Chapter 5:Recognizing the symptoms of fraud

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Chapter 5:Recognizing the symptoms of fraud

  1. 1. Carol Zhang
  2. 2.  Fraud is a crime that is seldom observed.  John J . Hall (1996)  “Fraud symptoms—the specific, observable signs that fraud might be present—may he of the actual fraud or of the cover-up attempt.” (p.85)
  3. 3. 1. Accounting anomalies 2. Internal control weaknesses 3. Analytical anomalies 4. Unusual behavior 5. Extravagant lifestyle 6. Tips and complaints
  4. 4. Common anomaly frauds involve:  Irregularities in source documents  Faulty journal entries  Inaccuracies in ledgers
  5. 5.  Irregularities in source documents  Normal  Fraud
  6. 6.  Faulty journal entries
  7. 7.  Inaccuracies in ledgers
  8. 8. Internal control fraud symptoms include :  Lack of segregation of duties  Lack of physical safeguards  Lack of independent checks  Lack of proper authorization  Lack of proper documents and records  Overriding of existing controls (most common)  Inadequate accounting system
  9. 9.  CFO and treasure stolen more than $6 millions in less than 5 years.  False tractions frequently but in small amount
  10. 10. Relatives of CFO-A Relatives of CFO-A Relatives of treasure-A Relatives of Treasure-B CFO Company A treasure Company B Company DCompany C Billing Payment Authorization Symptoms ?
  11. 11.  Three simple procedures to prevent small business fraud 1. Owners should open and reconcile bank statements 2. Pay everything by check so there is a record 3. Owners should sign every check themselves
  12. 12. Ernst and Young was not been negligent in performing the audit
  13. 13. ? Year end 2004/G corporation Book: more than $40M Bank: around $400 Bank officer Lent to other Stock Market FM conspire PWC Send confirmation
  14. 14.  Sarbanes-Oxley Act of 2002  imposes potentially serious penalties on firm executives with fines of up to $5 million and/or imprisonment up to 20 years  At the same time, this legislation requires that these firms tighten their internal controls over financial reporting.
  15. 15.  Strange financial statement relationships  Cash shortages or overages  Excessive late charges  Unreasonable expenses or reimbursements  Excessive turnover of executives  Physical abnormalities
  16. 16.  How to calculate the stone pour into river?  Sufficient paper documents
  17. 17. RM not enough Shipping in bad weather Ships were not enough Fraud
  18. 18.  Case in 2013  Expense padding by Kevin Richard Halligen  Former CEO of a security consulting and crisis management firm-RDI  2.1 millions with 1.7 millions buying a house for herself
  19. 19. Elements of fraud Theft act Concealment Conversion Company employees are in the best position to detect fraud
  20. 20.  Symptoms rather than evidence  People hesitant to come forward:  Not Sure about the fact  Fear reprisal for being a whistle-blower  Intimidated by the perpetrator  May regard squealing is wrong  Not easy within organization
  21. 21.  Law protect Whistle-Blowers and Promote Fraud Detections  Whistleblower Representation of SEC
  22. 22.  Barra, R. A. (2010). The impact of internal controls and penalties on fraud. Journal of information Systems, 24(1), 1-21.  Ge. C.(2005). Audit as a leader. China: Jixie Industry.  Former CEO of London based company pleads guilty to federal charge in 2.1 million fraud scheme, (2013). Press releases of FBI Retrieved from http://www.fbi.gov/washingtondc/press-releases/2013/former-ceo-of- london-based-company-pleads-guilty-to-federal-charge-in-2.1-million- fraud-scheme  Whistleblower Representation of SEC Retrieved from http://www.youtube.com/watch?v=8fsIKSXM1gk&list=PL97A225800A DE733F  Hall, J. J. (1996). How To Spot Fraud: Many managers consider some level of" shrinkage" as normal. Journal of Accountancy, 182, 85-85.  Hongtao.Hou (2007). The analysis of legal responsibility of CPA: G- Waigaoqiao Corporation VS PWC .Journal of Accounting and Finance ,2010(4),49-59

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