FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-1 Today’s Topics n E-Commerce Fraud n E-Commerce Fraud Risks n E-Commerce Fraud Prevention n Shenanigan #7 n Money Laundering

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-2 E-Commerce The Good, The Bad & The Ugly n The Good n Faster, cheaper and less prone to error n Customer centric n The Bad n Hardware issues…spotted owl disease n False sense of organization n Initial cost and implementation issues n Emerging economy issues…haves and have-nots n The Ugly n The bad guys and hackers…our focus today

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-3 Consider This… n The race to 60 million users n Radio—30 years n TV—15 years n The Internet—3 years to 90 million users

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-4 E-Commerce Fraud Risks n P – O – R…see text

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-5 E-Commerce Fraud Prevention n Difficult to impact pressure and rationalization at this time n Lack of personal contact with fraudsters n Avoid “iffy” situations and “sketchy” firms n Focus on reducing opportunities

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-6 Prevention in the Opportunity Sector n The control environment n Integrity and ethics n Board and Audit Committee involvement n Tone at the Top n Human resource policies and practices (training) n Risk assessment efforts n Implementation of control activities

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-7 Risk Assessment n Data theft is the big issue…not cash n Sniffing for passwords n Unauthorized password access n False identification of users n Spoofing for headers and “IP” (protocol models) n Impersonation of customers n False or misleading websites n Hijacking to copy-cat websites

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-8 Prevention Through Control Activities n Separation of duties n Authorization techniques n Firewalls n Passwords n Digital signatures n Biometrics n Documentation and encryption n Physical control n Independent assessment (operational auditing) n On-going not spot-checking

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide 17-9 E-Commerce Fraud Detection n Proactive posture n On-going analysis and effort n Defending the Digital Frontier, Mark Doll, Sajay Rai and Jose Granado. Ernst & Young, LLP.

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Shenanigan #7 n “The sun’ll come out tomorrow…” n How to make your firm’s future sunny n Shifting future expenses into today’s operations n Key question: why do firm’s do this?

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Techniques n Inflating a special charge n In-process research and development n IPR & D n Accelerating use of discretionary reserves

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Inflating Special Charges n The continuing saga of “Chainsaw” Al n Illusion of a successful restructure n How Sunbeam did it n Inflated special charges n Release of reserves in the future n Ultimately, bogus revenue

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Sunbeam’s Red Flags n Excessive post-acquisition charges n Reserve declines n DSO growth n Plummeting cash flow from ops. n Unrealistically high gross margins

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Other Examples n Cisco’s inventory reserve reversal n JDS Uniphase’s goodwill

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide In-Process R & D n What is it? n Some real world examples n General Instrument n Compaq n U.S. Robotics n Disney n The bottom line? n Examine these practices closely

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Acceleration of Discretionary Expenses n Prepayments n Reductions in depreciable lives

FORENSIC ACCOUNTING - BA124 - Fall 2007Slide Money Laundering n Layering techniques n Soprano’s analogy