Transcript Slide 1

Fraud
Investigations & Detection
George Jordan: Manager – Forensic Accounting Services
Tele:
832-320-3441
E-mail: [email protected]
The Smell Test
Forensic accounting services
generally involve the application of specialized
knowledge and investigative skills possessed by
CPAs to collect, analyze, and evaluate
evidential matter and to interpret and
communicate findings in the courtroom,
boardroom or other legal/administrative
venue.
Source: aicpa.org
The “Onion” Theory
The “Onion” Theory
• Crook(s) use the “Onion” Theory to plan scheme
• Fraudulent audit evidence is “layered”, like onion
• As the auditor “peels” off one layer of audit
evidence, the crook(s) makes sure another “layer”
is readily available
Nature of Fraud
• Intentional Act vs. Error or Mistake
• Ingenious schemes, limited only by
human imagination
• Gaining advantage through false
suggestions and suppression of truth
• By using surprise, trick or cunning, or any
other unfair means
The Cost of Occupational
Fraud
The typical
organization loses
an estimated 5% of
its annual revenues
to occupational
fraud.
©2012 Association of Certified Fraud Examiners, Inc.
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Initial Detection of
Occupational Frauds
©2012 Association of Certified Fraud Examiners, Inc.
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Perpetrators
©2012 Association of Certified Fraud Examiners, Inc.
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Recovery of Victim Organization’s
Losses
©2012 Association of Certified Fraud Examiners, Inc.
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Problems Dealing
with Fraud
No Accident
• Fraud is an “intentional” act, often involving
detailed planning and concealment
• Crooks “anticipate” the routine procedures,
evidence is often fabricated
• Exploits weaknesses in routine procedures or
internal controls
• Breach of trust
Fraud Engineering
Fraudulent schemes are “engineered”
(meticulously designed) to perpetrate and
conceal the theft, including an exit strategy
complete with “fall guys” and “alibis”
Intent
• Derived in large part from testimonial
evidence/interviewing process
• Difficult to prove because of the very
nature of fraudulent conduct…and bad
actors are generally reluctant to admit
wrong doing!
Fraud in Public Sector
• Anticipated funding cuts place added
pressure on Public Sector Entities to find
and “deter” fraud.
• Fraud “robs” Public Sector Entities of
precious, limited resources.
• Expect heightened public scrutiny
Detection/Solutions
Goal of an Anti-fraud
program
Cost vs. Benefit
You can’t completely prevent fraud.
Anti-fraud program should be aimed at
reducing the likelihood that if fraud
occurs, it will not go undetected for an
unreasonable amount of time.
Things to Look For
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Lifestyle changes
Financial duress
Vendor relationships/patterns
Smell Test
Lifestyle Changes
• Spending habits: people generally spend
what they steal. The more they steal, the
more they spend. Fraud almost always
starts small and grows.
• Behavioral changes: look for signs of drug
abuse, gambling or other patterns (dress,
work habits, or attitude toward others)
Keep an Eye on Vendors
• Examine/Monitor Vendors
– Identify unusual patterns (ie recurring, even amounts)
– Verify physical address (vs. employee addresses)
– Examine cancelled checks (counter signatures)
– Web search for derogatory information
– Verify receipt of goods or services
Smell Test
Sometimes “things” just don’t seem
right. The Smell Test is based on a
hunch, feeling or instinct.
Hotline - Tip
• The most effective crime detection
devise is the Hotline.
• Expands your view to all the “eyes” in
your organization.
• Cost effective
• Provides a vehicle for honest employees
to contribute to the well being of the
school
FRAUD ISSUES
• Texas crimes are primarily contained in
Statutes
• Texas Statutes
http://www.statutes.legis.state.tx.us/
• Texas Penal Code (Covers most criminal conduct)
http://www.statutes.legis.state.tx.us/?link=PE
Texas Criminal Statutes
• Criminal Statutes Impacting Government
– Theft (31.03)
– Misapplication of Fiduciary Property (32.45)
– Forgery (32.21)
– Tampering with Governmental Record (37.10)
– Credit Card or Debit Card Abuse (32.31)
– Fraudulent Use or Possession of Identifying Info (32.51)
– Engaging in Organized Criminal Activity (71.02)
Texas Criminal Statutes
Punishment Ladder
Crime Level
Minimum
Maximum
Class C Misdemeanor
$0.00
$19.99
Class B Misdemeanor
$20.00
$499.99
Class A Misdemeanor
$500.00
$1,499.99
State Jail Felony
3rd Degree Felony
2nd Degree Felony
1st Degree Felony
$1,500.00
$20,000.00
Fine
Confinement
$500 None
$2,000 Up to 180 Days County
$4,000 Up to 1 Year County
$19,999.99 $10,000 180 – 2 Years SJF
$99,999.99 $10,000 2 Years – 10 Years TDC
$100,000.00 $199,999.99 $10,000 2 Years – 20 Years TDC
$200,000.00+
$10,000 5 Years – Life TDC
Texas Criminal Statutes
Theft (32.03)
• Elements
– Unlawfully appropriates property with intent to deprive owner of property
– Unlawfully appropriates means:
• Without owner's consent; OR
• Property is stolen AND actor appropriates knowing it was stolen; OR
• Police represents as stolen AND actor appropriates believing it was stolen.
– Intent to Deprive means to:
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Withhold permanently, OR
Withhold for so long major value/enjoyment is lost; OR
Restore property only upon reward/compensation; OR
Dispose of property making recovery unlikely.
• Punishment –
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Value Ladder
Increased if Public Servant or Non-Profit
2nd Degree Felony if under $200,000 AND from an ATM
Other increases for Copper, Livestock, etc.
Texas Criminal Statutes
Punishment Ladder (Public Servant/Non-Profit)
Crime Level
Minimum
Maximum
Class B Misdemeanor
$0.00
$19.99
Class A Misdemeanor
$20.00
$499.99
State Jail Felony
$500.00
Fine
Confinement
$2,000 Up to 180 Days County
$4,000 Up to 1 Year County
$1,499.99 $10,000 180 – 2 Years SJF
3rd Degree Felony
$1,500.00
$19,999.99 $10,000 2 Years – 10 Years TDC
2nd Degree Felony
$20,000.00
$99,999.99 $10,000 2 Years – 20 Years TDC
1st Degree Felony
$100,000.00+
$10,000 5 Years – Life TDC
Texas Criminal Statutes
Misapplication Fiduciary Property /Financial Instit.(32.45)
• Elements
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Intentionally, knowingly, OR recklessly,
Misapplies Property,
That he/she holds as a fiduciary OR property of a financial institution,
In a manner that involves substantial risk of loss,
Either to owner, OR to a person for whose benefit the property is held.
Texas Criminal Statutes
Misapplication Fiduciary Property /Financial Instit.(32.45)
• Elements
– Intentionally, knowingly, OR recklessly,
– Misapplies Property (aka deal with property contrary to),
• an agreement concerning the property, OR
• a law prescribing custody/disposition of the property.
– That he/she holds as a fiduciary OR property of a financial institution,
– In a manner that involves substantial risk of loss,
– Either to owner, OR to whose benefit property is held.
Texas Criminal Statutes
Misapplication Fiduciary Property /Financial Instit.(32.45)
• Elements
– Intentionally, knowingly, OR recklessly,
– Misapplies Property (aka deal with property contrary to),
• an agreement concerning the property, OR
• a law prescribing custody/disposition of the property.
– That he/she holds as a fiduciary OR property of a financial institution,
• Trustee/guardian/executor/conservator/receiver
• Attorney/agent under durable power of attorney
• Person acting as fiduciary - NO commercial bailee
• Agent acting on behalf of fiduciary
– In a manner that involves substantial risk of loss,
– Either to owner, OR to whose benefit property is held.
• Punishment - Value Ladder
Texas Criminal Statutes
Forgery (32.21)
• Elements
– Forges
– A Writing
– With intent to Defraud or Harm Another
Texas Criminal Statutes
Forgery (32.21)
• Elements
– Forges
• Alter, make, execute, or authenticate any writing so that it purports, OR
– Act of another who did not authorize, OR
– Executed at time/place or in sequence other than the case, OR
– Copy of original when no original existed
• Issue, publish, or otherwise utter writing that is forged, OR
• Possess writing that is forged with intent to utter
– A Writing
• Printing or any other method of recording information; OR
• money, coin, token, stamp, seal, credit card, badge, & trademark; OR
• symbols of value, right, privilege, or identification.
– With intent to Defraud or Harm Another
Texas Criminal Statutes
Forgery (32.21)
(Continued)
• Punishment
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Class A Misdemeanor
State Jail Felony (Credit Card, Check, Security Agreement, Mortgage, etc)
3rd Degree Felony (Stock, Bonds)
Increased again if against Elderly Person
Texas Criminal Statutes
Tampering with Governmental Record (37.10)
• Elements
– Knowingly makes false entry in / false alteration of GR (GR)
– Makes, presents, or uses any record, document, or thing with knowledge of
its falsity and with intent that it be taken as a genuine GR
– Intentionally destroys, conceals, removes, or otherwise impairs the verity,
legibility, or availability of a GR;
– Possesses, sells, or offers to sell a GR or a blank GR form with intent that it be
used unlawfully;
– Makes, presents, or uses a GR with knowledge of its falsity; or
– Possesses, sells, or offers to sell a GR or a blank GR form with knowledge that
it was obtained unlawfully.
• Punishment –
– Value Ladder
Texas Criminal Statutes
Tampering with Governmental Record (37.10)
• Punishment
– Generally a Class A Misdemeanor, but
– If Intent is to defraud or harm another is a State Jail Felony, but
– Public School Record or Assessment Instrument under Chapter 39 Educ Code
• 3rd Degree Felony, but
• If Intent is to defraud or harm another is a 2nd Degree Felony, but
• Class C misdemeanor if GR that is required for enrollment of a student in a school district
and was used by the actor to establish the residency of the student.
• Intent
– Is presumed to intend to defraud or harm another if the person:
• acts with respect to two or more of the same type, or blank GR forms, and
• if each GR or blank GR form is a license, certificate, permit, seal, title, or similar document
issued by government.
Texas Criminal Statutes
Credit Card or Debit Card Abuse (32.31)
• Elements
– Presents Uses a Credit Card or Debit Card (CC/DB)
• Not Issued to him AND Not with Consent of Owner, OR
• CC/DB is Expired/Revoked/Cancelled AND Knows it
– Steals CC/DB OR Receives CC/DB if knows it is stolen and plans to use it
– Sells CC/DB if not Issuer
– Buys CC/DB from person knows is not Issuer
– Possesses CC/DB (Not his & No Consent & Intends to Use)
– Possesses 2+ incomplete CCs/DBs (Not his & No Consent & Intends to Use)
– Provides Goods/Services if knows CC/DB Stolen
– Lies about Providing Goods/Services in writing
• Punishment
– State Jail Felony OR
– 3rd Degree if Elderly Person
Texas Criminal Statutes
Fraudulent Use or Possession of Identifying Info.(32.51)
• Elements
– With the intent to harm or defraud another,
– Obtains, possesses, transfers, or uses an item of
• identifying information of another without other person's consent, OR
• identifying information of deceased, if obtained w/o legal authorization, OR
• identifying information of a child younger than 18 years of age.
Texas Criminal Statutes
Fraudulent Use or Possession of Identifying Info.(32.51)
(Continued)
• Other Points
– Intent to Harm is presumed if possess three or more
• Does not apply to business doing legal business activity
– Identifying Information identifies a person either by itself or with other info:
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Name and date of birth, OR
Unique biometric data (fingerprint, voice print, or retina/iris image), OR
Unique electronic ident #, address, routing code, or financial account #, OR
Telecommunication identifying information or access device, OR
SSN or other government-issued ID #
– Telecommunication Access Device (TAD) means:
• Card, code, account #, personal ID #, electronic serial #, mobile ID#, or means of
account access that alone or in conjunction with another TAD may be used to:
– Obtain money, goods, services, or other thing of value, OR
– Initiate transfer of funds (without paper)
Texas Criminal Statutes
Fraudulent Use or Possession of Identifying Info.(32.51)
(Continued)
• Punishment
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State Jail Felony (Less than 5)
3rd Degree Felony (5, but less than 10)
2nd Degree Felony (10, but less than 50)
1st Degree Felony (50 or more)
Next Higher Level if victim is Elderly Person
Restitution can include
• Lost income
• Other expenses incurred (no atty fees)
Involving Law Enforcement
• Make sure Case is Well Documented
• Written summary w/ all names & contact info
• If any evidence is available, Obtain & Preserve
– Personnel File, Snapshot of Server/E-mails
– Computer – TURN OFF, Unplug, Secure
– Do not alter original evidence (notes, highlight, etc)
• Try to avoid interviewing Target /other witnesses
– Ask witnesses to write down what they remember
Fraud Detection
The Smell Test
George Jordan: Manager – Forensic Accounting Services
Tele:
832-320-3441
E-mail: [email protected]