
  under review.
• Is a user-oriented concept
• Fraud examiner must consider what evidence the
  client deems to be important.

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Documenting Cases

• Documents can either help of hurt a case,
  depending on which ones are presented and how
  they are presented.

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Documentary Evidence

• Authentication
• Document is what it is purported to be
• Official records rule Certain public records,
  are self-authenticating.
• Best Evidence Rule
• Original documents trump copies
• Chain of Custody
• Ensures that evidence is not altered

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Obtaining Documentary Evidence

• Voluntary consent--preferred method
• Consent can be either written or oral.
• Subpoenas issued by the courts
• Subpoena duces tecum requires the production of
  documents/records.
• Forthwith subpoena requires that the records be
  produced immediately.
• Garbage search

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Document Collection Rules

• Make working copies for review, and keep the
  originals segregated.
• Avoid touching the originals they might later
  undergo forensic analysis.
• Maintain a good filing system for the documents.
  Losing a document may mortally damage the case.

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Organizing Documentary Evidence

• Segregate documents by transaction, witness, or
  date.
• Make a key document file for easy access to
  most relevant documents.
• Establish a database including
• Date of document and date obtained
• Description and source of document

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Chain of Custody

• Evidence obtained to prove an offense should be
• Marked
• Identified
• Inventoried
• Preserved in its original
  condition

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Chain of Custody Memo

• The memo documents
• Items received
• When received
• From whom received
• Where maintained

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In-Class Exercise 7

• Identifying Evidence Exercise, p. 2.2 of the
  Student Workbook.
• Take 5 minutes to complete the exercise.

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Identifying Evidence

• Copy of dealer file on auto in question
• Authenticates auto in question via VIN
• All receipts for purchase of auto
• Will show from whom funds were received
• Vehicle registration request
• Establishes in whose name auto is registered

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Identifying Evidence

• Invoices
• Will show who ordered
  or negotiated the deal
• Interviews with personnel who transacted the deal
• Alpine may have negotiated the deal and requested
  that the auto be placed in his girlfriends name.

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Sources of Information

• Information is the key to a successful financial
  investigation.

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Public Records

• Can be used to
• Establish leads
• e.g. identify property that the suspect owns.
• Corroborate or dispute the testimony of the
  suspect or other
  witnesses.

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Types of Public Records

• Real Estate
• Corporate Records
• Partnership Agreements
• Trusts
• Assumed Name Indexes
• Better Business Bureau

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Types of Public Records

• Chamber of Commerce
• Uniform Commercial Code Filings (UCC)
• Court Records
• Business Records
• Real estate purchases
• Vehicle purchases

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Exercise 8 George Chapman Embezzlement Case

• The purpose of this exercise is to familiarize
  you with real estate documents.
• Read the scenario on p. 3.2 of the Student
  Workbook

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Exercise 8, Part 1

• Read Part 1 George Chapman Interview
• Take 5 minutes to complete Part 1 with a partner.

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Part 1 Interview

• The main item that needs to be verified is--
• Was the money from the sale of the old residence
  used to purchase the cottage and the boat?
• Knowing this information will determine whether
  or not the suspect lied.

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Exercise 8, Part 2

• Take 20 minutes to complete Parts 2 and 3 with a
  partner.
• This is a test of your investigative skills.
  Dont give up!

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Part 2 Search of Public Records
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Document 1528537

• Information from document
• Warranty Deed for purchase of former residence
• No purchase price listed
• Transfer fee paid - 44.00
• Selling price 44,000

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Document 1528538

• Information from document
• Mortgage for Chapmans former residence
• Chapmans borrowed 41,100 to purchase the
  residence
• Downpayment must have been 2,900
  (44,000-41,100)

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Document 2057172

• Warranty Deed for purchase of lot for new
  residence
• Transfer fee paid - 92.70
• Deed is for lot because
• This is not homestead property
• Price - Cost of lot determined by dividing
  transfer fee by fee rate
• (92.70 / 3.00 x 1,000 30,900)

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Document 2057173

• Mortgage for Chapmans new residence
• New mortgage amount 122,000

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Document 2057174

• Accepted proposal to construct the new residence
• Building contract price 149,000

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Document 2068393

• Warranty Deed for sale of Chapmans old residence
• Selling price 73,000
• (219.00 / 3.00 x 1,000 73,000)

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Document 2071138

• Satisfaction of Chapmans old mortgage
• Original mortgage 41,100
• Principal paid 10,275
• Balance of mortgage 30,825
• Assumes about one-fourth of the principal was
  paid off during the first 10 years of the
  30-year mortgage.

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Part 3 Evaluate Findings
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Step 1

• Determine net proceeds from sale of old
  residence
• Selling price 73,000
• Balance of mortgage 30,825
• Net proceeds from sale 42,175

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Step 2

• Determine cost of new residence
• Cost of lot 30,900
• Building contract price 149,000
• Total cost 179,900

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Step 3

• Determine cash invested in new residence
• Total cost 179,900
• New mortgage amount 122,000
• Cash invested 57,900

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Step 4 Summarize Findings

• Cottage down payment 12,500
• Powerboat purchase 29,500
• Cash invested in residence 57,900
• Total cash paid out 99,900
• Cash from old house 42,175
• Unknown sources of funds 57,725
• Conclusion Chapman lied about where the money
  for the cottage and powerboat came from.

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Step 5 Fraud Theory

• Suspected sources of unknown funds
• Unknown sources of funds 57,725
• Theft from Widow Jones 30,000
• Theft from other victim(s)? 27,725

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Video Documentary

• How to Steal 500 Million
• Financial statement fraud at Phar-Mor
• Coopers and Lybrand failed to detect this fraud
• Look for red flags

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Phar Mor Epilogue

• A Monus friend, Raymond Isaac of Youngstown,
  pleaded guilty to offering a 50,000 bribe to a
  juror.

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Phar Mor Epilogue

• In the retrial, Monus was convicted of 109
  felonies and was sentenced to 18 years in prison
  and fined 1 million.
• In February 1999, Monus sentence was reduced by
  8 years and his fine was cut in half.

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Phar Mor Epilogue

• A federal jury found Coopers Lybrand liable to
  investors who sued for 150 million in damages.

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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