1. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-1 Today’s Topics n Organizational Fraud n Consumer Fraud n Bankruptcy & Tax Fraud n Money Laundering

2. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-2 Occupational Fraud n What is it? n Fraud against companies other than financial statement fraud n Asset misappropriations n Corruption n Know the graphics on pps. 506, 514 & 516

3. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-3 Occupational Fraud Statistics n Median loss $159K; 25% > $1.0M; 1% > $1.0B n Organizations with hotlines had 50% less median loss n Small business has higher median loss--$190K; poor pro-active effort n Executive involvement = $1.0M median loss n 30% involved accounting dept.; 20% involved upper and executive management n Only 8% of fraudsters had prior convictions

4. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-4 Asset Misappropriations n Stealing receipts n Employees, customers, collusion n Stealing assets on hand n Employees n Stealing through disbursements n Employees, vendors, collusion

5. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-5 Thefts of Cash n Larceny n Skimming n Fraudulent disbursements

6. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-6 Larceny n Theft of recorded cash w/o consent n Cash “shortages” n 14.2% of all misappropriation frauds n Easy to detect

7. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-7 Skimming n “Sharing” cash receipts n Sales not recorded n Fraudulent discounts n Customer payments and write-offs n Lapping n Collusion with customers

8. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-8 Fraudulent Disbursements n 67% of all asset-related frauds n Check tampering n Check modification, check forgery n Register schemes n False refunds, false voids n Inventory problems n Billing schemes n Dummy cos., 2X paying, personal use

9. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-9 Fraudulent Disbursements, continued n Expense schemes n Cheating on your expense report n Payroll schemes n Only 1.9% of all losses n Ghost employees, false hours & rates, commission scams and false worker compensation claims

10. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-10 Thefts of Assets n “Borrowing” for personal use n Personal business on company time n Outright theft of assets n Larceny involving inventory n Unauthorized transfer of assets with forged requisitions n Diversion of assets in receiving function

11. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-11 Corruption n Bribery n Payoffs, kickbacks, bid rigging n Conflicts of interest n Purchase and sales schemes involving “related” parties n Economic extortion n Illegal gratuities

12. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-12 Consumer Fraud n Fraud against individuals n Number one consumer fraud = Identity Theft

13. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-13 Identity Theft n Involves over 42% of reported frauds n Use of name, address, SSN, band or credit card PINs to commit fraud n Prevention is the key

14. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-14 Identity Theft Conversion n Purchase of large-ticket items n False car or real estate loans n Creation of phone or cell accounts n Counterfeit checks or debit cards n Creation of new bank accounts n False filing of bankruptcy n False filing of police information n Creation of new credit card accounts n Change of mailing address

15. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-15 Identity Theft Cycle n Stage 1: Discovery n Gain information n Verify information n Stage 2: Action n Document accumulation n Action cover-up n Stage 3: Trial n 1 st – 3 rd dimensions (gas station, store, new account)

16. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-16 How to Steal Someone’s Identity n Obtaining info falsely n Going through the trash n Skimming credit cards n Hacking n Stealing wallets n Outright theft from the home n Stealing mail n False change of address form n Shoulder surfing n Phishing or Pharming

17. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-17 How to Protect Yourself n Guard your mail n Do not use pre-approved credit cards n Guard SSN and PINs n Guard all personal information n Guard your trash n Protect your wallet n Protect and change your passwords n Protect your home n Protect your personal computers n Use the Gramm-Leach-Bliley Act to opt out of having your information sold

18. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-18 Post Event Activity n Report event promptly n Collect evidential matter n Contact FTC regarding identity theft n Homeland security implications

19. FORENSIC ACCOUNTING - BA124 - 2010Slide 12-19 Other Forms of Consumer Fraud n Foreign Advance-Fee Scams n Work at Home Schemes (Multi-Level Marketing Schemes) n Bogus Mystery Shopping Scams n Telemarketing Scams n Investment Scams (Ponzi Scams)

20. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-20 Today’s Topics n Fraud, bankruptcy and divorce n Tax fraud n Bankruptcy overview n Bankruptcy participants n Bankruptcy schemes and concealment n Divorce schemes and concealment n Money Laundering

21. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-21 Why Fraud? n Hiding assets to prevent redistribution n The Devil’s Triangle n Bankruptcy n Divorce n Fraud

22. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-22 CPAs Role n Examiner or trustee role n Creditor committee representation n Investigation assistance n Recovery assistance n Private investigation role

23. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-23 Tax Fraud n Criminal offense n IRS staff trained to “look for fraud” n Supported by tax law (p. 569) n See cases on pps. 568-571 n Careers in IRS Criminal Investigation

24. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-24 Types of B & D Frauds n Fraud causes B & D n Partner wants out due to the fraud n B & D is used to perpetrate the fraud n Fraudulent transfer of assets during the “stay” or cooling off period n B & D is used to conceal the fraud n Records destroyed as part of B & D which helps to conceal the fraud

25. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-25 Bankruptcy Overview n Chapter 7: complete liquidation n Chapter 11: reorganization n Chapter 13: individual reorganization n Criminal cases prosecuted by U.S. Attorney’s office n Concealment: “knowingly and fraudulently” n See summary in text

26. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-26 Bankruptcy Overview, cont. n Embezzlement against the debtor’s estate n Adverse interest or conduct n Bankruptcy fraud: false filings or reps. n Civil proceedings in U.S. Bankruptcy Ct. n Intentional deceit n Fraudulent transfers

27. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-27 Bankruptcy Participants n Bankruptcy court n U.S. Trustee: administrative role n Court appointed Trustee: working trustees n Examiners: investigators n Debtors: one who owes n Creditors: one who is due funds n Adjusters: field agents

28. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-28 Bankruptcy Frauds-the Bustout n Planned bankruptcy or the “bustout” (Soprano’s video) n Obtaining loans or merchandise and then failing to pay n Either with new or established companies n Red flags n P.O. box operation n Vague data on owners n Sudden change in management n Bad credit references n Order size increases n Inventory disappears n Unreasonably large discounts

29. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-29 Bankruptcy Fraud-Illegal Concealment of Assets n Common to divorce as well n Methods n Cash receipts are diverted to another entity n Inventory goes off-site or into gray market n Asset ownership shifted n Sales not recorded or understated n Fraudulent vendor payments n Records disappear n Inadequate disclosure

30. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-30 Bankruptcy Fraud-Illegal Concealment of Assets, cont. n Red flags n Transfers of property to insiders n Frequent bank transfers n Cash transactions n Large vendor payments n Rapid reduction in assets n Increase in losses n Financial and tax inconsistencies n Travel to tax havens n Missing records

31. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-31 Fraudulent Transfers n Intent to hinder, delay or defraud n Exchanged for less than fair value

32. FORENSIC ACCOUNTING - BA124 - 2012Slide 23-32 Money Laundering n See diagram on p. 584 n Recall the case of “Crazy Eddie” Antar