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- 1. CASE 9.2 Business Case 329 C A S E 9 . 2 Business Case: HSBC Combats Fraud in Split-second Decisions With billions of dollars, corporate reputations, customer loyalty, and criminal penalties for noncompliance at stake, fi nancial fi rms must outsmart fraudsters. Detecting and pre- venting fraudulent transactions across many lines of business (checking, savings, credit cards, loans, etc.) and online chan- nels require comprehensive real time data analytics to assess and score transactions. That is, each transaction has to be analyzed within a split second to calculate the probability that it is fraudulent or legitimate. A big part of a bank’s relationship with customers is giving them confi dence that they are protected against fraud, and balancing that protection with their need to have access to your services. HSCB Overview HSBC is a commercial bank known by many as the “world’s local bank.” HSBC is a United Kingdom–based company that provides a wide range of banking and related fi nancial services. The bank reported a pre-tax profi t of $6.8 billion in the fi rst quarter of 2014 (1Q 2014). It has 6,300 offi ces in 75 countries and over 54 million customers. Fighting Fraudulent Transactions HSBC was able to reduce the incidence of fraud across tens of millions of debit and credit card accounts. The bank imple- mented the latest Fraud Management software from SAS. The software includes an application programming interface (API)
- 2. and a real time transaction scoring system based on advanced data analytics. Using the Fraud Management app, HSBC has reduced its losses from fraudulent transactions worldwide and its exposure to increasingly aggressive threats. The antifraud solution is live in the United States, Europe, and Asia, where it protects 100 percent of credit card transactions in real time. Scenario Consider this scenario. A credit card transaction request comes in for the purchase of $6,000 in home appliances. The bank has a moment to decide to approve the transaction, or reject it as potentially fraudulent. Two outcomes are possible: • Legitimate purchase rejected: When a legitimate pur- chase is rejected, the customer might pay with another card. The bank loses the fee income from the purchase and the interest fee. Risk of account churn increases. • Fraudulent purchase accepted: When a fraudulent pur- chase is accepted, a legitimate customer becomes a victim of a crime. The bank incurs the $6,000 loss, the cost of the fraud investigation, potential regulatory scrutiny, and bad publicity. Chances of recovering any losses are almost zero. With trillions of dollars in assets, HSBC Holdings plc is a prime target for fraud. Fighting all forms of fraud—unauthorized use of cards for payment and online transactions, and even customer fraud—has risen to the top of the corporate agenda. Fraud losses are operating costs that damage the bottom line. As required by regulations, HSBC has implemented poli- cies to segregate duties, create dual controls, and establish strong audit trails to detect anomalies. In addition, the bank has antifraud technology, which includes SAS Fraud Manage- ment, to monitor and score the millions of daily transactions.
- 3. It is the cornerstone of these efforts. Fraud Management In 2007 HSBC’s fi rst SAS implementation went live in the United States, which was their largest portfolio with 30 million cards issued there. All transactions were scored in real time. Detection rates on debit ATM transactions have been very effective. HSBC has updated its Fraud Management solution multiple times as newer technology and threats emerged. Of course, fi nancial fraud morphs to avoid new detec- tion methods so antifraud models have a very short shelf life. Once HSBC closes up one loophole, thieves devise new threats to exploit other potential vulnerabilities. To counter- act threats, fraud-monitoring algorithms and scoring models require constant refreshing. Sources: BusinessWire (2011), SAS.com (2014), Reuters (2014), YouTube video “HSBC Relies on SAS for Comprehensive Fraud Detection.” Questions 1. Analyze the reasons to invest millions of dollars to detect and prevent fraudulent transactions. In your evaluation, do a cost–benefi t analysis to show why the investment cost is worthwhile. 2. Review the two outcomes of the fraud scenario. Assess the business implications of each of the following two goals. Explain why these goals are confl icting. a. To minimize rejecting legitimate purchases by autho- rized customers b. To minimize the risk of making customers victims of
- 4. fraud 3. The Fraud Management solution is based on a scoring model. For example, assume the scores range from 1 to 10, with 10 being the highest probability that the transac- tion is fraudulent. What cutoff score would you use to decide to approve a purchase? What cutoff score would you use to decide not to approve a purchase? If those cutoff scores are not the same, how do you suggest those falling between scores be treated? 4. Why are approval decisions made in a split second? Would customers tolerate a brief delay in the approval process if it reduced their risk of identity theft? Explain your answer. 5. Research ATM or other banking transaction fraud. How has a fi nancial fi rm been defrauded or harmed? c09EffectiveAndEfficientBusinessFunctions.indd Page 329 11/8/14 9:54 AM f-w-204a /208/WB01490/9781118897782/ch09/text_s Project I The trial balance of the Elker Fashions Incorporated contained the following accounts at December 31, 2008 the end of the company’s calendar year. Elker Fashions Incorporated
- 5. Trial Balance December 31, 2008 Debit Credit Cash $ 26,500 Accounts Receivable 42,200 Merchandise Inventory (Beginning) 52,500 Land 94,000 Buildings 183,000 Accumulated Depreciation-Buildings $ 56,400 Equipment 84,500 Accumulated Depreciation-Equipment 42,400 Notes Payable 40,000 Accounts Payable 37,500 Common Stock 205,500 Retained Earnings 67,800 Dividends 11,000 Sales 865,800
- 6. Sales Discounts 6,100 Purchases 720,000 Purchase Discounts 16,400 Freight-in 12,900 Salaries Expense 70,700 Utilities Expense 11,400 Repair Expense 5,900 Gas and Oil Expense 7,600 Insurance Expense 3,500 $ 1,331,800 $ 1,331,800 Adjustment data: 1. Depreciation is $12,000 on buildings and $10,000 on equipment. (Both are administrative expenses.) 2. Interest of $9,000 is unpaid on notes payable at December 31. Other data: 1. The beginning balance of accounts receivable is $26,750.
- 7. 2. The amount of total assets at the beginning of the year is $378,231. 3. Merchandise inventory on hand at December 31, 2008 is $80,000. 4. Salaries are 70% selling and 30% administrative. 5. $12,000 of the notes payable are payable next year. 6. Gas and oil expense is a selling expense. 7. Utilities expense, repair expense, and insurance expense are 100% administrative. Instructions 1) Journalize the adjusting entries. 2) Prepare a multiple-step income statement and a retained earnings statement for the year and a classified balance sheet as of December 31, 2008. 3) Journalize the closing entries. 4) Prepare a post-closing trial balance. 5) Prepare the following ratios and show all support for your computations: (No partial credit given without work/computations) a) Current Ratio b) Quick Ratio c) Working Capital
- 8. d) Accounts Receivable Turnover e) Average Collection Period f) Inventory Turnover g) Days in Inventory h) Debt to Total Assets Ratio i) Gross Profit Ratio j) Profit Margin Ratio k) Return on Assets Ratio l) Asset Turnover Ratio 6) Based on the ratios computed in 5) above, answer the following questions and use the financial statement ratios to support your answers where appropriate: Do you feel that the company is able to meet its current and long term obligations as they become due? Comment on the profitability of the company with respect to the various profitability ratios
- 9. that you computed. Would you lend money to this company for the long term? Comment on the ability of the company to collect its receivables and mange inventory. 2005 2006 2007 Industry Average Liquidity Current 2.41 2.72 2.85 3.08 Quick 1.08 1.12 1.19 1.47 Working Capital $ 96,750.00 $ 99,850.00 $ 101.700.00 $ 109,000.00 Leverage Debt to Total Assets (%) 19.84% 20.77% 21.45% 19.63% Times Interest Earned 8.75 9.08 9.48 10.12
- 10. Activity Inventory Turnover (sales) 8.21 9.91 10.15 10.52 Fixed Asset Turnover 3.24 3.62 3.73 3.81 Total Asset Turnover 2.15 2.22 2.30 2.56 Average Collection Period (days) 14.95 14.72 14.42 14.20 Accounts Receivable Turnover 24.08 24.50 24.88 25.17 Days in Inventory 42.91 34.59 34.31 41.75 Profitability Gross Profit Margin (%) 21.10% 23.40% 24.03% 24.56% Net Profit (%) 6.63% 7.25% 7.83% 8.03% Return on Total Assets (%) 15.65% 16.14% 16.24% 16.09% Return on Equity (%) 20.15% 21.89% 22.75% 22.56% Payout Ratio (%) 16.32% 16.78% 17.09% 17.72% Financial Accounting – Project II. The bank section of the bank reconciliation for the Jolly Company at December 31,2017 was as follows: JOLLY COMPANY
- 11. Bank Reconciliation December 31, 2017 Cash balance per bank $13,950.70 Add: Deposits in transit 2,348.20 16,298.90 Less: Outstanding checks Check Number Check Amount 5551 $2,175.50 5571 844.50 5572 1,521.75
- 12. 5574 995.00 5575 670.506,207.25 Adjusted cash balance per bank $10,091.65 The adjusted cash balance per bank agreed with the cash balance per books at December 30. The January bank statement showed the following checks and deposits. Check DateNumberAmount 1-1 5551 $2,175.50 1-2 5571 844.50
- 15. 1-24 3,478.00 1-26 2,567.30 1-29 2,886.20 1-30 1,025.00 Total $19,000.80 The cash records per books for January showed the following: Cash Payments JournalCash Receipts Journal Date Number Amount Date Number Amount Date Amount 1-1 5576
- 16. $1,300.00 1-20 5583 $ 1,140.00 1-3 $1,998.20 1-2 5577 2,130.00 1-22 5584 983.00 1-7 2,135.10 1-2 5578 579.10 1-23 5585 1,389.50 1-15 2,562.80 1-4 5579 3,233.00 1-24 5586 780.30
- 18. 1-31 2,347.00 Total $19,008.60 The bank statement contained two memoranda: 1. A credit of $2,655 for the collection of a $2,500 note for Jolly Company plus interest of $190 and less a collection fee of $35.00. Jolly Company has not accrued any interest on the note. 2. A debit of $633.45 for an NSF check written by J. Smith, a customer. On January 31, the check had not been re-deposited in the bank. At January 31, the cash balance per the books was $14,206.15 and the cash balance per the bank statement was $19,200.00. The bank did not make any errors but Jolly Company made two errors. Instructions (a) Prepare the bank reconciliation at January 31, 2018
- 19. (b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash receipts should be made to Accounts Receivable.)