Presented By Felix J Lozano III CPA CFEFelix J. Lozano ... · – Ski iSkimming – Larceny – Fraudulent disbursements • Accounts receivable schemes – Improper posting of credits

Presented By

Felix J Lozano III CPA CFEFelix J. Lozano, III, CPA, CFE

JUNE 4, 2009

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Professional Certifications

• Certified Public Accountant (CPA)• Certified Fraud Examiner (CFE)Certified Fraud Examiner (CFE)• Series 7 & 66 Licenses – Registered

Representative (NASD)Representative (NASD)• Group 1 License – Texas Department of

Insurancesu a ce

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Professional Organizationsg

• American Institute of Certified Public Accountants (AICPA)

• Texas Society of Certified Public Accountants (including Litigation Services Section)Section)

• Dallas Chapter of TSCPA• Financial Consulting Group L C• Financial Consulting Group, L.C.• Association of Certified Fraud Examiners

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Professional Appointments

• Nexia International Chairman Audit Committee• Nexia International – Chairman, Audit Committee• YMCA of Metro Dallas County – Chairman, Audit

Committee & Board Member• YMCA of Metro Tarrant County – Past Chairman

of the Board, past Chairman of Finance Committee

• TCU Young Alumni Association – Past Board Member

• Hispanic Chamber of Commerce Past Board• Hispanic Chamber of Commerce – Past Board Member

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Today’s Topicsy p

• FraudFraud – Definition/Theory– StatisticsStatistics– Types of Fraud

• Dealing with Fraud• Dealing with Fraud– Prevention

D t ti– Detection• Examples

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Fraud Trivia #1

Who is Jérôme Ker iel?Kerviel?

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Bull Market Make Heroes

Scott Sullivan, WorldCom: 1998 CFO of the Year

Andrew Fastow, Enron: 1999 CFO of the Year

Mark Swartz, Tyco: 2000 CFO of the Year

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Bear Markets Make CrooksF CFO’ f th YFormer CFO’s of the Year

Scott Sullivan, 2002: Indicted andScott Sullivan, 2002: Indicted and charged with fraud.

Andrew Fastow, 2002: Indicted and charged with conspiracy, fraud, g p y, ,money laundering, insider trading.

Mark Swartz, 2002: Indicted and charged with fraud.

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Elements of a Fraud

• A representation • About a material point• Which is false• Intentionally or recklessly so• Relied upon by the victim• To the victim’s damage

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Theory of Fraud Causationy

Donald R. Cressey

• Known for his studies of organized crimeorganized crime

• Served as organized crime consultant to the President's Commission on LawCommission on Law Enforcement and Administration of Justice in 1966 and 1967

• Cressey’s hypothesis later• Cressey s hypothesis later became known as the “Fraud Triangle”

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Why do People Steal?y pPRESSURE

Fraud Triangle

PERCEIVED

Triangle

PERCEIVEDOPPORTUNITY

RATIONALIZATON

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Fighting FraudWhat Have We Done?What Have We Done?

• Treadway Commission ’87• COSO ’87• SAS 53 ’88• Certified Fraud Examiner ’88• SAS 82 ’96• Sarbanes Oxley ’02• SAS 99 ’02

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Fraud Trivia #2

Which of theseWhich of these is not a real

SCAM?SCAM?A. Vishingg

B. Romance

C. Texas Hold’m

D. Work at home

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Organization Type of Victimsg yp

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*Obtained from 2008 Certified Fraud Examiners report “2008 Report to the Nation on Occupational Fraud and Abuse”

Based on Size of Victim Organizationg


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*Obtained from 2008 Certified Fraud Examiners report 2008 Report to the Nation on Occupational Fraud and Abuse

Initial Detection of Occupational FraudFraud


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Loss Based on Perpetrator's Incomep

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Fraud Trivia #3

Who is this famous man, and what didand what did

he li h?accomplish?

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Tenure of Perpetratorp

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Age of Perpetratorg p

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Education of Perpetratorp


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Position of Perpetrator – Median Loss


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Position of Perpetrator - Frequencyp q y


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Gender of Perpetratorp

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Fraud Trivia #4Who is this man?

His name has recently become synonymous withbecome synonymous with fraud, as he has plead guilty to 11 counts including money laundering and

j ll itiperjury as well as securities, mail, and wire fraud. He will be facing up to 150 years in prison on these chargesprison on these charges.

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Number of Perpetratorsp

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Perpetrators’ Criminal Historiesp

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Distribution of Dollar Losses

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Fraud Trivia #5What 2002 movie was based on a young conbased on a young con artist who successfully impersonated an airline pilot, doctor, assistant pattorney general and history professor, cashing more than $2.5 million in fraudulent checks in 26fraudulent checks in 26 countries?

a The Magnificent Frauda. The Magnificent Fraudb. Catch Me if You Canc. The Bourne Identity

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d. Gangs of New York

Behavioral Red Flags

Behavioral Red Flags Present During Fraud Schemes

19%20%

34%39%

Control issues, unw illingness to share dutiesWheeler-dealer attitude

Financial diff icultiesLiving beyond means

ags

15%14%

15%17%

19%

Addiction problemsIrritability, suspiciousness, defensiveness

Unusually close association w ith vendor/customerDivorce/family problems

Other

havi

oral

Red

Fl

7%7%8%9%

0% 10% 20% 30% 40% 50%

Refusal to take vacationComplaining about inadequate payPast employment related problems

Past legal problems

Beh

0% 0% 0% 30% 0% 50%

Percent of Cases

*The sum of percentages in this table exceeds 100% because in several cases the perpetrator exhibited more than one behavioral red flag.

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**Obtained from 2008 Certified Fraud Examiners report “2008 Report to the Nation on Occupational Fraud and Abuse”

Fraud Schemes• Asset Misappropriation• CorruptionCorruption• Financial Statement Fraud

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Fraud Trivia #6Fraud Trivia #6

Approximately how pp ymuch does the US lose due to fraud each year?

a. More than $50 billionb More than $200 billionb. More than $200 billionc. More than $500 billiond More than $900 billiond. More than $900 billion

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Misappropriation of Assetspp p

• Cash fraud schemesSki i– Skimming

– Larceny– Fraudulent disbursements

• Accounts receivable schemes– Improper posting of credits

• Discount• Discount• Return• Write-off

• Inventory and other asset schemes– Appropriating inventory and supplies for personal use

• Stealing inventory• Theft of scrap proceeds

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p p

A/R Fraud - Lapping/ pp g

Customer C Customer C Customer A Customer A Customer B Customer B

Owes

$100

Owes

$100

Owes

$100

Owes

$100

Customer B Owes

$100

Customer B Owes

$100

Customer A Pays $100 -A/R Clerk

Customer A Pays $100 -A/R Clerk

Customer B P $100

Customer B P $100

Customer C Pays $100

C t C C t C

pockets the money

pockets the money

Pays $100Pays $100 Pays $100

Customer C

Owes $100

on the books

Customer C

Owes $100

on the booksCustomer A is credited

$100 Owes

Customer A is credited

$100 Owes

Customer B is credited

$100 - Owes

Customer B is credited

$100 - Owes

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$100 - Owes $0

$100 - Owes $0

$0$0

Healthsouth, Inc. Trick,

Entr One A/REntry One A/RRevenue

Entry Two Fixed AssetsCashCash

Entry Three CashEntry Three CashA/R

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Healthsouth, Inc. Trick,

Entr One A/REntry One A/RRevenue

Entry Two Fixed AssetsCashCash

Entry Three CashEntry Three CashA/R

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Fraud Trivia #7Fraud Trivia #7

In 2008, the US Postal ,Service announced that only __% of all identify theft actsidentify theft acts were connected to the mail.

a. 2%b. 5%c. 10%

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d. 15%

Financial Statement Fraud• Fictitious revenues

– Involves the sale or goods or services which never occurredg• Timing differences

– Improper matching of revenues– Early revenue recognition– Recording expenses in the wrong periodRecording expenses in the wrong period

• Concealed liabilities and expenses– Liability/expense omissions– Returns and allowances and warranties

I di l• Improper disclosure– Liability omissions– Significant events – Management fraud– Accounting changes

• Improper asset valuation– Inventory– Fixed Assets

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Corruptionp

• Bribery• Illegal gratuitiesIllegal gratuities• Economic extortion• Conflicts of interest• Conflicts of interest

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Fraud Trivia #8

What firm has not been involved in legalWhat firm has not been involved in legal problems in the past 10 years?a Arthur Andersena. Arthur Andersenb. KPMG

PWCc. PWCd. E&Ye. Deloitte & Touchef. None of the above

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Fraud Trivia #9

What initiated the investigation into former governor Eliot Spitzer?Spitzer?

a. He bounced a checkb. Bank filed a SARc. He confessed to his

wifewifed. Internal audit

investigation

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Fraud Prevention

• What You Can Do– Tone at the Top– Code of

Ethics/ConductEthics/Conduct– Background Checks– Appropriate pp p

Compensation– Constant Training

System of Internal– System of Internal Controls

– Consequences

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Fraud DetectionFraud Detection

• What You Can DoWhat You Can Do– Internal Audit– Separate Fraud p

Department– Software Tools

M it i– Monitoring– Whistleblower Policies

External Audit– External Audit– Foster an Open

Culture

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Fraud Trivia #10

In 2008, the ACFE reported that most pfraud is discovered by a tip. The second-most common way is by: y ya. IRS auditb Nosy supervisorsb. Nosy supervisorsc. Accidentd. Disgruntled employee

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Firm Experiences with Fraud

• Financial Statement Fraud – 2007 Client• Neurologist’s Office Case• Fort Worth ISD Case

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Financial Statement Fraud

• Compilation Client• Inflating Accounts Receivableg• $123,000• WP Accounting Services

Identified

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Neurologist’s Office Case

• Business Manager• 25 yearsy• Refinance of Home Loan• Credit Report• HIPPA Audit • $176,000

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Fort Worth ISD Case

• Construction Fraud• Collusion

– Construction Superintendent– Concrete Vendor

• $7.6 Million Fraudulent Charges• 14 Month Investigation

FBI d DA’ Offi• FBI and DA’s Office• Project Team

– Construction Auditor– Engineer– CPA’s

• Jail Term – 96 Months for both Defendants

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Presented By Felix J Lozano III CPA CFEFelix J. Lozano ... · – Ski iSkimming – Larceny – Fraudulent disbursements • Accounts receivable schemes – Improper posting of credits

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