AFA708 Week 4 Slide Notes PDF

Forensic Accounting and Fraud Examination Chapter 4: Cash Receipt Schemes and Other Asset Misappropriations A Case of Taking from the Poor to Give to the Rich Non-profit for 9/11 victims misappropriated funds. Anonymous tip revealed corporate officers using...

Forensic Accounting and Fraud Examination Chapter 4: Cash Receipt Schemes and Other Asset Misappropriations A Case of Taking from the Poor to Give to the Rich Non-profit for 9/11 victims misappropriated funds. Anonymous tip revealed corporate officers using funds for personal use. Inconsistent vendor records and two sets of financial records. Some transactions missing from original journals and ledgers. Unauthorized personal expenditures on credit. Skimming Schemes—Cash Cash is stolen before entering the accounting system ("off-book" fraud). No direct audit trail; can occur anywhere cash enters the business. Sales Skimming: Fraudster collects payment without recording the sale. Receivables Skimming: Unlogged receivable payments. Check Skimming Example 1. Fraudster creates a company called OSI, LLC. 2. Opens a bank account using a tax identification number. 3. Deposits checks intended for Office Supplies Inc., LLC into the fraudulent OSI account. 4. Skims occasional checks and manages missing checks' receivables. Sales Skimming Employee collects payment but doesn’t record the sale. Cash Register Manipulation: Rigging registers to omit sale records. After-Hours Sales: Skimming during nonbusiness hours leads to inventory shrinkage. Skimming by Off-Site Employees: High-cost schemes in remote or unsupervised positions (e.g., apartment managers). Poor Collection Procedures: Lack of daily receipt itemization enables skimming. Understated Sales: Misrepresenting sales figures to cover theft. Check-for-Currency Substitutions: Substituting unrecorded checks for receipted currency. Theft in Mailroom: Employees steal incoming checks instead of processing them. Mixed Systems and System Interfaces Easier to skim in manual systems but possible in computerized ones. Fraudsters exploit interfaces between manual and computerized systems to facilitate and conceal fraud. Preventing and Detecting Sales Skimming Strong management oversight during cash handling. Use of clustered registers and video surveillance. Monitoring log-in/log-out times and activity logs for off-site employees. Involve multiple employees in opening mail and logging payments. Encourage customer complaints and tips. Big Data and Data Analytics Modern registers track transactions with time stamps, ISPs, etc. Data analytics used to identify anomalous activities across time, employees, or locations. Skimming Schemes—Receivables More complex than sales skimming; receivable payments not logged into system. Techniques to Conceal Receivables Skimming: ○ Lapping: Using one account’s funds to cover another. ○ Force Balancing, Stolen Statements, Fraudulent Write-offs. ○ Debiting Wrong Account, Altering Records. Lapping Common method to hide receivables skimming. "Robbing Peter to pay Paul"; continues until discovered, restitution is made, or accounts are adjusted. Lapping can also hide sales skimming. Ponzi schemes have similar elements to lapping. Big Data and Data Analytic Techniques for Detecting Noncash Misappropriations (3 of 3) Inventory receipts per inventory item versus actual receipts per invoice should be compared Inventory quantities received in excess of quantity ordered should be flagged Extract inventory returns with no corresponding sales Compare invoices and purchase orders for discrepancies in quantities, prices, or descriptions Review credit memos and refunds for inventory returned by employees or accomplices Identify patterns of excessive inventory write-offs or discounts Corruption Schemes Corruption schemes involve employees using their influence in business transactions for personal gain Common corruption schemes include: Bribery: Involves offering, giving, receiving, or soliciting something of value to influence a business decision Kickbacks: Involves payments made to employees in return for facilitating a deal or helping a vendor secure a contract Conflicts of interest: Occur when an employee has an undisclosed personal interest in a business dealing Illegal gratuities: Involves giving gifts or money to influence future decisions Preventing and Detecting Corruption Establish a strong code of conduct Implement a whistleblower policy and hotline Ensure transparency in business transactions Monitor unusual relationships between employees and vendors Rotate job duties to avoid collusion Review and audit vendor contracts regularly Use data analytics to compare prices and terms with industry benchmarks Financial Statement Fraud Schemes Financial statement fraud involves deliberately misstating or omitting information in financial reports to deceive stakeholders Common methods include: Revenue recognition fraud: Premature or fictitious revenue recognition Expense manipulation: Understating liabilities or inflating assets to improve financial ratios Improper asset valuation: Overstating the value of assets, such as inventory or accounts receivable  Concealing liabilities: Not recording liabilities to improve the appearance of financial health Preventing and Detecting Financial Statement Fraud Implement strong internal controls, especially over financial reporting Conduct regular and thorough audits of financial statements Use forensic accounting techniques to detect anomalies Ensure proper segregation of duties in the financial reporting process Regularly compare financial results with operational metrics to detect inconsistencies Employ data analytics tools to detect unusual trends in revenue, expenses, and asset valuations Enforce strict policies for revenue recognition and asset valuation Big Data and Data Analytics for Detecting Financial Statement Fraud Compare reported revenue to actual cash inflows Identify significant variances between budgeted and actual financial results Review expense reports for irregularities or inflated amounts Summarize unusual or one-time adjustments to revenue, expenses, or liabilities Extract journal entries with unusual debit and credit combinations Analyze trends in financial ratios and compare them to industry norms