1. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-1 Today’s Topics n Organizational Fraud n Shenanigan #4 n Sherlock Holmes, CPA n MT #2

2. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-2 Occupational Fraud n What is it? n Fraud against companies other than financial statement fraud n Asset misappropriations n Corruption n Know the graphic on p. 438

3. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-3 Asset Misappropriations n Stealing receipts n Employees, customers, collusion n Stealing assets on hand n Employees n Stealing through disbursements n Employees, vendors, collusion

4. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-4 Thefts of Cash n Larceny n Skimming n Fraudulent disbursements

5. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-5 Larceny n Theft of recorded cash w/o consent n Cash “shortages” n 2.9% of all frauds n Easy to detect

6. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-6 Skimming n “Sharing” cash receipts n Sales not recorded n Fraudulent discounts n Customer payments and write-offs n Lapping n Collusion with customers

7. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-7 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

8. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-8 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

9. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-9 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

10. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-10 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

11. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-11 Shenanigan #4- Expense Shifting with Assets… Think WorldCom n Technique #1: n Capitalizing normal operating costs-AOL n Technique #2: n Shift of expenses to earlier period due to accounting change-Snapple n Technique #3: n Slow amortization (somewhat subjective)-Orion Pictures n Technique #4: n Failing to write-down impaired assets-Lockheed n Technique #5: n Reducing asset reserves-Lucent

12. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-12 Shenanigan #4 Red Flags n Changes in capitalization policy pre- IPO n Late accounting change announcements

13. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-13 Once Again… It’s All About Transparency

14. FORENSIC ACCOUNTING - BA124 - Spring 2005Slide 13-14 Sherlock Holmes, CPA n Great follow-up to Dr. Jue’s presentation n Fraud examination n Interview methodology n Confession