Midterm 1 Flashcards
SBU
Strategic Business Unit
The first person who mentions a number
loses
What do they say in New York
tough
Rick Edelmen
The truth about money
What are you left with
Pennies on the dollar
What was the issue with the FSU library abuse
lack of supervision
What is a cookie Jar
This is a hidden reserve. This is when you overstate your liabilities and understate assets. This creates the hidden reserve that you can use later to smooth out earnings
What are misappropriation Schemes
false or misleading records or documents used to circumvent I/C
more common than corruption or cooking teh cooks
What is white collar crime
learned behavior .
Is it easy to find fraud
no - still very hard to find and eliminate
What does an embezzler look like
They are the nicest people in the world -look like innocent people
How do frauders start
With baby step and then it grows over time
What are methods of detecting economic crime
tip off management review whistleblowing or hotline accident Internal audit suspicious superior Internal Control external audit self reported data analytics
What is the difference between embezzlement and larceny
Larceny is theft - it was never in your possession
embezzlement is when you steal from you employer
What is larceny of cash
this is theft of cash AFTER is has been recorded on the books like from petty cash or a cash register
Prevent - segregation o duties and counting the money a second time
Skimming
this is off the books
It is when you take the money before it is entered on the books
unrecorded sales
understated sales
ringing no sale
theft of incoming checks
Swapping checks for cash
you take cash but leave a personal check in case of an audit but then later removes the check before it is cashed
Check tampering
This is check washing
Kiting
This is when you build up balances in between two account by drawing off of one and not recording but recognizing the deposit. You are floating ( kiting ) money between accounts.
Use a cutoff statement to catch
Lapping
Robbing Peter to Pay Paul. This is when you take money from an account and later replace it with the cash from another customer. The process repeats
Account receivable fraud
This is when you have a phony receivable that you can later write off
Or you can put up the AR as collateral for a loan
Inventory Fraud
- Short shipments
- Steal inventory
- Shoplifting
A/P fraud
This is duplicate payment - 2%
Doctored Sales figures
Unrecorded sales
Understated Sales
Creating fictitious Sales
padding prices to increase commissions
Sham payments
multiple payment, ghosts on payroll, shell companies, bogus refunds
bid rigging
felony - can go into cahoot to fix a bid
What is fraud
usually must have scienter - intent fraudulent intent is present.
external auditors and fraud detection
They are usually have a poor record of uncovering fraud. - why because they trust that the segregation of duties will prevent fraud and it doesn’t always.
Audit committee
- must be independent
- must be directly involved with audit firm
- establish procedure to report fraud - like a hotline
- authority and money to do their job
- one must have an accounting background
Board of Directors role
red flags - if insiders have greater than 50% control of board
- CEO is also chairman
- CEO is the founder
Lack of an audit committee
Management role
CEO and CFO certify:
- they have reviewed the report
- reported fairly in all material respects
- they are responsible for establishing and maintain internal control - evaluate it 90 day before the report
- report any deficiencies in I/C that they see
White collar crime is a division in the FBI
It is defined as lying, cheating and stealing
- bank fraud and embezzlement
- election fraud
- corporate fraud
- mortgage fraud
- securities and commodities fraud
SOX
established PCAOB
- auditors must be independent from their clients
- protection for whistleblowers
- CEO must sign the corporate tax return
- 20 year prison term for mail and wire fraud
- public companies must have an audit committee
Why is forensic accounting such a hot topic today
- automation changed the business landscape.
- in 1980 the number and speed of business transactions required a faster means of to create and audit financial statements
- became impossible to audit every transaction because there were so many
- Internal control, sizing risks, and sampling became the focus.
- unethical mangers learned to skirt the internal controls
-Thus the need for forensic accountants
-
Esforms Miami Healthcare scandal
Cycled thousands of medicare and medicaid beneficiaries through his network when they didn’t qualify for such care.
- gave them drugs
- 1 Billion in losses
- kickbacks
accounting fraud rates
Have tripled since 2003
percent of losses from type of fraudsters
-42% from internal fraudsters
43% - internal and external
25% - external fraudsters
What percent of companies fall victim to fraud
75%
What countries are considered teh most corrupt
Denmark and New Zealand
US - 18
What countries are worst for financial secrecy
1 - switzerland
2 - Hong Kong
3. US
What are the three m’s of financial reporting fraud
manipulation - altering accounting records
misrepresentation - intention omissions
misapplication - intention misapplication of accounting records
fraudulent financial reporting
Fraud financial statements are a small amount of fraud schemes - but have a major economic wallop.
Ficticuous or over stated revenue
overstate income. fictitious revenue to overstate income
- omitting elements that would lower actual revenue
- using mark to market to make records more flexible
fictitious reductions of expenses and liabilities
- lowering of expenses
world com- shifted line cost items into capital accounts which increased income
Premature Revenue Recognition
recording income as actual to inflate earnings when sales are not complete-
Xerox inflated revue by accelerating revenue recognition of leases of their copiers too early in their cycle
Misclassified Revenues and Assets
intentionally misclassifying securities t transferring securities to a different class that would trigger the recognition of a gain or postpone the recognition of a loss.
HTM vs. TS
Overvalued assets or undervalued expenses and liabilities
Overvalue assets that are unsupported - can be done to pay off parties-or for own company gain
accounts receivables offer many opportunities for valuation schemes
What is gain on sale accounting
use of SPE to purchase or sell overvalued ventures at unsupported values.
Omitted Liabilties
opposite of fictitious revenue and assets - this is done to hide negative numbers
Using SPE to buy poorly performing assets to hide the loss
omitted or improper disclosures
avoid listing questionable or bad news on the balance sheet
equity or security fraud
promotion or sale of non existent of illegal securities
Related party transactions
enron did many related party transactions through the special p unis.
minimizing or income or inflating expenses to reduce tax liabilities
stretch deductions or overstate expenses to reduce tax liability - this is evasion not avoidance
financial shenanigans
record revenue before it is earned
creating fictitious revenue
boosting profits with non recurring transactions
shifting current expense to a later period
failing to record or disclose liabilities
Shifting current income to a later period
Shifting future expenses to an earlier period.
what are the three legs of the fraud triangle
pressure, rationalization, and opportunity
what is the most essential part of managing risk
Internal controls. the lack of good internal controls opens the doors to fraud
What are the characteristics of white collar crime
- educated, married, religious, no arrest record, could be employed for a long time. could be old or young - look like everyone else
how do forensic accountant typically find problems
They comb through corporate books looking for oddities that could signal swindles
there is a thin line between legal earning management and abusive earning management
What about fraud
It is not necessarily only about stealing assets to falsifying financial statements. they can be about pressures in other ways like lying about school rankings
what are the three B of fraud
Babes Booze and bets
preventive , corrective, or detective
employee training bank reconciliations password control surprise cash counts insurance job rotation counting inventory
corrective detective preventive detective corrective preventive detective
What about Internal Auditors and fraud detection
the assist in the control of fraud be by examining the effectiveness of the internal control system
they must consider the possibility of material irregularities or non compliance during an internal audit
What must an internal auditor do if they discover fraud
- notify management or the board
- create a written report
What is the forensic accountants role
they are sleuths
they perform a separate investigation
they must be skeptical
they must assume that the financial statement might be wrong
they will note small errors and irregularities
What are the financial statement fraud categories
Overstated revenues
Management estimates
Maskign reduced cashflows
Look at capitalized accounts - EBITDA
Excessive debt
Inventory problems
CPA Problems - use a single auditor or a lot of switching
Hyped sales
Off balance sheet items - off shore accounts SPE
Big Bath
Balance sheet account problems - hide dent or liabilities 9 use the equity method rather the HTM or
What is the big bath
making write off directly against earnings - the result is the profits are depressed for a couple of years but future earning will look much better
What are pension plan problems
you can underfund these and the pension fund investment can inflate a companies bottom line.
What are some example of off balance sheet fraud
using SPE - this is what Enron did to mask problems in sales and expenses
What can you do to the balance sheet
hide debts and liabilities by:
using the equity method for investments rather than TS or HTM
Leasing accounts - saying they are operating leasing
Pension accounting - netting PBO and pension assets
Hiding debt inside special purpose entities
How do you use barter deals -
- internet companies use barter or non cash deal to increase their revenue
What are financial fraud detecting tools
by accident interviewing officers and witnesses percentage analysis - horitonzal (across time) and vertical ( common size percents) ratio analysis checklists tips surveillance undercover operations
materiality
the impact of the misstate does not impact the financial statement sas a whole
control risk
this is the risk that a company’s internal control system will not catch a material error
detection risk
This is the risk that the auditor will not find the material error
Inherent risk
This is the risk that there is an error in the f/s that si not due to fraud - transaction are complex or require judgment
misappropriation schemes
more common than corruption and cooking the books and less costly
they are false or misleading records or documents because of the circumvention of internal controls
What do we know about employee fraudsters
They look like everyone else
How does employee fraud start
with baby steps that serve to tex the system and then get bigger
what is money laundering
take money from one source and hide the source so you can use them without legal restrictions or penalties
What does a fraud risk assessment have - 3 elements
- identify the inherent fraud risks
- assess the likelihood of the inherent fraud risk
- respond to reasonably likely and significant inherent and residual fraud risk
The fraud risk assessment process
Organize the assessment Determine area to assess Identify potential schemes and scenarios Assess likelihood of fraud Assess significance of risk Link antifraud controls Apply assessment results
What are the two types of fraud investigation: proactive and reactive
proactive - is better include: - effective internal control -financial and operational audits Intelligence gathering - Logging of exceptions - reviewing variances
Reactive:
- investigating complaints an allegations
- intuition and suspicion
What can a company do to stop fraud
- have a hotline
- have a mandatory vacation policy
- rotate assignments
- have a written and signed ethics policy
- shift duties of internal auditors
- look for lifestyles changes of employees
- surprise audits
- in small business owner receives the bank statement s un opened
- bank statements should eb always reconciled
- think like criminals
- dont assume employees are honest
- count cash twice
- bond employees
- ## use fraud risk assessments
What can a manger do to prevent fraud
- count petty cash twice a day
- investigate suppliers to see if there are victiciosu vendors
- investigate customers
- examine endorsements in canceled checks
- add up the A/R subsidiary
- match payroll to medical insurance to catch ghosts
- match payroll to address to catch multiple person at one address
- look for document alternations
Where do you look for fraud symptoms
source documents
journal entries
accounting ledgers
Approach to fraud
1 - find the fraud
2 - how was the fraud committed
3 - set up system to stop fraud from happening again
Weapons in the fight again fraud
- implement string financial controls
- managemt closely look at monthly financial statements
- tone at the top - to encourage ethical conduct
- have a fraud hotline
- CFOS should only work in one company
- Audit firm not have once employees
- use two signature check writing system
- question any discrepancy
- auditors not accept gifts from clients
- notes any lifestyle upgrades
- verify cash in bank accounts
