FRAUD EXAMINATION & FORENSIC ACCOUNTING

Instructor: Sir Darren Ungco & Sir Mark Anthony Ramos

Chapter 14 – Fraud Against Organization

3 types of fraud against organization - Payroll: issue payment by making false claims
for compensation.
1. Asset Misappropriation: involves the theft or
- Wire Transfers: fraudulently wire transferring
misuse of an organization’s assets
employer’s bank accounts
2. Corruption: a person uses his or her influence
- Cash Register Disbursements: false entries
to obtain an unauthorized benefit
on a cash register to conceal the fraudulent
3. Fraudulent Statements: fabrication of an
removal of cash.
organization’s financial statements

ASSET MISAPPROPRIATION Check Tampering

- Opportunities to steal assets: - prepares a fraudulent check for his or her own
o Receipts of cash benefit
o Assets on hand - intercepts a check intended for another person
o Disbursement fraud or entity for their own benefit
- perpetrator physically prepares and control the
- Larceny: taking away an employer’s cash fraudulent check
without the consent
- Skimming: removal of cash prior to its entry Register Disbursement Schemes
(bago i-record) - Least costly of all disbursement schemes.
- Fraudulent disbursements
Two basic fraudulent schemes take place at the
LARCENY register:
- cash is stolen after the cash is recorded in the 1. False Refund – processes a transaction as if a
accounting system. customer were returning merchandise
- most successful when they involve relatively 2. False Voids - Whatever money the customer
small amounts over extended periods of time. paid for the item is removed from the register
as though it was being returned to the
SKIMMING customer.
- cash is stolen from an organization before it is
recorded Billing Schemes
- cost of inventory will rise while sales and - perpetrator submits or alters an invoice to
receivables will decline or remain constant. willingly issue a check or make other types of
- Lapping: delayed recognition of payment. payments.
embezzle a first customer’s payment and then - perpetrator does not have to undergo the risk of
credit that customer’s account when a second taking company cash or merchandise
customer pays
3 Most Common Types of Billing Schemes:
FRAUDULENT DISBURSEMENT 1. setting up dummy companies (shell companies)
2. altering or double-paying a non-accomplice
DISBURSEMENT SCHEMES vendor’s statements
3. making personal purchases with company
- Billing: issue a payment by submitting invoices funds
for fictitious goods or services, inflated invoices,
or invoices for personal purchases. Dummy/Shell Companies - fictitious entities created
- Check Tampering: forging or altering a check for the sole purpose of committing fraud.
- Expense Disbursement: employee makes a
claim for reimbursement of fictitious or inflated
business expenses.

AQUINO, E.J.M
 Expense Schemes 4. Extortion: wrongful use of actual or threatened
force, fear, or economic duress.
- perpetrators produce false documentation for
employers to unknowingly make a fraudulent
disbursement. BRIBERY
- Ex. Timecards, sales orders, and expense - offering, giving, receiving, or soliciting of
reports anything of value to influence an official act.

4 Common Types of Expense Disbursements Commercial Bribery

1. mischaracterizing expenses – to make it look - something of value is offered to influence a
like a business expense business decision rather than an official act of
2. overstating expenses – doctoring a recipt government.
3. submitting fictitious expenses - payment is received by an employee without
4. submitting the same expenses multiple times the employer’s consent
- acceptance of under-the-table payments
Payroll Disbursement Schemes
Kickbacks
4 Major Categories - undisclosed payments made by vendors to
1. ghost employees – generates the largest loss employees of purchasing companies.
1.1 For ghost employee scheme to work, - to enlist the corrupt employee in an overbilling
four things must happen: scheme
a. Ghost employee must be added to the
payroll
Bid-rigging schemes
b. Timekeeping and wage rate
information must be collected - employee fraudulently assists a vendor in
c. Paycheck must be issued winning a contract through the competitive
d. Check must be delivered bidding process

2. falsified hours and salary CONFLICT OF INTEREST

3. commission schemes - undisclosed economic or personal interest in a
4. false worker compensation claims transaction that adversely affects the company.
- involve the exertion of an employee’s influence
THEFT OF INVENTORY AND OTHER ASSETS to the detriment
Noncash Frauds
Purchase Schemes
- Inventory: theft or misappropriation of
physical, noncash assets - having some kind of ownership or employment
- Inventory: steals or otherwise misappropriates interest in the vendor that submits the invoice.
confidential information or trade secrets
- Securities: misappropriation of stocks, bonds, Net Asset Value (NAV): closing prices of the securities
or other securities. plus the value of any uninvested cash
Forward Pricing: 4:00PM – priced at NAV THAT day
4:01PM – priced at NAV NEXT day
CORRUPTION
- one of the oldest white-collar crimes known to Unlawful Trading Schemes
mankind 1. Market Timing
Types of Corruption - Involves “in-and-out” technique: a mutual fund’s
1. Conflict of Interest: undisclosed economic or price does not reflect the fair value of the
personal interest in a transaction assets held by the fund
2. Bribery: a person offers, gives, receives, or 2. Late trading
solicits something of value to influence - allowed selected investors to purchase mutual
business decision funds after 4:00 p.m., using that day’s NAV
3. Illegal Gratuities: solicits something of value
for, or because of, an official act or business
decision

AQUINO, E.J.M
 ECONOMIC EXTORTION AND ILLEGAL
GRATUITIES

Economic Extortion: the employee demands a

payment from a vendor in order to make a decision in
that vendor’s favor. (involves the use of actual or
threatened force, and fear)

Illegal Gratuities: there is not necessarily an intent to

influence a particular business decision but rather to
reward someone for a favorable decision

AQUINO, E.J.M
 FRAUD EXAMINATION & FORENSIC ACCOUNTING
Instructor: Sir Darren Ungco & Sir Mark Anthony Ramos
Chapter 15 – Consumer Fraud

CONSUMER FRAUD Ways for Identity to be stolen:

- any fraud that targets individuals as victims. a. Posing as someone which the victim conducts
- Examples: telephone fraud, magazine fraud, business
sweepstakes fraud, foreign money offers (such b. Shoulder surfing: fraudsters watch or listen
as Nigerian money scams), counterfeit drugs, c. Dumpster diving: rummaging trash
Internet auctions, identity theft, and bogus d. Skimming victims’ credit cards
multilevel marketing schemes.
Ways to minimize risk of Identity Theft:
IDENTITY THEFT a. Guard your mail
b. Opt out of preapproved credit cards
- most common type of consumer fraud c. Check personal credit information annually
- someone uses another person’s name, d. Protect SSN
address, Social Security number (SSN), bank e. Safeguard personal information
or credit card account number, or other f. Guard trash
identifying information to commit fraud or other g. Protect wallet
crimes. h. Use strong passwords
How Identity Theft Occurs? / Identity Theft Cycle i. Protect home
1. Discovery j. Protect computer
a. Perpetrators gain information; k. Opt out of information sharing
b. And verify information k.1 Gramm-Leach-Bliley Act
- Gain information through: o financial institutions have the right to
o Searching trash or home and computer share personal information for a profit.
o Stealing mail o Also gives individuals the right to opt out
o Phishing of having their information sold.
o Breaking into cars and homes
o Scanning credit card information Common Identity Fraud Statutes
1. Identity Theft and Assumption Deterrence
2. Action Act: one of the most direct and effective
a. Accumulate documentation statutes against identity theft
b. Conceive cover-up or concealment 2. Gramm-Leach-Bliley Act: prohibits the use of
actions false pretenses to access the personal
3. Trial information of others
a. First dimensional actions: Small thefts 3. Health Information Portability and
b. Second dimensional actions: involves Accountability Act, 1996: protects the privacy
personal interaction and confidentiality of patient information.
c. Third dimensional actions: perpetrators 4. Drivers Privacy Protection Act: personal
have confidence in their schemes information of motor vehicles is not disclosed
5. Family Education Rights and Privacy Act:
Common purchases made by identity theft: illegal for any agency that receives federal
a. Buying large-ticket items (computer or tv) funding to disclose any educational or personal
b. Taking out car, home, & other loans information of any individual
c. Establishing a phone or wireless service 6. Fair Credit Reporting Act: correcting mistakes
in victim’s name on credit reports and it can only be obtained for
d. Using counterfeit checks or debit cards legitimate business needs.
e. Opening a new bank account 7. Electronic Fund Transfer Act: provides
f. Filing for bankruptcy protection that involve using a credit card or
g. Opening a new credit account other electronic means to debit or credit an
h. Changing victim’s mail address account

AQUINO, E.J.M
 8. Fair Debt Collection Practices Act: protects money both on what they sell personally and on
consumers from unfair or deceptive practices the sales of those they recruited
used by debt collectors - Headhunter Fees: fees paid for signing
9. Fair Credit Billing Act: limits consumers’ additional recruiters on to a business
liability for fraudulent credit card charges. - Front Loading: representatives of legitimate
MLMs are required to buy large, expensive
OTHER TYPES OF CONSUMER & INVESTMENT amounts of inventory.
SCAMS - Snake oil plans: promise enormous earnings
or claim to sell miracle products.
- Ground floor opportunity: a classic marketing
Foreign Advance-Fee Scams
scheme that makes people believe that they
- a type of financial fraud that have been around will make money simply because they are one
for years and have widespread because of the of the earliest investors in a new venture
internet.
Chain Letter, Mail Stuffing, Product Testing, & Craft
Nigerian Money Offers Assembly
- contact victims through e-mail, fax, or - Chain letter scams: encourages individuals to
telephone and offer the victim millions of send a small amount of money to people who
dollars. were previously involved and to recruit other
- it is necessary to provide name and bank people as new participants
account numbers - Mail Stuffing: scam where consumers respond
- the letter asks for help to an advertisement that promises income
- it is a “once-in-a-lifetime” opportunity simply for stuffing envelopes
- perpetrator will try to build a relationship of - Product Testing: begins when consumers
confidence with the victim. receive brochures featuring different products.
- Craft Assembly: perpetrators promise high
Clearinghouse Scam pay for working on different projects.
- involves a victim receiving a letter that falsely
claims the writer represents a foreign bank Bogus Mystery Shopping Scam
- get victims to invest in foreign venture capital - perpetrators promise victims a job that involves
companies for high returns strolling through stores, enjoying the displays,
shopping for merchandise, and then filing
Purchase of real estate scam reports on the experiences they have had
- someone trying to sell a piece of real estate or - victims: teenagers and college students
other property to the victim
Telemarketing Fraud
Sale of Crude Oil at below Market Price - fraud that occurs via the telephone
- it is necessary to pay special registration and - Fraudsters set up giant rooms (referred to as
licensing fees boiler rooms) in rented offices where they train
salespeople to find and defraud victims
Disbursement of Money from Wills
Investment Fraud
- perpetrators send a letter from a mysterious
- fraud that is related to stocks, bonds,
“benefactor” interested in contributing a large
commodities, limited partnerships, real estate,
sum of money.
or other types of investments.
- recipient is required to pay inheritance taxes or
government fees
MORTGAGE FRAUD & SUBPRIME MORTGAGE
CRISIS
Work-at-Home Schemes
Mortgage Fraud: falsifying or omitting information
Multilevel Marketing (MLM) when obtaining a mortgage loan for the purpose of
- Representatives recruit other distributors to join obtaining a higher loan than would be provided if the
them in selling the product or service and make truth was disclosed

AQUINO, E.J.M
 FRAUD EXAMINATION & FORENSIC ACCOUNTING
Instructor: Sir Darren Ungco & Sir Mark Anthony Ramos
Chapter 15 – Consumer Fraud

TAX FRAUD
- committed against any governmental or other
organization that collects taxes, including the
federal government, state governments, local
governments, or other taxing authorities.
- Tax fraud cases are usually criminal matters.

DIVORCE FRAUD
- assets are given to spouses and attorneys
representing spouses

The party attempting to prove divorce fraud must

prove:
1. false representation was made by the other
Participants in the Bankruptcy Process
party
2. defendant had knowledge that the Bankruptcy court
representation was false or made with - All bankruptcy petitions are subject to U.S.
reckless indifference to the truth District Court jurisdiction
3. defendant had intent to induce plaintiff to act
or refrain from acting in a certain way U.S Trustee
- Trustees have the following functions:
BANKRUPTCY FRAUD o Administering bankruptcy cases
- assets are given to creditors o Appointing trustees, examiners, and
- usually involves concealment. It prevents these committees
assets from being liquidated and transferred to o Overseeing and monitoring trustees
creditors to extinguish debts. o Reviewing employees and fee
applications
Bankruptcy Code: a federal statute that governs the o Appearing in court on matters of interest
bankruptcy process to the debtor’s estate and creditors
- Trustees may have the following staff:
Civil and Criminal Bankruptcy Fraud Statutes o Staff Attorney: review fee applications,
Concealment of Assets, False Oaths and Claims, motions to appoint trustees and
and Bribery examiners, motions to convert or
- It is a crime for a person to “knowingly and dismiss a case, and other pleadings.
fraudulently” do any of the ff: o Bankruptcy Analysts: review operating
a. Conceal property of a debtor’s estate reports and other financial information
b. Make a false oath or account in a and oversee the debtor’s case to
bankruptcy case assure compliance
c. Make a false declaration, certification, o Special Investigative Units (SIUs):
verification, etc. investigate criminal complaints in
d. Present a false proof of claim bankruptcy cases.
e. Receive a “material amount of property”
Court-apppointed or panel trustee
- Also called as panel trustees, who identify and
collect a debtor’s assets and then allocate
those assets to creditors in an orderly manner.

AQUINO, E.J.M
 Examiners
- appointed by a bankruptcy judge in a
proceeding to investigate allegations of fraud or
misconduct by the debtor or its principals.

Debtors
- person or entity who is the subject for filing

Creditors
- one who holds a valid claim against a debtor

Adjusters
- also called operations or field agents.
- assist the trustee by performing such duties as
securing business facilities and assets, locating
assets of the debtor’s estate, locating business
records, opening new bank accounts,
investigating asset thefts, and arranging asset
sales.

BUST-OUT
- involves intentionally obtaining loans or
purchasing inventory on a credit basis and
concealing the proceeds from the loan or sale
of the inventory or with the inventory itself
before creditors are paid.

MONEY LAUNDERING
- engaging in financial transactions so as to
conceal the source, identity, or destination of
funds.
- one conceals the existence, illegal source, or
illegal application of income and then disguises
that income to make it appear legitimate

three steps in money laundering:

1. Placement Stage
- involves making cash deposits to a bank.
- Riskiest stage (because large money deposits
constitutes red flags)

2. Layering Stage
- most complex step
- conducting various financial transactions to
make it difficult to follow the flow of funds

3. Integration Stage
- the money reenters the economy in a form that
appears to come from a legal transaction.

AQUINO, E.J.M
 FRAUD EXAMINATION & FORENSIC ACCOUNTING
Instructor: Sir Darren Ungco & Sir Mark Anthony Ramos
Chapter 4 – Preventing Fraud

CREATING A CULTURE OF HONESTY, OPENNESS, Control Activities:

AND ASSISTANCE 1. Segregation of duties
Three major factors in fraud prevention: 2. Proper authorization
1. hiring honest people an providing awareness 3. Physical safeguards
training 4. Independent checks
2. creating a positive work environment 5. Documenting and records
3. providing an employee assistance program
(EAP), helps the employee deal with personal Whistleblowing System Elements:
matters 1. Anonymity: can report suspected incidents of
misconduct without fear of retribution
Hiring Honest People and Providing Fraud 2. Independence: reporting misconduct to an
Awareness independent party that is not in any way related
to the organization involved
3. Accessibility: several different channels
through which they can report
4. Follow-up: must be followed up and corrective
action must be taken where necessary

Contributes to high-fraud environments:

1. managers who do not pay attention to honesty
2. imposition of unreasonable budget
expectations
3. perceived inequalities in the organization
4. inadequate expense accounts
5. autocratic or dictatorial management
6. management by crisis
7. short-term business focus
8. high turnover and absenteeism
9. lack of clear organizational responsibilities
10. poor communication practice

ELIMINATING OPPORTUNITIES FOR FRAUD TO

OCCUR
Having a Good System of Internal Controls
- COSO Internal Control Framework
o Control environment
o Risk assessment process
o Control activities
o Information and communication
o Monitoring and compliance
- No internal control structure can ever be
completely effective, regardless of the care
followed in its design and implementation
AQUINO, E.J.M
 FRAUD EXAMINATION & FORENSIC ACCOUNTING
Instructor: Sir Darren Ungco & Sir Mark Anthony Ramos
Chapter 17 - Fraud in E-Commerce

E-COMMERCE RISKS INSIDE ORGANIZATION XSS: a method of injecting browser commands into
Data Theft: normally the first concern because data Web site data. When users’ browsers interpret these
have many useful attributes commands, unauthorized behavior occurs.

Passwords PREVENTING FRAUD IN E-COMMERCE

- a code that provides access to something.
- password selection is left to the end user and Security through obscurity
cannot be fully controlled. - the tactic of keeping security strategies,
Social Engineering: involves tricking people into encryption algorithms, and processes secret in
divulging information rather than directly hacking an effort to confuse attackers.
computing systems
Risk Assessment
Sniffing: logging, filtering, and viewing of information
- identifies the risks of doing business with e-
as it passes through a network line. a common method
business partners.
of gathering information from unencrypted
communications such as e-mail
Control Activities
Wartrapping: hackers go to known business traveler - policies and procedures that ensure that
locations like airports and set up access points through necessary actions are taken to address risks
their laptops to the Internet and frauds
1. adequate separation of duties
E-commerce Risks Outside Organizations 2. proper authorization of transactions and
activities
Spyware 3. adequate documents and records
installs monitoring software in addition to the regular 4. physical control over assets an records
software that a user downloads or buys 5. independent checks

Phishing Adequate Separation of Duties

Phishers send e-mail or pop-up messages to users - useful for making sure that individuals who
asking for personal information in creative ways authorize transactions are different from those
who execute them.
Spoofing
- changes the information in e-mail headers or IP Passwords
packets - vital part of the security of any electronic
- Perpetrators hide their identities by simply system. no other control can better prevent
changing information in headers thus allowing fraud than the wise use of passwords and
unauthorized access. adequate training of users regarding them.

Falsified Identity Digital Signatures and Certificates

- Perpetrators hide their identities by simply - electronic signatures used to reassure users
changing information in headers thus allowing that transactions are valid
unauthorized access. - prevent falsified identity and impersonation
SQL injections: hackers send a database command
Biometrics
after regular data in an online submission form
- use of unique features of the human body

AQUINO, E.J.M
 Adequate Document and Record
- the physical objects by which transactions are
entered and summarized.
- It is a detective control
- Public-key encryption: used for privacy and
authenticity

Physical Control over Asset and Records

- used to protect computer facilities
- Application service providers: to provide data
storage and application services

DETECTING E-BUSINESS FRAUD

Fraud Examiners
1. Understand the business of the organization
2. Identify possible frauds
3. Determine symptoms that the most likely frauds
would generate
4. Use databases and information systems to
search for those symptoms
5. Investigate the symptoms

AQUINO, E.J.M