Todays Topics n Fighting Fraud n n Fraud

Today’s Topics n Fighting Fraud n n Fraud prevention Early detection Fraud investigations Legal intervention FORENSIC ACCOUNTING - BA 124 – Fall 2014

Fraud Prevention n Culture of honesty and integrity n n n Manage by example Hire the right people Communicate expectations Positive work environment Proper handling of fraud Enterprise risk management n n Identify risks-likelihood and impact Implementing controls Widespread monitoring Effective audit function FORENSIC ACCOUNTING - BA 124 – Fall 2014

Fraud Detection n n By chance By intent-new trend FORENSIC ACCOUNTING - BA 124 – Fall 2014

Fraud Investigation n n Predication: circumstances that lead to past, present or future fraud Using the evidence square n n n Testimonial evidence Documentary evidence Physical evidence Personal observation Using a variation of the fraud triangle n n Investigation of theft Investigation of concealment Investigation of conversion Direct inquiry FORENSIC ACCOUNTING - BA 124 – Fall 2014

Investigation Process n n n n Establish truth Use experienced investigators Guard hypotheses Prudent communication Independent corroboration of information Avoidance of questionable techniques Fair and objective reporting FORENSIC ACCOUNTING - BA 124 – Fall 2014

Legal Action n None n n Civil n n More than 50% Good for non employees Criminal n n n Restitution and jail time Harder to convict Higher degree of evidence FORENSIC ACCOUNTING - BA 124 – Fall 2014

Howard Schilit’s Financial Shenanigans § § 3 rd Edition published in 2010 Accounting gimmicks in financial reports Schilit: president of the Financial Shenanigans Detection Group, LLC International expert on financial fraud FORENSIC ACCOUNTING - BA 124 – Fall 2014 7

Three Families— 13 Shenanigans § The categories § § § Earnings manipulation shenanigans Cash flow shenanigans Key metrics shenanigans FORENSIC ACCOUNTING - BA 124 – Fall 2014 8

Earnings Manipulation Shenanigans 1. Premature recognition of revenue 2. Recognition of bogus revenue 3. One time items masked as recurring items 4. Deferral of expenses 5. Hiding expenses 6. Shifting revenue into the future 7. Shifting expenses into the present FORENSIC ACCOUNTING - BA 124 – Fall 2014 9

Cash Flow Shenanigans 8. Shifts to operating cash increases 9. Shifts to investing cash decreases 10. Misuse of mergers 11. Unsustainable generation of cash flow FORENSIC ACCOUNTING - BA 124 – Fall 2014 10

Key Metrics Shenanigans 12. Overstating performance metrics 13. Distorting performance metrics FORENSIC ACCOUNTING - BA 124 – Fall 2014 11