School of Accounting Florida International University Fraud Detection Recognizing the symptoms of Fraud Proactive Approaches to Detecting Fraud.

School of AccountingFlorida International University

Fraud Detection

Recognizing the symptoms of Fraud

Proactive Approaches to Detecting Fraud


Discuss the Symptoms of Fraud


List 6 Symptoms of Fraud

Accounting AnomaliesLedger Doesn’t BalanceInternal

Control Weakness

No Vacation

Analytical Anomalies

1 = 1


List 6 Symptoms of Fraud

Extravagant Lifestyle

Unusual Behavior

Tips & Complaints


Accounting Anomalies:Irregularities in Source Documents

• Missing Documents• “Stale Items” on Bank

Reconciliation• Excessive Voids or

Credits• Payee Names &

Addresses = Customer Names & Addresses

• Photocopied Documents

• Payee Names & Addresses = Employee Names & Addresses

• Doc sequences that do not make sense

• Questioning handwriting on doc

• Altered Documents

• Duplicate Payments

• Second Endorsements on Checks


Accounting Anomalies

• Faulty Journal Entries

• Inaccuracies in the Ledgers

– Ledger Doesn’t Balance

– Master or Control Accounts Do Not Equal the sum of individual customer or vendor accounts


Internal Control Weaknesses

Lack of Segregation of Duties

Lack of Physical Safeguards

Lack of Independent Checks & Reviews

Lack of Proper Authorization

Overriding of Existing Controls

Inadequate Accounting System


Some Common Examples of Analytical Anomalies

• Unexplained Inventory Shortages or Adjustments

• Increased Scrap

• Excess Purchases

• Too Many Debit or Credit Memos

• Significant increase or decrease in account balances

• Physical Anomalies

• Cash Shortages or Overages

• Excessive Late Charges

• Unreasonable Expenses or Reimbursements


Revenues with Receivables

Revenues with Inventory

Strange Financial Statement Relationships

Inventory with Payables

Volume with Increase Cost Per Unit Volume with Scrap

Inventory with Warehousing Costs

Revenues with Cash Flows


Accounting Anomalies


Extravagant Lifestyles

• Financial Pressure

• Greed

• Spend What They Steal

• Significant Improvement in Lifestyle

• Living Way Beyond Their Legal Means


What is the chain that leads to unusual behavior?

Guilt

Fear

Stress

BehaviorChanges


Some Unusual Behaviors

• Insomnia

• Increase Drinking

• Drug Abuse

• Unusually Irritable & Suspicious

• Unable to Relax

• Lack of Pleasure in Former Pleasing Things

• Inability to Look People in the Eyes

• Unusually Belligerent• Working Standing Up• Sweating• Increased Smoking• Fear of Getting

Caught


Why are more frauds discovered through tips & complaints?

• Auditors Focus on Paperwork, Systems & Information

• Fellow Employees Notice Lifestyle Changes

• Complaints & Tips Are Only Symptoms - the Actual Investigation Can Show if a Fraud Exists


Why do employees hesitate to come forward with fraud information?

1. They’re Not 100% Sure a Fraud Is Occurring

2. They Don’t Want to Wrongly Accuse Someone

3. They Have Heard Horror Stories About What Happens to Whistle Blowers

4. Intimidation by Fraudsters

5. Condition Against Squealing


Discuss the Use of Hotlines

• Hotlines are “800” Phone Numbers Where Employees Can Provide Anonymous Tips & Information

• Sometimes Set Up by the Company or Contracted with a Service or Organization Like ACFE


What is typical of most frauds, as in the case of Mr. Hamanaka?


Differentiate Between Detecting & Investigating Fraud

DetectionDiscovery of

Fraud

Answers the Question

Does a fraud exist?

InvestigationPreceded by Detection

Proving a Fraud

Answers the Questions

How? Who? Why? What? Where? When a fraud took place?


Data-Mining as a Means of Detecting Fraud

• ACL- Audit Command Language

• Looking for Anomalies in Databases

• Difficulty Because ACLs Are Limited in What They Can Handle

• The Result Is They May Identify Thousands of Symptoms Because of Their Limitations


How Benford’s Law Works


What are some disadvantages of Benford’s Law?

• Looks at a Large Company as a Whole, May Not Show Problems With Some Individual Vendors

• Not Precise

• Broad Identification of Symptoms

• Does Not Zero in on Perpetrators


Detecting or Identifying Fraud Perpetrators

• Use technology to search through vast sources of data to identify strange, abnormal relationships.


5. Follow Through with Investigation to Determine if Fraud Exists or Not

What is the 5 step Process for Deductive Fraud Detection

4. Use Databases & Information Systems to Search for Symptoms

3. Understand the Symptoms these Types of Fraud Create

2. Understand the Types of Fraud that Occur in this Business

1. Understand the Business


Compare the 3 Approaches

Commercial Data Mining Packages are least costly, but have limited

usefulness. They provide excessive symptoms, but are easy to use and

modify.



Statistical Analysis provides lots of symptoms and is

very useful for discovering vendor kickback frauds.



The Deductive Approach is the most expensive to

use.


Summarize the Process Which Results in Financial Statements

Effects Investor or Creditor Decisions

Economic Transactio

n

Produces

Journal Entry

Posted

Financial Statement

s

Analysis

General Ledger

Summar-ized

Source Document

s

Analysis


What Effect Does the Size of the Fraud Have on the F/S?

Small frauds are unlikely to

affect F/S usually

detected when examining

source documents

Large frauds effectF/S detected

during analysis of

unexplainedchanges in

F/S


How Revenue Affects the Company’s Accounts

If SalesIncrease

Then

Accounts Receivabl

e

Revenue

Cost of Goods Sold

Inventory


Perform Vertical Analysis

Perform Horizontal Analysis

Calculate Key Ratios

Compare from Period

to Period

How can you convert balance sheets & income statements to

change statements?

Compare Account Balances

from Period to Period


Describe How to Perform Vertical Analysis on


Describe How to Perform Horizontal Analysis on


What questions should be the focus when using a Statement of Cash

Flows to detect fraud?

• Are there any unexpected changes in cash?

• Did A/R go up or down? Why?

• Why did inventory go up or down?

School of Accounting Florida International University Fraud Detection Recognizing the symptoms of Fraud Proactive Approaches to Detecting Fraud.

Documents

symptoms of fraud slide

caught slide

acfe slide

squealing slide

fraud information

fraud perpe

thousands of symptoms

vacation analytical