Forensic Accounting & Fraud Investigation

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Forensic Accounting & Fraud Investigation Powered By Docstoc
Week 5 – Lecture 2
 Fraud & Error
 Types of fraud
 Potential red flags of fraud
 Detection & Prevention Techniques
Types of fraud
 The most useful way to classify the activity of the
  fraudster is to discuss the five typical accounting cycles
  of any organisation where it will likely leave some kind
  of audit trail
Types of fraud
  The five accounting cycles are:
 Sales & Collections
 Purchases & Payments
 Payroll & Personnel
 Inventory & Warehousing
 Capital Acquisition & Repayment
Sales & Collections
 Bills clients for sales of goods & services
 Collection of money
 Most cash-intensive
Sales & Collections
  Most common frauds are:
 Outright cash thefts
 Theft of other assets
 Kickbacks to customers
 Front-end frauds
Purchases & Payment
 Includes non-capital procurements and
 Payments for goods, equipment & services used in
  company operations
 Buyer acts alone
 Set-up shell companies to receive goods misdirected
  from his company by false invoices
 Scheme is complex & involves bank accounts, mail
  drops and corporate filings for dummy entities
Purchases & Payments
  Procurement fraud / employee-vendor fraud:
 Procurement fraud is frequently a collusive employee-
  vendor fraud
 Vendor provides bribe or kickback in return for
 In case of tendered contracts – for employee to rig the
  bidding in favour of the fraudulent vendor
Purchases & Payments
  Another scheme:
 Once vendor has been awarded the contract,
 cost of the bribe may be recovered and
 profits increased by:
   substituting products inferior to contract specifications
   billing for work not done
   shipping less than ordered
   padding overhead expenses, etc.
Procurement / Contract fraud
  How to identify:
 Analyse contract
 Identify conflict of interest
 Analyse policies and controls
 Analyse vendors
Payroll & Personnel
  Cycle deals with:
 Hiring & termination
 Salaries
 Timekeeping
 Expense account reimbursement
 Health & other type of employee insurance coverage
Payroll & Personnel
  Common forms of fraud in this cycle are:
 Paying ghost employees
 Overstating hours worked
 Overstating expenses
 Filing false medical claims
Payroll & Personnel
  Personnel fraud:
 Important but often overlooked area is the improper
  vetting of job applicants
 Collusion between personnel department employee
  and fraudster applicant
Inventory & Warehousing
 Controls the purchase & storage of goods for later
  processing and sale or just for sale
 Most common frauds are:
   Ordering un-needed inventory and then stealing it for
    personal use
   Committing outright theft
   Charging embezzlements occurring elsewhere in the
    company to inventory losses
Inventory & Warehousing
  This scheme involves:
 Loading-dock workers
 Inventory accounting personnel
 Truck drivers
 Receivers of stolen goods
Capital Acquisition &
 This cycle accounts for:
    Debt & equity financing
    Interest
    Dividend payments
 Results of these transactions are reflected on the
 company’s financial statements.
Capital Acquisition &
 Because these accounts are developed at the executive
 level, this type of fraud is committed almost
 exclusively by management

 Usual frauds are:
    Borrowing company money for personal use
    Misuse of interest income
    Misuse of proceeds from financing
Other types of financial fraud
 Customer fraud / Insurance fraud
 Bank fraud
 Hospitality fraud / Refund fraud
 Management fraud
 Ponzi Scheme
Customer fraud / Insurance
 Insurance company
 filing of false applications and
 fraudulent claims, especially those for personal injury
Bank fraud
 Submission of false financial information on loan
 Overstating value of collateral
 Pledging fictitious collateral
 Multiple pledging of assets as security
 Fraudulently conveying assets – against which loans
  were made – to related parties, third parties or other
  lending institutions
Hospitality / Refund fraud
  Guest refund request
 Forged hotel managers signature
 Refund money credited to own account
 No review of list of hotel refunds
 No review of refund request
 Segregation of duties – refund request
 Aware of new trends in refund fraud
Management fraud
 In addition to theft through capital acquisition and
  repayment cycle, management can commit fraud
  through the manipulation of earnings reported on the
  financial statements for shareholders and creditors
 This type of fraud can affect:
   stock prices,
   management bonuses and
   the availability and terms of debt financing
 eg. Enron, WorldCom, etc.
Ponzi Scheme
 A financial fraud
 Repay old investors with funds provided by new
 High rates of return
 Pyramid structure
 Only initial investors and sponsor of the scheme
  recover their investments
Financial Crime
 Kings Brothers Buses
 Wattle Group Investments
King Brothers Bus Company
 Business tycoon siphoned millions
 Company directors Peter & Anthony King
 Defraud National Australia Bank - $44 million
 Money to refinance a fleet of 144 buses, which never
 Millions transferred out of the company to finance
  millionaire lifestyle
 Business deal went wrong
Wattle Group Investment
 Ponzi Scheme
 Geoffrey Robert Dexter
 2,700 investors
 Raised in excess of $160 million
 Investors told that their funds were on-loaned on short
  term basis to provide returns of up to 50%
 Instead, it was a Ponzi scheme that paid interest and
  refunds to investors entirely out of the incoming funds
  of new investors entering into the scheme

 Fraudsters often rationalize their deeds by claiming
 “I wasn’t hurting anyone” –
 clearly this is far from reality.

 (Silverstone H & Sheetz M, 2007, p.9)


          Thank you

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