1. FORENSIC ACCOUNTING - BA124 - 2015 Today’s Topics n E-Commerce Fraud n Cash Flow Shenanigans n Metrics Shenanigans

2. FORENSIC ACCOUNTING - BA124 - 2015 E-Commerce Fraud

3. FORENSIC ACCOUNTING - BA124 - 2015 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

4. FORENSIC ACCOUNTING - BA124 - 2015 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

5. FORENSIC ACCOUNTING - BA124 - 2015 E-Commerce Fraud Risks n P – O – R…see text

6. FORENSIC ACCOUNTING - BA124 - 2015 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

7. FORENSIC ACCOUNTING - BA124 - 2015 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

8. FORENSIC ACCOUNTING - BA124 - 2015 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

9. FORENSIC ACCOUNTING - BA124 - 2015 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

10. FORENSIC ACCOUNTING - BA124 - 2015 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.

11. FORENSIC ACCOUNTING - BA124 - 2015 Final Shenanigans n Cash Flow Shenanigans n Metrics Shenanigans

12. Cash Flow Shenanigans CFS #1: Shifting Financing inflows to Operating inflows CFS #2: Shifting Operating outflows to Investing outflows CFS #3: “Inflating” Operating inflows through normal but infrequent ops CFS #4: “Inflating” Operating inflows through normal operations FORENSIC ACCOUNTING - BA124 - 2015

13. CFS #1 Bank borrowings as CFO Sale of receivables as CFO Sham sale of receivables as CFO FORENSIC ACCOUNTING - BA124 - 2015

14. CFS #2 Boomerang transactions Capitalization of operating expenses Treating inventory purchases as investing activities FORENSIC ACCOUNTING - BA124 - 2015

15. CFS #3 Inheriting cash flows via acquisition Acquisition of customers or products Structuring a divestiture to benefit operating cash flows FORENSIC ACCOUNTING - BA124 - 2015

16. CFS #4 Paying vendors more slowly Collecting from customers more quickly Purchasing less inventory Limited disclosure of one-time benefits FORENSIC ACCOUNTING - BA124 - 2015

17. Metrics Shenanigans MS #1: Misleading metrics that overstate performance MS #2: Distorting metrics that avoid bad news FORENSIC ACCOUNTING - BA124 - 2015

18. MS #1 Proforma revenue metrics Proforma earnings metrics Proforma cash flow metrics FORENSIC ACCOUNTING - BA124 - 2015

19. MS #2 Distorting A/R metrics Distorting inventory metrics Distorting financial asset metrics Distorting debt metrics FORENSIC ACCOUNTING - BA124 - 2015