Forensic accounting

fraud triangle

Opportunity, Pressure, Rationalization

How do fraudsters cover their tracks?

Crediting assets, debiting expenses. Normally you will increase expenses when committing fraud.

Elements that increase likelihood of fraud

Lack of Controls, inability to judge performance quality, failure to discipline fraudsters, lack of access to info, ignorance, lack of an audit trail

Difference between fraud, corruption, and negligence

Fraud has intent and victim. Corruption is the misuse of entrusted power for private gain such as bribery. Negligence is not intentional.

7 things needed for fraud

1. A representation

2. About a material point

3. which is false

4. and recklessly so

5. which is believed

6. and acted upon by victim

7. to the victim’s damages.

Preventative control examples

Segregation of duties, system of authorizations, physical safeguards

Detective controls

Independent checks, documents and records

Ponzi Scheme

Investment fraud that pays returns to earlier investors using money contributed by newer investors, rather than actual profit

Occupational fraud

The misuse of one’s occupation for personal enrichment such as employee embezzlement

Direct embezzlement

Stealing company assets

Indirect embezzlement

taking kickbacks

5 parts of internal control framework

1. control environment

2. Risk assessment/accounting system

3. control activities

4. information and communication

5. monitoring activities

two fundamental activities of preventing fraud

1. Create and maintain a culture of honesty and high ethics

2. Assess the risks for fraud, develop concrete responses to mitigate the risks, eliminate the opportunities for fraud

5 ways to eliminate fraud opportunities

1. have good internal controls

2. discourage collusion

3. monitor employees and provide a whistle-blowing system

4. create an expectation of punishment

5. conduct proactive auditing

6 groups of fraud symptoms

1. Analytical anomalies

2. document (accounting) anomalies

3. controls override

4. unusual behavior

5. lifestyle

6. tips and complaints

analytical anomaly examples

JEs without doc support, unexplained adjustments, JEs that don’t balance, JEs made by individuals who don’t normally make them, JEs made at end of accounting period, round or large number transactions, infrequent or regular patterns

Document/Accounting anomalies

missing docs, stale items, excessive credits, common names or addresses, duplicate payments, document sequences that don’t make sense, increased past due items.

Controls override examples

poor control environment, segregation of duties, physical safeguard, independent checks, proper authorizations, proper document and records

what makes up the control environment

managment’s role and example, management communication, clear organizational structure, appropriate hiring, effective internal audits

risk assessment/accounting system

transactions are valid, authorized, complete, properly classified, reported in proper period, properly valued, and summarized correct.

control activities

segregation of duties, dual custody, system of authorizations, independent checks, physical safeguards, documents and records

fraud triangle opportunities

lack of controls, inability to judge performance quality, failure to discipline fraudsters, lack of access to info, ignorance, lack of audit trail

rationalization

getting little recognition, feeling dissatisfied, fear of losing job, being overlooked, feeling underpaid