Fraud Examination. Prevention, Detection, and Investigation. Steven M. Bragg

Transcription

1 Fraud Examination Prevention, Detection, and Investigation Steven M. Bragg

2 Chapter 1 Introduction to Fraud... 1 Learning Objectives... 1 Introduction... 1 What is Fraud?... 1 Confidence... 1 The Effects of Fraud... 2 Fraud Triggers... 2 Perceived Pressure... 3 Opportunity... 4 Rationalization... 5 Fraud Addiction... 5 Collusion... 5 Types of People More Likely to Engage in Fraud... 6 Types of Fraud... 6 Financial Statement Fraud... 6 Embezzlement... 6 Supplier Fraud... 7 Customer Fraud... 7 Investment Scams... 7 Common Fraud Risk Indicators... 8 Responsibility for Fraud Prevention... 9 The Fraud Examiner Chapter Summary Review Questions Review Answers Chapter 2 Fraud and Theft Schemes Learning Objectives Introduction Cash Theft Disbursement-Related Theft False Expense Reports Misuse of Company Credit Card Billings from Fake Suppliers Self-Insurance Fraud Unauthorized Shipments Redirected Payments Check Theft ACH Debits Compensation Fraud Executive Loans Workers Compensation Fraud Check Kiting Solicitations Disguised as Invoices Lapping Inventory Theft Product Replacement Fraud Fixed Asset Theft and Misuse Bust-Out Scams Advance-Fee Loan Schemes Kickbacks Bid Rigging Bribery Conflicts of Interest... 22

3 Insider Trading Stock Option Backdating Information Theft Time Theft Money Laundering Schemes Financial Statement Fraud Schemes Sales Inflation Expenses Falsification Marketable Securities Falsification Prepaid Expenses Falsification Receivables Falsification Loss Reserves Falsification Inventory Falsification Fixed Asset Falsification Liability Falsification Debt Falsification Discontinued Operations Stuffing Cash Flow Reclassifications Acquisition Falsification The Most Difficult Financial Statement Fraud Areas to Detect Financial Statement Disclosure Fraud Fraud Schemes More Common in Closely-Held Businesses Chapter Summary Review Questions Review Answers Chapter 3 Financial Statement Fraud Learning Objectives Introduction Reasons for Financial Statement Fraud Instigators How Financial Statement Fraud Begins The Financial Statements The Balance Sheet The Income Statement The Statement of Cash Flows Interactions between the Financial Statements Horizontal Analysis Vertical Analysis Interrelationships Analysis Revenue Interrelationships Revenue Acceleration Interrelationships Cost of Goods Sold Interrelationships Capitalization Interrelationships Ratio Analysis Financial to Non-financial Relationships Time-Based Analysis Other Red Flags A Note of Caution The Auditor s Approach Other Factors to Consider The Management Team The Organizational Structure The Size of the Organization The Board of Directors The Auditors Legal Issues ii

4 Short Selling Related Entities Footnotes Industry Analysis Chapter Summary Review Questions Review Questions Chapter 4 Fraud Prevention Learning Objectives Introduction Combatting Perceived Pressure Minimizing Fraud Opportunities Cultural Adjustment Activities Hire Correctly Communicate Expectations Provide an Example Establish the Work Environment Handle Fraud Situations Correctly Minimizing Collusion Engaging in Fraud Auditing Activities Combatting Rationalization Fraud Prevention for the Small Company Fraud Prevention for Outsiders Chapter Summary Review Questions Review Answers Chapter 5 Fraud Policies and Controls Learning Objectives Introduction Policies Audit Policy Check Signing Policy Employee Background Check Policy Employee Bonding Policy Expense Receipt Policy Expense Review Policy Employee Transfer Policy Missing Check Policy Stock Sale Investigations Supplier Background Check Policy Vacation Policy Whistleblower Rewards Policy Control Activities Segregation of Duties Authorization Levels Independent Reviews Physical Safeguards Documentation Preventive and Detective Controls Manual and Automated Controls When to Add Controls Control Overrides Fraud-Specific Order Entry Controls Fraud-Specific Credit Controls Fraud-Specific Shipping Controls iii

5 Fraud-Specific Billing Controls Fraud-Specific Cash Controls Fraud-Specific Inventory Controls Fraud-Specific Fixed Asset Controls Fraud-Specific Payable Controls Fraud-Related Purchasing Controls Fraud-Related Receiving Controls Fraud-Related Payroll Controls Fraud-Specific Journal Entry Controls General Controls Oversight Capabilities Incentive Systems Small Business Controls Chapter Summary Review Questions Review Answers Chapter 6 Fraud Detection Learning Objectives Introduction Fraud Symptoms Accounting Anomalies Analytical Anomalies Lifestyle Symptoms Unusual Behavior Assistance in Spotting Fraud Assistance from Employees The Employee Hotline Assistance from Suppliers and Customers Assistance from Auditors Records Examination Publishing Activities Data Analysis Data Analysis Techniques Benford s Law Cross-Matching Analysis Outlier Analysis Trend Analysis Discovery Sampling Access to Documents Nonfraud Factors Where Fraud Does Not Occur Undetectable Fraud Role of the Auditor in Fraud Detection Chapter Summary Review Questions Review Questions Chapter 7 Fraud Investigation Learning Objectives Introduction Whether to Investigate Investigation Policies and Procedures Fraud Investigative Techniques Documentary Evidence Personal Observation Physical Evidence iv

6 Testimonial Evidence Invigilation The Need for Objectivity The Need for Investigation Secrecy Involving the Police Signed Confessions Chapter Summary Review Questions Review Answers Chapter 8 Investigation of Concealment and Conversion Learning Objectives Introduction The Chain of Custody Organizing the Evidence Document Examination Conversion and Incarceration Information Sources National Crime Information Center Interstate Identification Index Federal Inmate Database Tax Returns State-Level Information County-Level Information Divorce Information Probate Court Information Professional Licensing Information Rental Information SEC Filings Tax Assessor Information Title Information Voter Registration Information Acquaintances Information Trash Analysis Fee-based Search Tools Investigations Related to Mail Fraud Calculating the Amount Stolen Chapter Summary Review Questions Review Answers Chapter 9 Fraud Interviewing Techniques Learning Objectives Introduction The Ideal Interviewer Types of Interviewees The Ideal Interview Interview Planning The Interview Interactions with Friendly Interviewees Interactions with Unfriendly Interviewees Asking for an Admission of Guilt Additional Interviewing Rules Activities Following the Interview Income Questions Lifestyle Questions Interviewee Motivations Reactions to Fraud v

7 Integrity Testing Chapter Summary Review Questions Review Answers Chapter 10 The Fraud Report Learning Objectives Introduction Report Tone Sample Text of the Report Chapter Summary Review Questions Review Answers Chapter 11 Legal Aspects of Fraud Learning Objectives Introduction Types of Prosecution The Civil Litigation Process The Criminal Litigation Process The Fraud Examiner Role in Lawsuits Federal Statutes Covering Fraudulent Activities CFR b5-1 Trading on the basis of Material Nonpublic Information U.S. Code 78dd 1 Prohibited Foreign Trade Practices U.S. Code 201 Bribery of Public Officials and Witnesses U.S. Code 500 Money Orders U.S. Code 1030 Fraud and Related Activity in Connection with Computers U.S. Code 1037 Fraud and Related Activity in Connection with Electronic Mail U.S. Code 1341 Frauds and Swindles U.S. Code 1342 Fictitious Name or Address U.S. Code 1344 Bank Fraud U.S. Code 1956 Laundering of Monetary Instruments U.S. Code 1961 Racketeer Influenced and Corrupt Organizations U.S. Code 7201 Attempt to Evade or Defeat Tax U.S. Code 8701 Prohibited Conduct (Kickbacks) Chapter Summary Review Questions Review Answers Glossary Index vi