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1st day of class


Unfortunately, Katie had already 'spent' the bonus money. ... were concerned about the 'hit' their stock price would take if this occurred. ... – PowerPoint PPT presentation

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Title: 1st day of class

1st day of class
  • Professor Kevan Jensen
  • Fraud Examination
  • Spring Semester, 2005

Class Business
  • Review Syllabus
  • Introduce Self
  • General Background
  • Professional Background
  • Educational Background
  • Family
  • My expectations for the class

Case 1
  • You are a new intern working for a major
    professional services firm. During your lunch
    break each day, you and a fellow intern, Owen,
    eat at a local sandwich shop. One day Owens
    girlfriend, Sarah, joins you for lunch. When the
    bill arrives, Owen pays with the company credit
    card and writes the meal off as a business
    expense. Owen and Sarah continue to be treated
    to lunch for several days. You know that Owen is
    well aware that a recent memo from management
    stated that casual lunches are not valid business
    expenses. When you ask Owen about the charges, he
    says, Hey, were interns. Those memos dont
    apply to us. We can expense anything we want.

Case 2
  • Jason was the star football player on the college
    team. During the off season (?) Jason was working
    as a cashier at a local clothing store. One of
    the perks of Jasons position was a 20 discount
    for he and his immediate family on the purchase
    of any non-sale items. Jasons family did not
    live in town and was seldom able to take
    advantage of the discount. However, Jason had
    many friends (he was NFL bound, what would you
    expect). Often, they would shop at the store and
    Jason would give them the discount at the
    register, even though this was technically a
    violation of the discount privilege. He felt that
    it was OK because if his family lived nearby,
    they would have been taking the discounts anyway.

Case 3
  • Kendra was the general manager of one of the
    fifteen warehouses owned by a large wholesaler of
    plumbing supplies in the western US. She had
    worked for this company for many years even
    though she always felt that the company was
    underpaying her. One day, Kendra realized that
    she could make things more fair by popping an
    occasional case of small inventory parts in her
    car at the end of the day, taking it home and
    selling it directly to Jumao, a plumbing
    subcontractor near her home. While the amounts
    involved were not material to her employer, the
    extra dollars sure came in handy. Kendra still
    considered herself a good employee.

Case 4
  • The town had been growing rapidly and its only
    high school was overcrowded. This problem was
    well-known in the community and with the
    prospects of a new school being built, many
    contractors dropped by to get to know the
    superintendent and school board members. Jerod,
    owner of Jerods Construction, secretly gave
    several thousand dollars to a member, Lauren, to
    assist in the bidding process. On the last day
    of the bidding process, Lauren called Jerod and
    told him what the lowest bid was. She didnt
    think it really mattered who got the contract.
    Jerod then won the contract by bidding slightly
    lower than that bid. In order to turn a profit,
    Jerod then used substandard materials in building
    the new school.

Case 5
  • Katie was the controller of one of the divisions
    of a large publicly traded company. Katie noticed
    that her normal bonus for the year was going to
    be lower than normal because sales were down for
    the quarter. Unfortunately, Katie had already
    spent the bonus money. Since she was the
    controller, she just told the accountants to keep
    the books open for a few days after the end of
    the quarter to capture additional sales from the
    next quarter. She felt like she could do this and
    then be more frugal in her personal life during
    the next few months to make up for the lower
    bonus that would result next quarter.

Case 6
  • Reema was a very clever purchasing manager, but
    she was very bitter that she had been passed over
    for promotion several times. Once she realized
    that she was the person responsible for
    controlling the master vendor list, she placed
    several fictitious vendors on the list. After a
    few days, she began to submit phony invoices from
    these phony vendors for various consulting
    services. Accounts payable sent the payments to
    Reema (of course they didnt know it was her)
    after checking the master vendor list. Reema was
    particularly clever because she realized that if
    her phony vendors provided inventory instead of
    services, it would lead to shortages in the
    inventory records, which might lead to her being
    caught. The invoice amounts totaled the
    difference between her current salary and what it
    would have been with the promotions.

Case 7
  • Bree waited tables at a local restaurant. What
    she made at the restaurant was not enough to pay
    for her drug habit. Once she became savvy with
    the cash register, she began to skim a little
    off the top for herself. The way she would do
    this is when a customer paid in cash, she would
    sometimes ring up no sale on the register and
    then slip the cash into her apron. Bree realized
    that when she did this, the cash in the drawer
    would always match the register tape, and no one
    would ever know. Bree didnt feel bad about what
    she was doing because the restaurant was upscale
    and charge really high prices for its food.

Case 8
  • The economy had entered a recession and it looked
    like the company was not going to meet earnings
    forecasts for the quarter. Chris (the CEO) and
    Chad (the CFO) were concerned about the hit
    their stock price would take if this occurred.
    They believed that things were going to improve
    during the next quarter and such a hit was
    unnecessary. Something needed to be done to
    protect them, the company, and the investors.
    Chad instructed Casi, the new accounting manager
    to review the maintenance expense records for the
    last three month and find some large expenses
    to capitalize as fixed assets. Casi did so and
    booked an adjustment that made earnings come out
    exactly as forecast. Although she was nervous
    about doing this, she shrugged it off, thinking
    that Chad must know what he was doing.

Case 9
  • Kevan and Eileen bought something that looked
    really cool on TV (The Magic Bullet mixer and
    juicer) from Homeland Housewares in Pacoima,
    California. When it arrived, it did not work at
    all as shown on TV. Although they advertised that
    refunds were available, they refused to give us a
    refund, even when I said I would use them as an
    example of consumer fraud in my fraud class.
    Although consumer fraud is not a focus of this
    course, I thought it was important that you make
    note of this company and product and share it
    with as many people as possible, including your
    family and friends.

What is Fraud?
All multifarious means which human ingenuity
can devise and which are are resorted to by an
individual to get an advantage over another by
false suggestion or suppression of the truth,
and includes all surprise, trick, cunning, or
disassembling, and any unfair way by which
another is cheated. -Webster
What is Fraud?
  • A deception that includes A representation
    about a material point, which is false, and
    intentionally or recklessly so, which is believed
    and acted upon by the victim to the victims
  • -Albrecht

A. Employee Fraud
  • Sometimes called occupational fraud,
    embezzlement, fraud against an organization
  • Includes Asset Misappropriation and Corruption

Asset Misappropriation 1
  • Skimming (taking assets before they are recorded)
  • Larceny (taking assets after they are on the
  • Disbursement schemes (include billing, payroll,
    reimbursement, check tampering, register
    disbursement schemes)

Asset Misappropriation 2
  • Assets are generally categorized as
  • - Cash
  • - Other Assets
  • Includes either taking or using assets

  • Conflicts of Interest (purchase, sales schemes)
  • Bribery (kickback, bid-rigging schemes)
  • Illegal Gratuities
  • Extortion

B. Management Fraud
  • Sometimes called financial statement fraud or
    fraud on behalf of an organization
  • May involve overstatement or understatement

Recent Management Frauds
  • Enron
  • WorldCom
  • Adelphia
  • Global Crossing
  • Xerox
  • Qwest
  • HomeStore
  • Sunbeam
  • Many others (Cendant, Lincoln Savings, ESM,
    Anicom, Waste Management, Tyco, etc.)

Since things were fixed
  • US Foodservice
  • Nortel
  • Fannie Mae
  • Krispy Kreme
  • Others

Other types of Fraud
  • Vendor Fraud
  • Customer Fraud
  • Investment Scams
  • Consumer Fraud
  • Tax Fraud
  • Bankruptcy and Divorce Fraud
  • Identity Theft

These Are Interesting Times
  • Number and size of management frauds seems to
    have surged recently
  • Number and size of employee frauds also appear to
    be increasing
  • Some recent frauds involve multiple
    individualsas many as 20 or 30 (indicates moral
  • Because investors lost confidence in the
    credibility of financial statements and corporate
    reports, we now have SarBANEs-Oxley.

Fraud Statistics
  • Organizations Lose Between 1 and 6 of Revenues
    to Fraud
  • Insurance Fraud in 1999 was 120 Billion
  • General Motors had 436 Million Fraud
  • Large Bank in 1996
  • 6200 Customer Frauds
  • 2100 Employee Frauds
  • Dishonesty Is Increasing
  • 12 in 1961
  • 31 in 1986
  • ?? In 2000
  • Retail Losses
  • 30 Customers
  • 70 Employees
  • 9 Per Employee Per Day

Why Dishonesty Is Increasing!
  • Bad Modeling/Lack of Good Modeling
  • Makes Up The News
  • Focus of TV/Movies
  • Dishonest Leaders
  • Good Models Are Rare
  • Lack of Positive Labeling
  • Home….Average Family Spends 10 hours less time
    together a week
  • Vocabulary of Kindergarten children
  • Schools
  • Churches

Ernst Young Fraud Study2002 (Europe)
  • One in five workers are aware of fraud in their
  • 80 would be willing to turn in a colleague but
    only 43 have
  • Employers lost 20 cents on every dollar to
    workplace fraud
  • Types of fraud
  • Theft of office items37
  • Claiming extra hours worked16
  • Inflating expenses accounts7
  • Taking kickbacks from suppliers6

Expense Report Cheating
Cheating on an expense report 58 Working
second job on company time 50 Rushing deals
through accounting before closed 36 Listing
Strip bar as a restaurant on expense 33 Giving
a kickback to a customer 19 USA Today
The typical U.S. organization loses 6 of its
annual revenue to fraud 660 billion!
Why Fraud is a Costly Business Problem that must
be addressed by corporate executives
  • Fraud Losses Reduce Net Income for
  • If Profit Margin is 10, Revenues Must Increase
    by 10 times the losses to Recover the Affect on
    Net Income
  • Losses…….100 Million
  • Revenue…..…1 Billion
  • Fraud Robs Income

Revenues 100 100 Expenses 90 90 Net
Income 10 10 Fraud 1 Remaining
9 To restore income to 10, need 10
more dollars of revenue to generate 1 more
dollar of income.
Fraud Cost….Two Examples
  • General Motors
  • 436 Million Fraud
  • Profit Margin 10
  • 4.36 Billion in Revenues Needed
  • At 20,000 per Car, 218,000 Cars
  • Bank
  • 100 Million Fraud
  • Profit Margin 10
  • 1 Billion in Revenues Needed
  • At 100 per year per Checking Account, 10
    Million New Accounts

Financial Statement Fraud
  • Financial statement fraud causes a decrease in
    the market value of a stock of approximately 500
    to 1,000 times the amount of the fraud.

2 billion drop in stock value
7 million fraud
Where does fraud occur?
  • Type Median Loss
  • Private company 42 123,000
  • Public company 30 100,000
  • Government 16 38,000
  • Non-profit 12 100,000

Where does fraud occur?
  • No of employees Median Loss
  • 1-99 46 98,000
  • 100-999 21 79,000
  • 1000-9,999 20 88,000
  • 10,000 13 106,000

Where does fraud occur?
  • Industry of cases Median Loss
  • Manufacturing 13 125,000
  • Banking 11 101,000
  • Service 11 139,000
  • Government 11 45,000
  • Other 9 145,000
  • Insurance 9 173,000
  • Retail 8 36,000
  • Health Care 7 105,000

Where does fraud occur?
  • Industry of cases Median Loss
  • Education 6 31,000
  • Construction 3 145,000
  • Transportation 3 225,000
  • Oil Gas 3 102,000
  • Communication 3 150,000
  • Utility 3 30,000
  • Real Estate 2 385,000
  • Agriculture 1 1,080,000

Fraud Internationally Transparency Intl
  • 1. Finland
  • 2. Denmark
  • 3. New Zealand
  • 4. Iceland
  • 5.Singapore
  • 5. Sweden
  • 7. Canada
  • 7. Luxembourg
  • 7. Netherlands
  • 10. United Kingdom
  • 11. Australia
  • 16. United States
  • 18. Germany
  • 20. Japan
  • 31. Italy
  • 59. China
  • 71. Russia
  • 96. Indonesia
  • 101. Nigeria
  • 102. Bangladesh

What do these frauds look like?
  • 10,000-100,000 36
  • 100,000-1,000,000 36
  • 1,000,000 15

What do these frauds look like?
  • Asset Misappropriation 93 93,000
  • Corruption 30 250,000
  • Financial Statement 8 1,000,000

Who is doing it…gender?
  • Males 53 160,000
  • Females 47 60,000

Who is doing it…age?
  • 31-40 34 80,000
  • 41-50 32 173,000
  • 51-60 15 250,000
  • 60 2 527,000

Who is doing it…education?
  • Graduate 9 325,000
  • Bachelor 42 150,000
  • High School 49 50,000

Who is doing it…marital status?
  • Married 72 150,000
  • Separated 9 50,000
  • Divorced 8 80,000
  • Single 11 54,000

Who is doing it…position?
  • Employee 68 62,000
  • Manager 34 140,000
  • Owner/Executive 12 900,000

Who is doing it…history?
  • Prior convictions 12
  • Charged never convicted 5
  • Never previously charged 83

Who are the victims?
  • Owners
  • Managers
  • Investors
  • Employees
  • Families
  • Customers
  • Clients
  • There are always victims!!!!!!!!!

Who Are The Fraud Perpetrators?
  • Employees
  • Managers
  • Colleagues
  • Friends
  • Suppliers/Customers
  • Contractors
  • Neighbors
  • Bishops/Ministers

Who Commits Fraud?
Bank Robbers
Normal Citizens
Fraud Perpetrators

Major Differences
No Significant Differences
While people who commit rape, murder, bank
robbery and other property offenses have
distinguishing characteristics, fraud
perpetrators look more like more citizens than
Who Commits Fraud--Psychological Characteristics
  • Optimistic
  • High Self-Esteem
  • Achieving
  • Family Harmony
  • Socially Conforming
  • Self Control
  • Kind
  • Sympathetic

Who Commits Fraud -Demographics
  • Married
  • Active Church Members
  • Children
  • Good Education
  • First-Time Offenders
  • Good Employees
  • Dont Abuse Alcohol

  • …Fraud perpetrators look exactly like you and me!

And thats why you need this class!
Career Opportunities
  • Government
  • FBI, IRS (CID), GAO, Postal Inspectors, State
    Agencies, Treasury, etc.
  • Forensic Accounting
  • Big 4
  • Smaller firms
  • Boutiques
  • Corporations (internal audit, security, in-house

Career Opportunities
  • Law firms (prosecuting and defending fraud)
  • Consultants (prevention, detection, etc.)
  • Expert witnessing
  • And dont forget those of you who own your own

Whats Hot in Accounting--7 Sizzling Areas
  • Assurance services--Elder care
  • Consulting services
  • Information technology services
  • Forensic accounting
  • Environmental accounting
  • International accounting
  • Tax and financial planning

This information comes from the American
Institute of CPAs
Wanted More Schools for Security Pros
  • The U.S. alone will face a shortfall of between
    50,000 and 75,000 security professionals in the
    next few years.
  • Al Decker, CEO of Fiderus, Information Security
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