Wells ffirs.tex V3 - September 2, 2013 12:16 A.M Page ii Wells ffirs.tex PRINCIPLES OF FRAUD EXAMINATION V3 - September 2, 2013 12:16 A.M Page i Wells ffirs.tex V3 - September 2, 2013 12:16 A.M Page ii Wells PRINCIPLES OF FRAUD EXAMINATION FOURTH EDITION JOSEPH T WELLS, CFE, CPA ffirs.tex V3 - September 2, 2013 12:16 A.M Page iii Wells VICE PRESIDENT AND PUBLISHER George Hoffman EXECUTIVE EDITOR Joel Hollenbeck CONTENT EDITOR Brian Kamins EDITORIAL ASSISTANT Rebecca Costantini Sr MARKETING MANAGER Karolina Zarychta Honsa SENIOR PRODUCTION MANAGER Janis Soo ASSOCIATE PRODUCTION MANAGER Joel Balbin PRODUCTION EDITOR Eugenia Lee COVER DESIGNER Kenji Ngieng COVER PHOTO C Thinkstock/iStock ffirs.tex V3 - March 13, 2014 6:21 P.M This book was set in 10/12pt TimesLTStd by Laserwords Private Limited, Chennai, India and printed and bound by Courier Kendallville The cover was printed by Courier Kendallville This book is printed on acid free paper Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright C 2014, 2011, 2008, 2005 Association of Certified Fraud Examiners, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy Outside of the United States, please contact your local representative To order books or for customer service, please call 1-800-CALL WILEY (225-5945) ISBN-13: 978-1-118-92234-7 (pbk.) Printed in the United States of America 10 Page iv Wells To the memory of my father, Coyle A Wells (1906–1962), and my mother, Vola D Wells (1910–1990) ffirs.tex V3 - September 2, 2013 12:16 A.M Page v Wells ffirs.tex V3 - September 2, 2013 12:16 A.M Page vi Wells flast.tex V1 - July 29, 2013 1:38 P.M FOREWORD It is a pleasure to write the foreword for Principles of Fraud Examination, a book authored by my friend, Dr Joseph T Wells I have known Joe for over 20 years While most students, practitioners, and academics know him as the founder and chairman of the Association of Certified Fraud Examiners, I know Joe as a friend, as one who has influenced my thinking, knowledge, and research about fraud, and as a person who is one of the most thorough, ambitious, and thoughtful fraud researchers I have ever met And, as you will see from reading this book, Dr Wells is an excellent communicator who can make numerous fraud theories and schemes easy to understand Joe is a prolific writer For several years, he authored a fraud-related article in nearly every issue of the Journal of Accountancy, and he has written many other books and articles Dr Wells’ work has won numerous awards He has also written and produced more than a dozen fraud-related videos that are an integral part of nearly every accounting, auditing, and fraud curriculum in the United States It is my opinion that Joseph T Wells has made a greater contribution to the prevention, detection, and investigation of fraud than any person in the world Because of his work in fraud education and research and his vision in organizing the ACFE, there are tens of thousands of people who have a better understanding of fraud and who are working to reduce its cost and occurrence Principles of Fraud Examination provides an excellent description of the behavioral and social factors that motivate occupational offenders It also provides an analysis and taxonomy of various kinds of frauds and cases that illustrate and help readers understand each type of fraud The concepts described in the book are sound and are based on the most extensive empirical research ever conducted on the subject This book is a must read for any student interested in the study of fraud Reading Principles of Fraud Examination will help you better understand the various ways fraud and occupational abuse occur, thus helping you identify exposures to loss and appropriate prevention, detection, and investigation approaches And, as you will see, the book is written in a way that will capture and hold your attention The numerous fraud stories and personal insights provided by Joe will have you believing you are reading for enjoyment, while in fact, you will be learning from one of the true master educators I believe this book is destined to become one of the real classics and definitive works on the subject of fraud W Steve Albrecht, PhD Brigham Young University vii Page vii Wells flast.tex V1 - July 29, 2013 1:38 P.M Page viii Wells www.downloadslide.net b04.tex V2 - August 10, 2013 12:00 A.M Page 512 www.downloadslide.net INDEX Abuse, definition of, 10–12 Abusive conduct, defining, 443–444 Accounting principles and fraud in financial statements, 273–276 responsibility for financial statements, 280–281 types of financial statements, 281–283 user of financial statements, 281 Accounts receivable, 325 ACFE Fraud Examiner’s Manual, 453 Admission-seeking questions direct accusation, 431–432 interrupt denials, 432 observe reaction, 432 repeat accusation, 432 Admission-seeking questions Miranda warnings, 431 presence of outsiders, 430–431 theme development, 431 Albrecht, Dr Steve, 21–24 Fraud Scale, 23–24 Altavista, 459 Altered inventory records, 229 Altered payee scheme, 134–138 conversion of fraudulent checks, 137 prepared by fraudster, 136–137 prepared by others, 136 preventing and detecting, 137–138 Altered receipts, 185 Altered sales, 168–169 Ancestry.com, 462 Anti-corruption legislations, 263–267 Foreign Corrupt Practices Act (FCPA), 263–265 United Kingdom (UK) Bribery Act, 265–267 Anybirthday.com, 462 Ascribed obligations, violation of, 14 Asset misappropriations, 44–45 Asset requisitions and transfers, 222–223 Association of Certified Fraud Examiners (ACFE), 8, 21, 30–31, 33, 41, 43–44 ‘‘Attempt to commit’’ offenses, 294 AU 240, 329, 331, 335–336 Auditing, 334–335 fraud risk assessment and, 384 surprise audits, 449 vs fraud examination, Authorized maker scheme, 139–142 overriding controls, 140–141 poor controls, 141 preventing and detecting, 141–142 Automated clearing house (ACH) payments, 148 Automatic check-signing mechanisms, 129 Bankruptcy Code (§107), 406 Bankruptcy documents, 406 Bankruptcy loopholes, 295 Bid-pooling, 252–253 Bid-rigging schemes, 249–255 presolicitation phase of the competitive bidding, 250–252 preventing and detecting, 254–255 solicitation phase of the competitive bidding, 252–253 submission phase of the competitive bidding, 253–254 Bid rotation, 355 Bid-splitting, 252 Billing schemes from the ACFE 2011 Global Fraud Survey, 96 case study, 93–94 non-accomplice vendor schemes, 104–108 personal purchases with company funds, 108–114 proactive computer audit tests for detecting, 114–116 shell company schemes, 97–104 Bing, 459 Black’s Law Dictionary, Blogs, 407 Bogus supporting documents, 147 Booking fictitious assets, 326 BRB Publishing, 464 Breach of fiduciary duty, Bribery, 242–243 bid-rigging schemes, 249–255 diverting business to vendors, 244–246 gifts as, 255 kickback schemes, 244–246 overbilling schemes, 246–249 promises of future employment, 255 Bureau of Industry and Security’s List of Denied Persons, 463 Business combinations, 325 Business diversions, 262 Business reversals, 15 Capitalizing non-asset cost, 328 Cash larceny, 74 by altering cash register, 80–81 case study, 75–77, 86–87 data from the ACFE 2011 Global Fraud Survey, 78 513 www.downloadslide.net 514 INDEX Cash larceny, (continued) ‘‘death by a thousand cuts’’ larceny scheme, 80 defined, 77 from the deposit, 82–86 from deposits in transit, 84–85 by destroying records, 82 by force balancing, 82 by fraudulent reversing transactions, 80 by lapping method, 82 at the point of sale, 78–81 preventing and detecting, 81, 85–86 proactive computer audit tests for detecting, 87–88 of receivables, 81–82 from registers, 78–80 by reversing entries, 82 Cash receipts schemes, 77 Center for Responsive Politics, 463 Certification obligations for CEOs and CFOs internal controls, 290 section 302, 289 section 906, 289 Certified fraud examiners (CFEs), 30–31, 393 Channel stuffing, 314 Check-for-currency substitutions, 59–61 Check fraud, 352–353 Checks before delivery, intercepting, 132–133 Check tampering schemes altered payee scheme, 134–138 authorized maker scheme, 139–142 case study, 121–123 concealed check schemes, 138–139 concealing of, 142–147 data from ACFE 2011 Global Fraud Survey, 123–124 forged endorsement schemes, 130–134 forged maker schemes, 125–130 proactive computer audit tests for detecting, 149–151 Chronology, 399 Civil liabilitywhistleblower protection, 293–294 Clear, 464 Closed questions, 420 Code of Business Ethics and Conduct, 467–469 Collusion, 35–36 among contractors, 355 between employees and vendors, 244 with other employees, 101 with supervisors, 164–165 Commercial bribery, 266 Commercial online services, 406, 457–459 Commission schemes, 167–169 altered sales, 168–169 case study, 169–170 detecting, 169 fictitious sales, 167–168 Company assets, 472–473 Company checks, forging, 125–127 Company existence, verifying, 103 Company invoices, identifying, 101–102 Complementary bidding, 355 Compliance letter, 475–479 Computer fraud, 358 preventing and detecting, 359–361 Computer hacking, 358–359 Concealed check schemes, 138–139 Concealed liabilities and expenses, 316–320 allowances, 320 capitalized expenses, 318–319 expensing capital expenditures, 319 liability/expense omissions, 317–318 red flags associated with, 320 returns, 320 warranties, 320 Concealing of register disbursement scheme, 205–206 destroying records, 206 for small disbursements, 206 Conflict of interest questionnaire, 475–479 Conflicts of interest, 256–263, 469–472 business diversions, 262 case study, 257–259 financial disclosures, 263 preventing and detecting, 263 provisions in Sarbanes–Oxley Act of 2002, 291–292 purchasing schemes, 259–261 resource diversions, 262 sale schemes, 261–262 ‘‘Conspiracy to commit’’ offenses, 294 Controls in authorized maker scheme, 140–141 in electronic payment tampering, 148–149 employee perception of, 29–30 fraud deterrence and, 447 organizational, and deviance, 28–29 of stolen checks, 132 in workplace, 29–30 Conversion, Conversion of fraudulent checks, 137 Corporate cop, 21 Corporate espionage access to a target’s information, 362–363 favorite targets of, 361–362 preventing and detecting, 363–364 surveillance and, 363 Corporate Information, 464 Corporate sentencing guidelines definition, 450–451 types of penalties, 451 vicarious or imputed liability, 451 Corruption, 45 See also Anti-corruption legislations bribery, 242–243 case study, 239–241 data from the ACFE 2011 Global Fraud Survey, 241–242 defined, 241 economic extortion, 243 www.downloadslide.net INDEX illegal gratuities, 243 proactive computer audit tests for detecting, 267–269 Cost mischarging, 357 Counterfeit checks, 127, 352 Counterfeit credit cards, 353–354 County fire marshal, 401 Courtlink, 461 Covert operations, 395 Credit card fraud, 353 stolen card numbers, 353 Credit card refunds, 202 Cressey, Donald R., 13 absconders, 19–21 business reversals, 15 employer-employee relationships, 16 fraud triangle, 13 hypothesis on embezzlers, 13 independent businessmen, 18 long-term violators, defined, 18–19 nonshareable financial problem, 13–14 perceived opportunity to commit a trust violation, 17 physical isolation, problems from, 16 problems resulting from personal failure, 15 rationalization of crime, 17–18 secret solving of problems, 16–17 status-gaining, problems relating to, 16 violation of ascribed obligations, 14–15 Criminal records, 461–462 Criminal sanction whistleblower protection, 294 CSC, 458 Customers, threats from, 352–354 Data availability, Data destruction, 359 Data manipulation, 359 D&B, 458 DCS Information Systems, 458–459, 462 ‘‘Death by a thousand cuts’’ larceny scheme, 80 Death certificate, 401 Deception, Deposit lapping, 84 Detecting and preventing occupational fraud, 43–45 Deterrence, fraud adequate reporting programs, 449–450 analytical review, 449 employee education, 448 higher stance, 448–449 impact of controls, 447 perception of detection, 447–450 proactive fraud policies, 448 surprise audits, 449 Deterrence of financial statement fraud, 342–343 Deterring Fraud: The Internal Auditor’s Perspective, 21 Dialog, 458 515 Dialog.com, 458, 464 Differential association theory, 13 Directorate of Defense Trade Controls website, 463 Directories, 406 Disbursements journal, falsifying, 146 Disgorgement of bonuses, 295 Divorce records, 405 Document destruction, 295 Docusearch, 464 Dogpile, 460 Doing business as (DBA) registration, 402 E-commerce check scams, 352 Economic extortion, 243, 256 Electronic payment tampering bank security services, 149 internal controls, 148–149 prevention and detection, 148–149 Embezzlement, Employee conduct, 473–474 Employee/labor records, 403 Employer-employee relationships, 16 Encryption, 360 Ethical connection, 452–453 Evidence-gathering order in fraud examinations, Expense reimbursement fraud case study, 179–180, 190–192 data from the ACFE 2011 Global Fraud Survey, 181–182 expense as business entertainment, 184 fictitious expense reimbursement schemes, 187–189 mischaracterized expense reimbursements, 182–184 multiple reimbursement schemes, 189–190 overstated expense reimbursements, 185–187 proactive computer audit tests for detecting, 192 External consultants, 394 External frauds, External fraud schemes case study, 349–351 threats from customers, 352–354 threats from unrelated third parties, 357–361 threats from vendors, 354–357 Facebook, 460 Factiva, 465 Fair competition, 468 Fake sale, 221 False billings, 98 falsifying documents to obtain authorization, 111 False billing scheme, 223 False documents, reliance on, 100 False invoices personal purchases schemes, 109–112 self-approval of, 99–100 submission of, 99 False purchase requisitions, 112 False refunds, 199–202 www.downloadslide.net 516 INDEX False refunds, (continued) case study, 202–204 credit card refunds, 202 fictitious refunds, 200–201 overstated refunds, 201 False shipping documents, 224–225 False voids, 199, 204–205 Falsified hours and salary schemes, 163–167 manually prepared timecards, 163–166 preventing and detecting, 166–167 rate of pay, 166 time clocks, 166 Falsifying incoming shipments, 223–224 Federal Bureau of Prisons’ Inmate Locater, 461 Federal Deposit Insurance Corporation (FDIC), 463 Federal Sentencing Guidelines, 450 Fedworld, 463 Fictitious accounts receivable, 229, 325 Fictitious expense reimbursement schemes, 187–189 claiming the expenses of others, 188–189 obtaining blank receipts from vendors, 187 preventing and detecting, 189 producing fictitious receipts, 187 Fictitious names/doing business as registration, 402–403 Fictitious or fabricated revenue schemes, 308–311 pressures to boost revenues, 310 red flags associated with, 310–311 sales with conditions, 309 Fictitious receipts, 187 Fictitious refunds, 200–201 Fictitious sales, 167–168, 229 Fictitious suppliers, 253 Fictitious time reports, 165 Fiduciary, Financial Accounting Standards Board (FASB), 276 FASB ASC 605, 308 Financial disclosures, 263 Financial reporting, conceptual framework for, 276–280 comparability and consistency, 280 conservatism, 279–280 costs and benefits, 279 economic entity, 277 full disclosure, 278–279 going concern concept, 277 historical or acquisition cost, 278 industry practice, 279 matching concept, 278 materiality, 279 monetary unit, 278 periodicity, 278 relevance and reliability, 280 revenue recognition, 278 Financial statement analysis horizontal, 337–339 vertical, 337–338 Financial statement fraud, 45 case study, 301–304 concealed liabilities and expenses, 316–320 costs of, 305–307 definition, 305 detection of, 329–341 fictitious or fabricated revenue schemes, 308–311 improper asset valuation, 323–329 improper disclosures, 320–323 timing differences, 311–314 Financial statements fraud in, 273–276 responsibility for, 280–281 types of, 281–283 users of, 281 Financial suit records, 405 Force balancing, 66, 82 Forced reconciliation, 229 Foreign corporation registration, 402 Foreign Corrupt Practices Act (FCPA), 263–264, 391, 468 accounting provisions, 264–265 anti-corruption legislation, 264 books and records provisions, 265 enforcement of the accounting provisions, 265 internal controls provision, 265 Forensic accounting, Forged endorsement schemes, 130–134 checks before delivery, intercepting, 132–133 fraudster’s main dilemma in, 131 preventing and detecting, 133–134 stolen check, converting, 133 Forged maker schemes, 125–130 forging of signature, 129 obtaining the check, 125–128 preventing and detecting, 130–131 writing fraudulent checks, 128 Forging of signature, 129 Fraud, definition of, 8–10 Fraud examination, evidence-gathering order in, methodology, 5–8 tools used in, 6–8 vs auditing, Fraud examiner, Fraud in financial statements, 273–276 data from the ACFE 2011 Global Fraud Survey, 296–297 groups of people who commit fraud in, 274 methods, 275–276 reasons for, 274–275 Fraud risk definition, 367–368 factors influencing risks, 368–369 inherent risks, 368 residual risks, 368 www.downloadslide.net INDEX Fraud risk assessment audit process and, 384 considerations for developing, 374 definition, 369 executing, 377–382 key elements to conducting a good, 371–373 making an impact with, 386–387 need to conduct, 369–371 objective, 369 preparing the company for, 374–377 reporting the results of, 385–386 Fraud Risk Assessment Tool, modules cash larceny schemes, 491–493 cash register schemes, 495–496 check tampering schemes, 493–495 conflict of interests, 505–506 corruption, 504–505 employee assessment, 481–484 expense reimbursement schemes, 500 financial statement fraud schemes, 506–509 management/key employee assessment questions, 484–487 payroll schemes, 498–500 physical controls assessment questions, 488–489 purchasing and billing schemes, 496–498 skimming schemes, 489–491 theft of proprietary information, 503–504 Fraud Scale, 23–24 Fraudster as authorizer of invoices, 109–111 Fraudster reconciling bank statement, 143 Fraud theory approach, 5–6 Fraud tree, Fraud triangle, 13, 342 Fraudulent disbursement schemes, 77 categories, 95–96 Fraudulent reversal transactions, 80 Fraudulent write-offs, 228–230, 262 Fraudulent write-offs or discounts, 66–67 Freedom of Information Act (FOIA), 464 Free-hand forgery, 129 Freezing of assets, 295 FriendFeed, 461 Fuld and Company, 464 GA Public Records Services (GAPRS), 462 Generally accepted accounting principles (GAAP), 276, 278–279 Ghost employee schemes, 157–163 adding ghost to payroll, 158–160 falsification of personnel or payroll records, 158 ghost’s paycheck, issuing, 161 paycheck delivery, 161–162 preventing and detecting, 162–163 timekeeping information, collecting, 160–161 Google, 459 Google+, 460 517 Hi5, 460 Highbeam Research, 465 Hollinger, Richard C., 24–30 Hollinger-Clark Study, 24 age and theft, relationship between, 27–28 aspects of policy development, 30 employee deviance, 25 employee perception of control, 29–30 hypotheses of employee theft, 24–25 income and theft, relationship between, 27 job satisfaction and deviance, 28 organizational controls and deviance, 28–29 position and theft, relationship between, 28 Hoover’s, 464 Horizontal statement analysis, 337–339 Human resources personnel, 394 Hypothesis creating a, refining and amending, testing the, Icerocket, 461 Identified fraud risks, addressing establishing an acceptable level of risk, 382 ranking and prioritizing risks, 382–384 residual fraud risks, 384–385 Illegal gratuities, 243, 256 Imperative ethical principle, 452 Improper asset valuation, 323–329 accounts receivable, 325 business combinations, 325 fixed assets, 326–328 inventory valuation, 324–325 red flags associated with, 328–329 Improper disclosures, 320–323 accounting changes, 322 liability omissions, 321 management fraud, 321 red flags associated with, 323 related-party transactions, 321–322 subsequent events, 321 Independent businessmen, 18 Informants, 396 Informational questions, 420–421 Infospace, 462 InfoUSA, 458 In-house information, 400 Inspectors General website, 463 Insperity Employment Screening, 457 Intelius, 462 Intercepted checks, reissuing, 146–147 Internal auditors, 393–394 Internal frauds, International Accounting Standards Board (IASB), 276, 308 International Financial Reporting Standards (IFRS), 276 Internet, 406 www.downloadslide.net 518 INDEX Interviewing witnesses aberration of conduct, 433 accuser’s actions, 434 admission-seeking questions, 430–441 altruism, 434 assessing questions, 424–425 benchmark admission, 435–436 close questions, 420 closing questions, 423–424 depersonalizing the victim, 434 diffuse alibis, 434 discuss deceptions, 435 discuss witnesses, 435 display physical evidence, 435 family problems, 433 financial problems, 433 genuine need, 434 informational questions, 420–421 intent, 438 introductory phase of interview, 418–420 introductory questions, 418 leading questions, 420–421 minor moral infraction, 434 nonverbal clues to deception, 426–427 open questions, 420 physical evidence, 438 present alternative, 435 question sequences, 421 rationalization, establishing, 433 reinforce rationalization, 436 revenge, 434 signed statement, 438–440 stress, drugs, alcohol, 434 techniques in questioning, 421–423 typical attitudes displayed by respondents, 427–430 unfair treatment, 433 verbal clues to deception, 425–426 verbal confession, 436–438 voluntary confessions, 438 Introductory phase of interview, 418–420 Introductory questions, 418 Intrusion detection systems, 360 Inventory misuse, cost of, 218 Inventory padding, 230 Inventory shrinkage, concealing of, 228–230 Inventory valuation, 324–325 Investigations developing evidence, 394–397 necessity of, 391–392 organizing documentary evidence, 398–399 planning the, 392–394 preserving the document, 397–398 sources of information, 399–408 Investigative Reporters and Editors, 464 IT and computer forensics experts, 394 Kickback schemes, 244–246 fraudsters lacking approval authority, 246–247 preventing and detecting, 247–249 KnowX, 457, 464 Lapping, 65–66, 84 Larceny, of noncash assets, 218–222 Leading questions, 420–421 Legal counsel, 393 LexisNexis, 457, 464 LexisNexis CourtLink, 463 Limited-value purchase orders (LPOs), 111 LinkedIn, 460 List of Parties Excluded from Federal Procurement and Nonprocurement Programs, 462 Litigation history records, 405 Lococitato, 461 Long-term contracts, 314 Long-term offenders, 19 Long-term violators, defined, 18–19 Mail fraud, 294 ‘‘Maker’’ of the check, 125 Mamma, 460 Management representative, 394 ‘‘Management versus labor’’ mentality, 220 Marriage license records, 400 Matching revenues with expenses, 311–312 Material false statement, 10 Metacrawler, 460 Meta-search engines, 460 Minor moral infraction, 434 Mischaracterized expense reimbursements, 182–185 preventing and detecting, 184–185 Misclassifying assets, 328 Miscoding a check, 130 Misrepresenting asset valuation, 326–328 Missingmoney.com, 462 Multiple reimbursement schemes, 189–190 MySpace, 460 National Center for State Courts, 461 Newslink, 465 Non-accomplice vendor schemes, 104–108 case study, 106–107 overbilling with invoices, 105–106 pay-and-return schemes, 104–105 preventing and detecting fraudulent invoices from, 108 Noncash assets, misuse of, 217–218 Noncash misappropriations asset requisitions and transfers, 222–223 case study, 213–215, 225–227 concealing inventory shrinkage, 228–230 data from the ACFE 2011 Global Fraud Survey, 215–217 false shipments of inventory and other assets, 224–225 www.downloadslide.net INDEX frequency and cost, 215 misuse of noncash assets, 217–218 purchasing and receiving functions of a company, 223–224 types of, 215 unconcealed larceny schemes, 218–222 write-offs, 228 Nonverbal clues to deception, 426–427 Observation, Occupational fraud and abuse, 351 defined, detecting and preventing, 43–45 measuring levels of, 445–447 2012 Report to the Nations on, 30–45 research in, 12–22 Office of Thrift Supervision (OTS) Prohibition Orders Database, 463 Open questions, 420 Organizational environment, 22–23 Organization’s check stock, safeguarding, 127–128 Orkut, 460 Other People’s Money: A Study in the Social Psychology of Embezzlement, 13 Overbilling schemes, 246–249 Overbilling with invoices, 105–106 Overpurchasing, 185 Overstated expense reimbursements, 185–187 altered receipts, 185 of employee’s expenses, 185 orders to overstate expenses, 185–186 overpurchasing, 185 preventing and detecting, 186–187 Overstated refunds, 201 PACER, 461 Paperhangers, 352 Pass-through schemes, 101 Password cracking, 359 Pay-and-return schemes, 104–105 Payroll collusion schemes, 164–165 Payroll schemes case study, 155–157 commission schemes, 167–169 data from the ACFE 2011 Global Fraud Survey, 157 falsified hours and salary schemes, 163–167 ghost employee schemes, 157–163 proactive computer audit tests for detecting, 171–175 Perceived opportunity to commit a trust violation, 17 Perpetrators of occupational fraud age of, 33–34 collusion, effect of, 35–36 criminal history, 38–40 department, 36–38 education level, 34–35 gender of, 32–33 positions, 32 tenure of perpetrator, effect of, 38 type, 32 Perpetual inventory, 222–223, 228–230 Personal characteristics, 22–23 Personal failure, 15 Personal identification information, 462 Personal injury suit records, 405 Personal purchases schemes, 108–114 on charge accounts, 113 on credit cards or other company accounts, 112–113 prevention and detection, 114 returning merchandise for cash, 113 through false invoicing, 109–112 Phantom bids, 355 Phishing, 359 Photocopied forgery, 129 Physical evidence, 438 Physical isolation, problems with, 16 Political contributions, 473 PoliticalMoneyLine, 463 Poor custody procedures, 165–166 Predication, Premature revenue recognition, 312–314 Pretexting, 395–396 Proactive fraud policies, 448 Probate records, 406 Product substitution, 356 Professional associations and licensing boards, 404–405 Property tax records, 401 Purchasing schemes, 259–261 Qzone, 460 Ratio analysis asset turnover, 341 average number of days inventory is in stock, 341 collection ratio, 340–341 current ratio, 340 debt-to-equity ratio, 341 definition, 339 inventory turnover, 341 profit margin, 341 quick ratio, 340 receivable turnover, 340 Rationalization, in interviewing witnesses, 433 Rationalization of crime, 17–18 Rationalizations of long-term violators, 18 Real property records, 401 Re-altering checks, 145–146 Receivables skimming case study, 63–65 debiting the wrong account, 67 destroying or altering records of the transaction, 67 force balancing, 66 fraudulent write-offs or discounts, 66–67 lapping, 65–66 519 www.downloadslide.net 520 INDEX Receivables skimming (continued) preventing and detecting, 67–69 stolen statements, 66 Refdesk, 464 Register disbursement scheme case study, 197–199 concealing of, 205–206 data from the ACFE 2011 Global Fraud Survey, 199–200 false refunds, 199–202 false voids, 199, 204–205 preventing and detecting, 207 proactive computer audit tests for detecting, 207–208 1996 Report to the Nation on Occupational Fraud and Abuse, 2012 Report to the Nations on Occupational Fraud and Abuse, 30–45 age, effect of, 33–34 certified fraud examiners (CFEs), 30–31 collusion, effect of, 35–36 costs of occupational fraud, 31–32 criminal history of perpetrators, 38–40 education, effect of, 34–35 gender effects, 32–33 perpetrator’s department, 36–38 perpetrators of occupational fraud, 32 positions of perpetrators, 32 tenure of perpetrator, effect of, 38 victim organization, type of, 40 victims of occupational fraud, 38–40 Report writing format, 409–414 know the reader, 408–409 opinions or conclusions, 414 purpose of reports, 408 Rerouting delivery of checks, 133 Residual fraud risks, responding to assume the risk, 385 avoid the risk, 384 combination approach, 385 mitigate the risk, 385 transfer the risk, 384 Resource diversions, 262 Revenge, 434 Reversing transactions, 82 ‘Rubber stamp’ supervisor, 100, 165 Sale schemes, 261–262 Sales skimming after hours sales, 58 cash register manipulation, 57–58 check-for-currency substitutions, 59–61 off-site employees, 58–59 poor collection and recording procedures, 59 preventing and detecting, 62–63 theft in mailroom, 61–62 understated sales, 59 Sales tax filings, 403–404 Sarbanes–Oxley Act of 2002, 283–295 audit committee responsibilities, 290 auditor reports to audit committees, 292 certification obligations for CEOs and CFOs, 289–290 code of ethics for senior financial officers, 293 composition of the audit committee, 290 conflict of interest provisions, 291–292 corporate governance and accounting provisions, 284–287 enhanced review of periodic filings, 293 financial expert, definition, 291 internal controls, 292 mandatory audit partner rotation, 291 manipulation or misleading an auditor, 292 measures, 283 off–balance sheet transactions, 292 penalties for white-collar crime, 294–295 personal loans or otherwise extend credit, 293 pro forma financial statements, 292 protections for corporate whistleblowers, 293–294 Public Company Accounting Oversight Board, establishment of, 287–288 real-time disclosures, 293 restrictions on insider trading, 293 restrictions on nonaudit activity, 291 SEC rules, 283 whistleblowing structure, 291 Search engines, 459–460 Search warrant, 397 SEC Enforcement Actions database, 463 Secret solving of problems, 16–17 SEC’s EDGAR System, 463 Securities fraud, 294 Security personnel, 394 Selective Service System website, 462 Sex Offenders Registry, 462 Shell company schemes, 97–104 collusion with employees, 101 company existence, verifying, 103 company invoices, identifying, 101–102 employee behind a shell company, identifying, 104 false billings, 98 false documents, reliance on, 100 false invoices, submitting, 99 fraudulent invoices, self-approval of, 99–100 pass-through schemes, 101 preventing and detecting, 101–104 purchases of services rather than goods, 101 ‘rubber stamp’ supervisor, 100 testing for, 102–103 Sheriff or the county prosecutor, 401 Shipments, falsifying of incoming, 223–224 Shrinkage, 228–230 Signature, forging of, 129 Signed statement, 438–440 Situational ethics, 452 www.downloadslide.net INDEX Skimming, 77 data from the ACFE 2011 Global Fraud Survey, 54–55 defined, 53 proactive computer audit tests for, 69–71 schemes, 55–69 Slush funds, 247 Social engineering scheme, 359 Social-networking sites, 407–408, 460 Social Security Administration’s MasterDeath Index, 462 Spokeo, 461 Statewide Criminal Record Searches, 462 Stolen card numbers, 353 Stolen check, converting, 133 Stolen statements, 66 Strict liability offense, 266 Subpoena duces tecum, 396 Subpoenas, 396–397 Supervisor’s signature, forging of, 163–164 SurfWax, 460 Surprise audits, 449 Surveillance, 396 Suspected co-conspirators, Sutherland, Edwin H., 12–13 Switchboard.com, 462 Targets of corporate espionage, 361–362 human resource department, 362 manufacturing facility, 362 marketing, 362 research and development (R&D), 362 Technical skill, 17 Technorati, 461 Theft by Employees, 24 Theft fo returned checks, 132–133 Theft of company property, 218 Time clocks, 166 Timing differences, fraudulent financial statements channel stuffing, 314 long-term contracts, 314 matching revenues with expenses, 311–312 premature revenue recognition, 312–314 recording expenses in wrong period, 315 red flags associated with, 315 TLO, 459 ‘‘To-do’’ list, 399 Trust violators, 13 Turnaround sales, 261 Twitter, 460 Unconcealed larceny schemes, 218–222 Underbilling scheme, 261 Understated sales, 59 Understating assets, 328 Unfair treatment, 433 Uniform Commercial Code (UCC) filings, 403 United Kingdom (UK) Bribery Act, 265–267 bribing a foreign public official, 266 categories of offenses, 266 general commercial bribery, 266 scope, 266–267 SFO enforcement, 266–267 United States v Booker, 450 Unreasonable expectations, 446–447 Unrelated third parties, threats from, 357–361 U.S Tax Court, 461 USA.gov, 463 Utilitarian ethical principle, 452 Utility company records, 402 Vendors, threats from, 354–357 Verbal clues to deception, 425–426 Verbal confession, 436–438 Veris, 458 Vertical statement analysis, 337–338 Vicarious or imputed liability, 451 Victim organization antifraud measures at, 42–43 size of, 40–42 types of, 40 Victims of occupational fraud, 38–40 Voluntary confessions, 438 Voluntary consent, 397 Voter registration records, 400 Wages in kind, 446 ‘‘What-if’’ scenario, White-collar crime, 12 Wire fraud, 294 Wire tapping, 359 Workers’ compensation information, 403 World Bank Listing of Ineligible Firms, 463 Writing fraudulent checks, 128 payable to accomplice, 128 payable to cash, 128 payable to perpetrator, 128 payable to vendor, 128 Yahoo!, 459 Yoname, 461 Zoominfo, 461 521 www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net ... allegation of fraud Page Wells c01.tex V2 - September 2, 2013 10:25 A.M FRAUD EXAMINATION METHODOLOGY FRAUD EXAMINATION METHODOLOGY Fraud examination methodology requires that all fraud allegations... covered in detail herein Principles of Fraud Examination begins by providing an understanding of fraud examination methodology Thereafter, it sets forth the schemes used by executives, managers,... Audits are conducted primarily by examining financial data Fraud examination techniques Fraud examinations are conducted by (1) document examination, (2) review of outside data such as public