Chapter 10

Fraud and Other

Investigative
Techniques
 Learning Objectives

The definition of fraud

Different types of fraud

Components of the Fraud Triangle

Utilization of ACL and i2 Analyst

Notebook in fraud investigation
 Learning Objectives
(contd.)

Overview of fraud examination

and business investigation
Use of computer technology and
fraud examination/investigations
 Types of value added
services
Risk assessment of fraud and illegal acts
Legal counsel asks you to investigate
embezzlement scheme involving hidden
assets
Vendor kickback determination
Fact-finding for alleged frauds involving
bribery, wire fraud, securities fraud.
All of these involve forensic accounting or
litigation support
 Fraud defined
Intentional deception, simply lying,
cheating, or stealing
A generic term, embracing all
multifarious means which human
ingenuity can devise, and which are
resorted to by one individual to get
advantage over another by false
suggestions or by suppression of
truth. It includes surprise, trickery,
cunning, dissembling, and any unfair
way by which another is cheated.
Fraud defined (contd.)

Fraud includes the following elements:

A misrepresentation of a material
fact
Known to be false
Justifiably relied upon
Resulting in a loss
 Types of frauds
Fraudulent financial reporting
(management fraud)
Actions whereby management
attempts to inflate reported
earnings or other assets in order to
deceive outsiders
Overstating assets/revenues, price
fixing, contract bidding fraud,
understating expenses/liabilities
 Types of frauds
(contd.)
Misappropriation of assets
(employee fraud)
Actions of individuals whereby
they misappropriate (steal)
money or other property from
their employers
Embezzlement, theft of company
property, kickbacks
Types of fraud (contd.)

Employee embezzlement fraud in which

employees steal company assets either
directly stealing cash or inventory or
indirectly taking bribes or kickbacks
Management fraud deception by top
management of an entity primarily
through the manipulation of the financial
statements in order to mislead users of
those statements
Investment scams the sale of
fraudulent and often worthless
investments (telemarketing and Ponzi
scheme type frauds)
Types of fraud (contd.)

Vendor fraud fraud resulting from

overcharging for goods purchased,
shipment of inferior goods, or non-
shipment of inventory even when
payment has been received
Customer fraud fraud committed by a
customer by not paying for goods
received or deceiving the organization in
various ways to get something for
nothing
Miscellaneous fraud all others
altering birth records or grade reports,
etc.
 Examples of fraud
activities
Misappropriation of assets Fraudulent financial
Skimming reporting
Forgery Fictitious revenues
Kiting Asset overstatement
Phony refunds Unrecorded liabilities
Larceny Improper disclosure
Fraudulent disbursements
Lapping
Corruption
Fictitious write-offs Conflict of interest
Duplicate payments Bribery
Nonexistent vendor Illegal gratuities
Kickbacks Economic extortion
Misdirected shipments
Theft
Unauthorized personal use
of assets
Fictitious burglary
Phantom employees
Falsified time cards
 The Fraud Triangle
Three factors in the triangle (usually all
3 exist in a fraud)
Motivation (perceived pressure or
incentive)
Perceived opportunity

Rationalization

Effective internal controls limit fraud

If an organization can contain any one of
the three elements, fraud will most likely
not occur
 Overview of financial
fraud examination
Two basic categories of fraud an
auditor investigates when
examining material misstatement
risk assessment
Fraudulent financial reporting

Misappropriation of assets
 Overview of financial
fraud examination
(contd.)
Financial reporting fraud red flags
Incentive/pressures
High degree of competition or market
competition in conjunction with
declining profit margins
Perceived or real adverse effects of
reporting poor financial results
Personal guarantees by management
or board members of entity debt
 Overview of financial
fraud (contd.)
Financial reporting fraud (contd.)
Opportunities flags

Highly complex transactions

Major international operations

Deficiencies in internal controls

 Overview of financial
fraud (contd.)

Financial reporting fraud (contd.)

Attitudes/rationalization flags
Ineffective communication or
enforcement of ethical standards
Excessive interest by
management in maintaining or
increasing the entitys earnings
trend
 Overview of financial
fraud (contd.)
Misappropriation of asset risk
factors
Susceptibility of assets to
misappropriation
Large amounts of cash on hand

Easily convertible assets (bonds,

diamonds)
Controls (lack of)
 Overview of financial
fraud (contd.)
Steps of the fraud examination
Indentify issue/plan the
investigation
Gather the evidence/the
investigation phase
Evaluate the evidence

Report he findings to
management?/legal counsel
 Computer technology
in fraud investigation
(contd.)
Data mining software
Software tool that models a database for
the purpose of determining patterns and
relationships among the data
Wizrule used for data cleaning
(searching for clerical errors) or anomaly
detection.
Financial Crime Investigator systematic
approach for investigating, detecting,
and preventing contract and
procurement fraud
 Computer technology
in fraud investigation
(contd.)
Data mining software (contd.)
IDEA (Audimation Services, inc) allows user
to display, analyze, manipulate, sample or
extract data
Monarch allows investigator to convert
electronic editions of reports into text files
ACL for windows data inquiry, analysis, and
reporting software
Analysts notebook assists investigators by
uncovering, interpreting, and displaying
complex information in easily understood
charts.
 Public records see
figure 10-7
Courthouse records lawsuits, judgments,
property filings, bankruptcy filings
Company records SEC filings, Dun and
Bradstreet has private company data, D/B/A
filings with state or county, real estate
filings
Online databases lexis nexis, dow jones,
etc
The internet knowX fraud searches,
switchboard white and yellow page
listing,