Fraud Resistance and Detection - Case Study Example

Fraud Examination-Case Studies Name Course Name and Code Instructor’s Name Date Introduction Fraud are real risks that as evidenced in the recent past, millions of dollars in cash and in stocks have been lost in fraud scams in both local and international organizations. Pedneault et al. (2012) defines fraud as the activity which takes place within a social setting and has severe repercussions for the economy, organizations and for individuals. The author describes fraud as the opportunistic infection that comes forth when greed meets the opportunity for deception. Albrecht et al. (2011) describes fraud as theft through deception. According to Wells (2011), fraud examination provides a basis for information that is vital in designing fraud prevention programs and strategies. This informs this report that examines varied case studies related to fraud and answering questions thereof. Case Study 1 from chapter 7 of the txt (Abrecht et al., 2012, pp. 229-230) More often, examining fraud requires the fraud examiner to not only be vigilant, but also, maintain a low profile to ensure that prior to reporting suspicion of fraud; they have sufficient evidence to support their claims. To ensure that those involved in the fraudulent activities do not get a chance to cover up their scam and erase any evidence trails leading to them hence, making the fraud examination results inconclusive in the long run (Vona, 2011). For the case study, following the red flags which are the spikes in the number of requests made in Ford’s account, as an agent with the Federal Bureau of investigations I should ensure that the information that I already have remains confidential and that no one, not even the management are aware of the investigations. Since one can never be sure who is involved since, those who carry out fraud have profiles that are not dissimilar from other people. This will involve establishing from where the account requests are being made from, and identifying a trend or pattern since fraudsters just like serial killers tend to have patterns in carrying out their crimes. Since the fraudsters relied on wire transfers, the next step would be to follow up on trails of all wire transfers suspected to be fraud and get details on the destination accounts. In addition, following up on the location of the communication systems such as emails and telephone numbers used to make the account requests through use of surveillance and gathering electronic evidence using corporate server and centralized backups in order to limit detection. It is important to keep copies of documents as evidence of suspected fraud to be used when the fraud is confirmed. Interviews will be carried out from people not presently linked to Cummings and Baptiste working inwards to the main suspects. Samocuik et al. (2010) indicates that vulnerability charts are used as a means for the fraud examiner to explicitly establish all the aspects of fraud and for determining fraud hypothesis. According to Albrecht et al. (2011), vulnerability chart is defined as a chart that coordinates varied elements of possible threat, encompassing missing or stolen assets, people with opportunity for theft, theft investigative techniques, possibilities for concealment, conversion possibilities, red flags, pressures of suspected perpetrators, rationalization by the perpetrators and internal controls, which were compromised to facilitate fraud. The vulnerability chart for the case study is as follows What was taken? Which Individuals had opportunity? How were the assets moved? How was the theft concealed? How the assets are converted Red flag symptoms? Pressures? Rationalizations? Key internal control Credit identity -Supervisors -Proof operators -Credit transfer agents -Customer service personnel -employees from the credit bureaus Entering verified credit, Order ne ATM cards, Order ne credit cards using victim’s name and Creating new credit lines under the victim’s name, and Depleting the bank accounts through wire transfers Changing addresses of accounts so current information does not reach the victim, Order new checks to be written off with victim’s bank account, Moving assets into accounts that have fictitious names Customer complaints, and Significant number of credit requests from major accounts Financial difficulties Feels they need more money, And Feels they can never get caught and they can get away with fraud without detection Restrict computer access to client information, Certification And verifying credit requests from customers and, changing account access codes routinely Surveillance and covert/ undercover operations refers to theft investigations methods which rely on the fraud examiner’s sense of seeing and hearing which encompasses observing and recording the physical information, acts and movements that constitute part of fraud (Hall, 2010). As indicated by Albrecht et al. (2011) there are varied forms of surveillance namely stationery and fixed point, mobile observation or tailing, wire tapping and electronic surveillance. For the case study, the most suitable method of surveillance is a combination of electronic surveillance and wire-tapping. Where for example, cameras and videos installed in ATM points can be used to identify persons who withdrew money from the suspected accounts or in shopping malls or other buying points where credit cards using the victim’s name were used and suspect’s internet usage and telephone conversations are tapped respectively. In addition, tracking wire transfers and telephone numbers from which the credit requests are made. Technology can be used in this investigation by using GPRS to locate the position or location from where the telephone number making the credit request are located and tracking movement of credit on wire. Physical evidence is essential as proof of crime and without it is becomes impossible to validate theft and more importantly, to prove the suspects involved (Cohen, 2005). Physical evidence establishes the who, those involved and the how, the fraud was carried out. Among physical evidence for the case study includes copies of emails from credit bureaus, new checks written off the victim’s bank accounts and the new addresses of the accounts, which were created to conceal fraud by the Nigerian nationalists. In addition, the telephone numbers used to make credit requests. All these are useful in zeroing and narrowing down to the real suspect. Case Study 1 from chapter 10 of the txt (Abrecht et al., 2012, pp. 316) As an investigator, Sherman failed to remain objective and he was not fully prepared and informed to ensure he did not miss potential indicators. It is mostly important to conduct interviews from the outside inwards, meaning from individuals who do not have current link to the suspects. In addition, the investigative method used should generate the strongest form of evidence for fraud (Albrecht, et al., 2011). Sherman should have first analysed the case by seeking alternative means of gathering information other than using threats to intimidate the suspects into submission before using interviews to collect evidence for theft. Sherman thought and perceived the suspects as criminal. An aspect of an effective interview is that investigator needs to strategically plan, ask relevant questions and remain objective as indicated by Cohen (2005). Interviews are usually unsuccessful for failure to have sufficient information to address the issues and owing to insufficient preparation and inadequate time allocated for the inter view. Although the suspects arrived in time, the interviewer was late. Establishing a rapport between the interviewer and the interviewee is crucial and can be generated by the interviewee showing fairness, professionalism and objectivity during the whole process (Albrecht, et al., 2011). Respect and courtesy towards the interviewee develops a comfortable interview setting, of which Sherman failed to do since he started of the interview with threatening demeanour in the first phase of the interview. He was unable to be professional and rather than approach the two with respect and fairness, he was authoritative, un-objective, threatening, late. Another mistake Sherman did was that he interviewed two people at one time, which is ill advised as noted by Albrecht et al. (2011). According to Albrecht et al. (2011), characteristics of a good interview are that interviews should have adequate length and depth to reveal relevant details and they focus on relevant information and they should start and finish on a positive note. Other than conducting interviews immediately after the even in question, they should be objective and information should be collected in a fair and unbiased way. Based on these characteristics, Sherman should have initiated the interview with a positive note by first arriving in time and personally telling Lee and Jackson to wait for a while, which could have demonstrated respect and courtesy for the two and they would not have been hostile as indicated by Lee’s outburst following Sherman tardiness. In addition, he should have carried out the interview professionally by being objective and gathering the information in an impartial manner rather than threatening them. It seemed to Joe and Jackson that Sherman was out to get them which should not be the case (Albrecht, et al., 2011). According to the author, information is best and efficiently collected by informal and low key manner which contrasts with Sherman show of authority. Sherman should have refrained from making accusations he could not substantiate and worse, making the suspects feel as if they were targets of an inquiry (Cohen, 2005). Sherman was less professional by his coming late and he appeared as a threat to Joe and Jackson, which should not be. There was an inhibitor of communication demonstrated in the case study which is the competing demands for time where Joe and Jackson seemed eager to get over with the interview and get back to their work. In such a case, the interviewee weighs the value of conducting the interview against going to the paid work. Sherman should have therefore, assured and convinced Joe and Jackson that the interview was a good utilization of their time. Among some of the threats and claims that Sherman made that he could not prove were that Joe and Jackson were guilty, he indicated there was a surveillance tapes, written confessions from Hill and Grant and a paper trail proving that Lee and Jackson were involved in the fraud. The admission-seeking interview Sherman used can only be applied when the investigator is confident the interviewee committed the act and it is aimed to generate confessions. It is never acceptable to make a threat that involves physical violence since the use of threats indicate lack of objectivity and the interviewees are more likely to remain hostile and call it bluff. According to Albrecht et al. (2011), except for hostile interviewees, interviews should be carried out at the office or the workplace of the interviewee in order to allow the interviewee easy access to necessary materials such as papers and books among other evidence. Such locations are usually more convenient and comfortable for interviewees. The place where the interview takes place should be devoid of distractions from either co-workers or telephones (Hall, 2010). Interrogation rooms are some of the places where interviews can be conducted. The interrogation room for this case study was appropriate place for the interview. Alternatively, Joe and Jackson could have been interviewed in another more comfortable place such as an office within Sherman’s place of work or Sherman could have met them at the interview’s place of work. Case Study 2 from chapter 11 of the txt (Abrecht et al., 2012, pp. 386-387) Among ways that investigating management and the directors would help determine the value of Bre-X’s gold prospects include analysing the influence the management has in making decisions for the company. The ability for the management to influence decisions in the firm is crucial to understand since it becomes then easier for the management to perpetrate fraud when some of them have primary powers in making decisions (Silverstone & Davia, 2005). More powers in decisions making among Bre-X’s management and directors means that they can easily inflate the value of the company’s gold prospects than they really are. Among other ways includes understanding the backgrounds of the management and the director in terms of their past individual or organizational legal problems, changes in the management makeup, key issues related to the backgrounds of key members of management and analysing whether the management and the directors commission for independent audit and compensation procedures. Using the information it therefore becomes easy to strategically analyse whether the prospects for the company are what they are or they are exaggerated in any way and if they are, withdrawing the investments (Albrecht, et al., 2011). Among other ways include understanding what motivates management and the board of directors which generates insights into whether any of the management and the directors have the pressure, rationalization and the opportunity to commit fraud by inflating the values of gold prospects than they really or indicating there are gold prospects when they are non-existent (Albrecht et al., 2011). Understanding the degree of influence of the management and the board of directors is another way the prospects of gold can be valued since it gives an insight into assessing the possibility for fraud owing to the pressure asserted on employees to outperform. Alternatively, the opportunity for the management to deceive in order to acquire personal affluence through the influence they have over operations. Examining the company’s relationship with other entities such as financial institutions, third party investors, auditors, regulatory bodies and lawyers helps determine the value of Bre-X’s gold prospects in that it will help assess the opportunities or exposures that the management has in facilitating fraud. By understanding, the relationship with financial firms and shareholders offers a pointer to the degree to which the firm is leveraged (Albrecht, et al., 2011). By examining, the organization and its industry can help determine the value of Bre-X’s gold prospects by exposing organizational structures which can be used to make it easy to conceal fraud. In addition, it helps the examiner identify the trends, competition, market saturation, and the rate of changes within the industry and establish the performance of the firm. From the findings, establish how similar or dissimilar the company is to the rest within the same industry and identify any inconsistencies or points where Bre-X deviates from the patterns in the industry to indicate fraud (Albrecht et al., 2011). Among ways investigating the financial results and operating characteristics help, determine Bre-X’s gold prospects are by establishing exposures to fraud. By establishing changes that show themselves in the financial performance can suggest inconsistencies which can act as a red flag for fraud. Rapid changes to financial results and operating characteristics can suggests that something out of the ordinary is causing them and hence, analysis is required to ensure they are genuine and not as a result of fraudulent activities. To validate the financial results and operating characteristics one can always examine other firms within the same industry (Silverstone & Davia, 2005). Some of the effects of the fraud within Bre-X to the gold industry and the Canadian stock markets were that the actual prices of gold within the gold industry dropped considerably owing to the prospects and the great anticipation of the great increase of gold. The Canadian stock market was a buzz with increased activities as people from all levels and investors, pension and mutual funds sought to cash in the gold rush by increasingly purchasing Bre-X’s stocks, which rose from pennies to not less than 250 dollars per share prior to a 10-for-1 stock split was declared (Albrecht, et al., 2011). Albrecht et al. (2004) highlight some of the aspects of the perfect fraud storm which includes a booming economy, decay of moral values, misplaced executive incentives, high analyst’s expectations, and high debt levels. Others are nature of accounting rules, opportunistic behaviour of firms, greed by the management, investors and financial companies and educator failures, which are coupled with perceived pressure, perceived opportunity and rationalization. All fraud cases rely on the elements of perceived pressure, perceived opportunity and rationalization must exist (Rezaee & Riley, 2009). Those who devised the Bre-X fraud had the opportunity to do so, they were under either personal or organizational pressure and they were able to justify the theft to themselves. Other than three elements of perceived pressure, perceived opportunity and rationalization that were common in both the perfect fraud storm and Bre-X scandal includes opportunistic behaviour of the management and the company in general, greed by all the relevant stakeholders, high analyst’s expectations, decay of moral values, misplaced executive incentives and educator failures (Albrecht, et al., 2011). As indentified by Albrecht et al. (2011), among motivations for the Bre-X fraud were to gain personal affluence. To enhance positive earnings for the company’s stock and a need to report high income to support stock prices as illustrated by the substantial amount of money the company and its management got in profits from selling some of the Bre-X stocks an year prior to fraud being discovered. Case Study 1 from chapter 12 of the txt (Abrecht et al., 2012, pp. 431-433) Despite the fact that less than 3% of SPE equity was owned by investors from the outside, LJM1’s books were recorded independently from Enron’s which permitted LJM1’s financial statements to remain unconsolidated. LJM1 had no governing controls in place making fraud inevitable. In a bid to insure Enron from declining Rhythm’s stock, LJM1 was established and it utilized Enron’s stock as its capital to sell the Rhythms stock, by carrying out independent actions separate from Enron, LJM1 offered a hedge against profitable investments. In addition, LJM1 was effectively used to change the actual financial statements of Enron to hide huge liabilities and losses and show the company was performing successfully when it was not. The Performance Review Committee aided the executives in committing fraud since it gave the employees perceived pressure to commit fraud in a bid to get better ranking, rationalization in that employees would justify fraud to get good ranking. More importantly, the hiring and yanking concept intensified inter-employee competition and fear of the executives which led to employees being unable to offer their opinions and valid concerns such as red flags for fraud for fearing they would get low ranking scores and are fired by the superiors. Among factors explaining the increased frequency of falsifying financial statements are the advancement in technology which allows complex systems of fraud that are hard to detect. Enhanced fraud detection systems that easily uncover fraud making more frauds in present day being discovered, greed and increased pressures among management and companies to succeed in a highly competitive environment as noted by Hall (2010). In regards to lack of clarity in how Enron makes money , it generates a red flag in alerting me to the possibility of fraud since, each and every financial transaction and procedure should be clear to understand and to follow and any complexity generates opportunity and exposures which can facilitate fraud. As an investor I should be able to effectively able to know how, when and why the company I am investing in makes money since failure to achieve clarity means there are issues that are hidden of which may be fraudulent in nature. References Albrecht, W.S. Albrecht, C.C., Albrecht, C.O., & Zimbelman, M.F. (2011). Fraud Examination. London: Cengage Learning. Albrecht, W.S., Albrecht, C.C. & Albrecht, C.O. (2004). Fraud and corporate executives: Agency, stewardship and broken trust. Journal of Forensic Accounting, 109-130 Cohen, F. (2005). Frauds, Spies, And Lies: And How to Defeat Them. Singapore: Fred Cohen & Associates. Hall, J.A. (2010). Accounting Information Systems. London: Cengage Learning. Pedneault, S., Rudewicz, F., Sheetz, M., & Silverstone, H. (2012). Forensic Accounting and Fraud Investigation for Non-Experts. New York: John Wiley & Sons. Rezaee, Z., & Riley, R. (2009). Financial Statement Fraud: Prevention and Detection. New York: John Wiley and Sons. Samocuik, M., Nigellyer, & Doody, H. (2010). A short guide to fraud risk: fraud resistance and detection. London: Gower Publishing, Ltd. Silverstone, H. & Davia, H.R. (2005). Fraud 101: Techniques and Strategies for Detection. Sidney: John Wiley & Sons. Singleton, T.W., & Singleton, A.J. (2010). Fraud Auditing and Forensic Accounting. Sidney: John Wiley and Sons. Vona, L.W. (2011). The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems. New York: John Wiley and Sons. Wells, J.T. (2011). Corporate Fraud Handbook: Prevention and Detection. New York: John Wiley & Sons. Read More