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

(employee fraud)
Actions

of assets

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 nonshipment 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

Skimming
Forgery
Kiting
Phony refunds
Larceny
Fraudulent disbursements
Lapping
Fictitious write-offs
Duplicate payments
Nonexistent vendor
Kickbacks
Misdirected shipments
Theft
Unauthorized personal use
of assets
Fictitious burglary
Phantom employees
Falsified time cards

Fraudulent financial
reporting

Fictitious revenues
Asset overstatement
Unrecorded liabilities
Improper disclosure

Corruption

Conflict of interest
Bribery
Illegal gratuities
Economic extortion

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,