March 20th, 2012 
Alexander Glaser 
Non cash assets
Two most common: equipment and inventory
Proprietary information least likely but has high costs
Graphs on pg 230 -233
Usually employees
Misuse
Unconcealed larceny
Assets requisitions and transfers
Purchasing and receiving schemes
Fraudulent shipments
Misuse
Can be borrowed
Or stolen
Fake sales
prevention
Requisitioning, purchasing and receiving should be segregated
Cameras
Asset requisitions and transfers
Moving assets within a company
Transfer documents
During process of moving asset it is stolen
Purchasing and receiving schemes
Falsifying incoming shipments
Would say only 900 of 1000 items received
False shipments of inventory and other assets
Send product to person stealing or made up person
Acts like it is sold
Allows someone other than fraudster to remove items from storeroom
May be written off as uncollectible
Other schemes
Trick those in charge that old equipment is new equipment and steal new
Concealing inventory shrinkage
Shrinkage is a red flag
Altered inventory records
Forced reconciliation
Fake sales and acct receivables
Write off inventory
Physical padding- empty boxes
Audit tests on page 248
corruption
Act done with the intent to give some advantage inconsistent with official duty and the rights of others
Schemes
Bribery
Illegal gratuities
Economic extortion
Conflicts of interest
Official – deals with govt
Commercial – business
Commercial is most often
Offering a payment can constitute a bribe, money doesn’t have to be exchanged
Does not have employer’s consent
Unreported gifts from vendors
Economic extortion – pay up or else
- Ex. If you don’t pay you lose their business
Ph 257 -260 is graphs
Most corruption is conflict of interest
Employee tip is most common detection
Usually done by management
Bribery
Kickback schemes
Collusion between vendors and employees
Employee makes sure inflated invoice gets paid to vendor
Employee gets kickback from vendor
Diverting business to vendor
Divert business to a vendor
Overbilling scheme
Employees with approval authority
False invoice can overstate cost of goods or have fake sales
Employee approves invoice
Gets kickback
Lacking approval authority
False purchase requisition
False vouchers
Forge signature
Fake invoice
Other kickback schemes
Slush Funds
Bribes are 2 sided transactions
Divert company funds into an account to pay for bribes
Preventing/detecting
Monitor trends
Price thresholds
Monitor purchase levels
Right to audit clause on vendors
Written policies against gifts
-explains what is proper
-allows for termination if violated
Pg 266
Bid rigging schemes
Inside influence gives a vendor a contract
Can rig process
Usually occur in pre-solicitation phase
Pre-solicitation
Before bids are officially sought
Need recognition scheme- employee is paid to convince company a project is needed
High requirements for inventory levels and even still requesting more
Write off surplus to scrap
No back up list of vendors
Specifications scheme- tailor contract to specifications
Elements, materials, dimensions and other relevant requirements
Restricts competition
Prequalification to eliminate competitors
-example: must have certain % of women ownership
Sole source or noncompetitive procurement- saying only one vendor can be used
Writing off of vague specifications- employee paid off to add amendments to raise price
Bid splitting- if value of bid is over a certain value it must have bidding, so they break the bid into smaller parts
Payoff to see specifications in advance
Solicitations Phase
Restrict the pool of competitors
Bid pooling – bidders conspire to split up contracts
Fictitious Suppliers – fake bids are used to justify high bids
Other- restricting time
Submission Phase
When bids are proffered to buyer
Abuse of sealed bid process
-bids are supposed to be confidential
-shows one supplier other bids so they can beat it
Detection/prevention
Unusual bidding patterns
Unusually high contract price
Pg 271
Something of Value
-must be given for bribes
Illegal Gratuities
Gift after the fact but not meant to influence
Economic Extortion
Opposite of a bribe
Conflict of interest
Purchasing schemes
Sale Schemes
Buying or selling at high or low price to someone with a hidden interest
Purchasing
-turnaround sales
Flip- resell at higher price
Sales
Underbillings
Writing off sales
Other
Business diversions
Siphon off clients for own company
Resource diversions – use for development of own business
Financial Disclosures- related party transactions
Detection/prevention
Company ethics
Annual disclosure to reveal interests
Audit tests pg 280
Accounting Principles and Fraud
Who commits financial statement fraud
Senior management
Mid and low level employees
Organized criminals
Why do people commit financial statement fraud
Conceal true performance
Preserve person control
Maintain personal income/wealth
Why senior management will overstate business performance
Pg 289
May understate pg 289
How do people commit financial statement fraud
Playing the accounting system
Beating the accountint system
Going outside the accounting system
Pg 290
Conceptual framework for accounting pg 290-194
Responsibility for financial statements
Company’s ethic – code of conduct
Users of financial statements – pg 295
Types of financial statements 296
SOX pg 297-300
PCAOB
Established by sox
Pg 301-309
Graphs on page 310-314
Fraudulent Financial Statement Schemes
Top management: ceo and cfo
Pg 323 is list of scandals
Treadway commission- definition of financial statement fraud
Types of fraud
Falsification, alteration or manipulation of records
Material omission or misrepresentation
Deliberate misapplication of accounting principles
Intentional omissions of disclosures or presenting inadequate documents
T types of misstatements
Intentional misstatements or omissions of amounts or disclosures
Misappropriation of assets
Harmful because:
Undermines the reliability, quality and transparency of reporting process
Jeopardizes the integrity and objectivity of the auditing profession
… for full list – go to page 326
Methods of financial statement fraud
Fictitious revenues
Timing differences
Improper asset valuations
Concealed liabilities and expenses
Improper disclosures
Fictitious revenue
Revenue is realizable when:
Evidence of arrangement exists
Delivery has occurred or service rendered
Seller’s price is determinable
Collection is reasonably assured
Change in assets to occur
Change can be measured
Revenue is substantiated with change in assets and liabilities
Contractual rights enforceable
Sales with conditions
-sale is booked despite not all terms being completed
Pressures to boost revenue
Red flags
Rapid growth or unusual level of profits
Recurring negative cash flows from operations
Many related party transactions
Unusual growth in the number of says’s sales in receivables
Pg 330
Timing differences
Matching revenues with expenses
Premature revenue recognition
Arrangement does not exist
No written or verbal record of agreement
Written Agreement is customary, but now its verbal
Conditional order
Contains right of return
With related party which is not disclosed
Pg 332
Delivery has not occurred or service not rendered
Shipment not made to standard location
Items of wrong specification shipped
No services provided
Mix of goods misstated
Pg 333
Sellers price to buyer is not fixed
Price is based on some future event
Service fee unpredictable
Option to exchange products in contract
Pg 333
Collection is not assured
Contingent on future event
No ability to pay
Pg 333
Long term contracts
Completed contract method or percent completed method
Channel stuffing
Trade loading
Sale of unusually large quantity of a product, buyer enticed by deep discounts
Concern over collectability
Recording expenses in wrong period
Pg 334
Red flags with timing differences
Unusual growth in gross margin
Complex transactions
Repeating negative cash flows
Pg 334
Concealed liabilities and expenses
Liability/expense omission –simply fail to report them. Simple and easy
Capitalized expenses – provide most benefit to company. Increases income and assets. As assets are depreciated, income in subsequent periods will be understated
Expensing what should be capitalization
Failure to disclose warranty - fail to report proper expenses related to repairs for warranties
Red flags
Allowance for sales returns
Unusual growth in gross margin
Pg 339
Improper Disclosures
Liability omissions
Subsequent events
Management fraud
Related party transactions
Accounting changes
Pg 339-341
Red flags
Domination of management by one person
Ineffective BoD
Rapid growth
Improper Asset valuation
Inventory valuation- failing to write down
Accounts receivable – fake accounts, failure to write down
Business combos- goodwill pg 344
Fixed assets
-booking fake assets – making up assets and recording them
Misrepresenting asset valuation- should be recoded at cost
n Govt related companies have incentive to understate
Improperly capitalizing inventory and startup costs – interest and finance charge, misclassify assets
Red flags pg 347detection of financial statement schemes
Pg 347-356
-has entire step by step process
Financial statement analysis
Vertical – analyze relationship between items on a financial statement
Horizontal – measuring percentage change over periods
Deterrence
Reduce pressure to commit fraud
Reduce opportunity
Reduce rationalization pg 363
Interviewing Witnesses
Guest speakers
Ben franklin was first inspector
Federal agents
No 1811 status
Mail fraud, identity theft, illegal content
Federal Statute
Title 18 usc section 1341
Elements: Devising or intended devising of scheme
Intent to defraud
Use mail carrier to fraud
Punishment: fine or up to 20 yrs
Chain letters
Foreign lotteries
Merchandise schemes
Investment schemes
Work at home schemes
Types of mail fraud: Business
Government look a like mail
- Need to order to be in compliance
Solicitations disguised as invoice
- Yellow pages advertisements
- Disguised to look like a real company
Manipulations of mailings by mass mailer
Victims: car dealership
Actions taken
Criminal prosecution presented to us attorney office
Civil action presented to usao
Referrals
-law enforcement, AG’s office, BBB
- Complaints
- Database searches
Case must:
-meet fraud elements
Be in jurisdiction
Meet prosecution guidelines
Identity theft
9-10 million victims a yr
50 billion dollar hit to economy per yr
Theft is acquiring info
Fraud is using the info
Sources of theft
Wallet, checks, credit card = 14%
Family members 14%
Credit card transactions 13%
Mail theft 4%
Phishing, viruses, key logs 55%
Mike wagner
First job was selling windows
Loan to take equity out of house to pay for windows
-if house is worth 100,000 they’d say after windows it would be worth 150,000
-mortgage fraud
steve warshak
3 phases
1 is no problem
2 is condition but not full on problem
3 is disease and need treatment
Joined in 2002 and in charge of the books
High revenue came from continuity. Charges from credit cards that was not from initial trial.
-“wanted to make sure customer never ran out”
- to remain effective
Sent card that said it was an auto renew
Have to fully disclose process before credit card info is obtained. Cannot tell customers they are going to be auto-renewed at the end.
Double dinging- splitting sales transaction into 2
Charge back ratio
Charge back / total sale transactions
They broke sales down to create higher transaction numbers to lower ratio
1% is acceptable
Chargeback is a dispute of credit card transaction
2002 = 30 mil sales
2003 = 85 mil sales
2004 = 185 mil sales
.1% complained to BBB
Raided in 2005
100 mil dollar fraud = 25 yrs
Villa Hills Civic Club Fraud
- Property worth 2 mil
- 27k savings in bank
- 7k in operating account
Theft started months within Steve Sparks taking charge
5 member board, secretary and treasurer
Steve convinced president that contacting treasurer was too hard, so he got a stamp with everyone’s signature
Non-payments kept happening. Phones, cable…
Place is always packed, but losing money????
Property was about to be sold for non payment of taxes
- Steve was on vacation
Feb 7th, 2007- police call about club finances
Had 76 dollars in bank!
Tried to deposit check at wrong bank. Teller noticed he was acting weird. So he ran out and left town.
Poor record keeping made it hard to track what happened
Had mother write 75k check to trick company into thinking money was in account
300k + missing
He and his wife faced threats
50k loan taken against property
No payment for 3 yrs
-forgery involved on loan
Club has not worked on rebuilding and becoming trusted again
Court date on march 20th
Check tampering
Forgery
-fake bank statements
Payroll fraud
10 rules for being expert witness:
Qualified through training or education
- Seminars
Experience
Certified in a field
Have resume and questions together
Follow policy
Photo arrays
Officer investigating cannot present lineup
Document everything
Prepare
Knowing facts
Practice testimony
Familiarize with science
-show how you think
First impression
Eye contact
Knowing role
Tv is big influence
Accounting methods being protected is essential for protecting the public and for CPA firms.
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