Fraud Incidents at Teledata Communications Inc, Topside Industries, and Enron - Case Study Example

Fraud Case studies Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Case study 1: Credit information fraud at Teledata Communications Inc. 1. Coordinate an investigation in a manner that would not arouse suspicion from Cummings and Baptiste. Cummings and Baptiste were online criminals and they were committing a non-contact fraud using technology. It is necessary therefore that technology supported investigation is contacted especially after briefing by victim of the continuous requests from one computer into one clients account is suspicious. First, surveillance is undertaken to identify the computer used in the fraud. Technology can support identification of the Computer being used, location and also ownership. After confirming this, it is necessary that the fraudsters are confirmed to have been committing crime using the same computer over some time. Secondly, it is imperative that invigilation is undertaken to ensure that the fraudster is actively engaged in fraudulent activities and his actions recorded. Cummings will be found to have access to private information through impersonation. Finally it is necessary that physical evidence like the computers being used in the fraud and other supporting information like contacts of the ring members are collected. 2. Create a vulnerability chart to coordinate the various elements of the possible fraud. What was taken Who had the Opportunity How fraud was concealed How are assets converted Red flag Pressures Rationalization Key internal Controls Customer deposits Customer representative Entering verified codes to the company database Change of address, request of new cheque books, credit cards Changed behaviour of customer representative Extravagant lifestyle Greed Frequent changes in Access codes. Restricted access to customer information 3. Assuming your investigation used surveillance and/or covert investigation techniques, what types of surveillance and/or covert operations would you use? How would technology play a role in this part of the investigation? Stationery or fixed point; this will be applicable at the location where the fraud is being committed. It me involve use of bugs to recorded occurrences at the scene of crime. A professional investigator can be strategic located at a fixed point where the fraud scene can be easily monitored. Moving or trailing; this will be contacted when the suspects leads away from the scene of crime and should be contacted by the professionals. It involves tracing the suspects movement over time in order to identify other supporting contacts and transactions the suspects happens to partake. Electronic surveillance; Video cameras can be used to record further activities of suspects away from the scene of crime. Other electronic surveillance will be tracing on the computer location where the physical address of the suspect might positively be identified. Also by use of network monitoring other associated contacts of the suspects in Nigeria might be napped. 4. Finally how would analysis of physical evidence play a part in this investigation? What types of physical evidence would be helpful? Computers; this hardware should be preserved and necessary possession rights for investigation purposes should be requested from the necessary institutions like the courts. The computer hardware will indicate the device that has been used to send purported clients request for changes in credit data and requests for new cheque books. Without the computer hardware that has been used in the fraud being identified, the prosecution evidence may be weaker but having a computer used in the fraud being positively identified as being owned by the suspect and having been the source of all the fraudulent electronic request then a milestone of positive identification of the suspect. Cheque books, credit cards At the scene of crime, they might have been a collection of cheque books and credit cards for various people hence this will assist in firming of the prosecution case against the suspect. Case Study 2: Topside Industries- Dock workers 1. Mistakes that Sherman did while interviewing Lee and Jackson Mr. Sherman being an investigator did not adhere to strategic investigation skills rather used unorthodox means involving threats to physical assault of the suspect. He failed to have a plan of action with regards to the interview consequently losing his temper. Mr. Sherman also failed when he threated Lee and Jackson that he would hang then in the gallows and also threatened them with physical injury. A suspect still has all the benefit of doubt and the main aim of interviewing is to eliminate circumstantial suspects because of their contact with the location of fraud. It is therefore wrong for Mr. Sherman to assume and allege that Lee and Jackson are already guilty. And finally by being judgmental, Mr. Sherman failed as a fraud investigator who delayed the interview deliberately to make the interviewee nervous. 2. Interview approaches that Sherman should have used; a) Mr. Sherman should have prepared and discussed an interview plan relevant for the scenario prior to interview. Fraud investigation requires diligence on the side of the investigator since a fraud is a white collar crime therefore, the perpetrators are very intelligent and would always finds ways of concealing the necessary evidence while at the same time directing evidence to the wrong persons. b) Mr. Sherman should have gathered all the pertinent documentary evidence necessary for interviewing Lee and Jackson. Sherman’s hasty and haphazard interview of the suspects amounted to lack of the necessary credential and skills as an investigator. He should have produced some documentary evidence and asked Lee and Jackson for their knowledge of the said documents. Mr. Sherman could intelligently understand the suspects responses and the same time read their facial expression for signals to their guilt or otherwise. c) Mr. Sherman approach should have exhibited high degree of fraud investigation professionalism and behavior. By failing to remain calm and ask intelligent questions to the suspects, Mr. Sherman ought not to have been allowed to interview the suspects. 3. Threats and Claims that Sherman could not prove; Acceptability of threat to physical violence. Mr. Sherman threated Lee and Jackson with physical assault threat after claiming to have confessions from Hill and Grant which he did not adduce before the suspects. Also he indicated that pirates were being executed in the gallows in the pre-colonial Virginia consequently insinuating that both Lee and Jackson could undergo the same treatment. This amounted to being judgmental and playing the role of the courts. Making written confession after being coerced through a threat of physical violence will amount to an infringement of the constitutional rights of the suspects Lee and Jackson and this may jeopardize the prosecution’s evidence credibility. 4. Is interrogation room relevant as a location where interview should take place? Interrogation room is a private place which is secure and therefore an interview can take place there. A location relevant for a fraud suspect should be in a place where security and safety for the suspect and the interview is guaranteed and therefore the interrogation room is relevant even though the suspect might develop non-compliance attitude towards the interview . Case study 3 Answer Bred-X Minerals Scandal 1. Assume you are a financial analyst who works for a major brokerage Company that has heavily invested in Bred-X’s minerals. a. In what ways would investigating management and directors help determine the value of Bred-X’s mineral prospects? Investigating the conduct of the management as a financial analysis will enable the acquisition of the necessary due diligence before issuing clients with advice with regards to the financial prospects in Bred-X. Management behaviors will in one way or another indicate their source of income and their compliance with the corporate governance requirements from them both from the corporation’s statutes and ethical standings. If one of the critical management team has a wanting character then it is necessary that his/her conduct in the company is clearly understood. b. In what ways would investigating the company’s relationship with other entities determine the value of Bred-X’s mineral prospects? The relationship between the company and other entities will indicate credit worthiness of the company where the third parties are suppliers. Where the entities are in a holding and subsidiary company relationship then the company’s history and financial value and soundness can be established. It would be prudent also to have the relationship between the company and the other players in the industry and where the company’s value or performance is exceedingly above or below the company average then it would be necessary that the underlying factors are established. Especially with Bred-X’s surging share prices, necessary assurances from independent valuation agents needs to be obtained for the investment analyst to be conclusive on its investigation. c. In what ways would investigating management and directors help determine the value of Bred-X mineral prospects? The management and the directors’ behavior will reflect the company’s future trends especially when they are disposing their shares at the time when the market anticipates that the future of the company is very bright. It is very incoherent to see that the company management is disposing shares when the public aspires to acquire a share of the company’s ownership. This behavior could have been a signal of some underlying fraud coordinated by the management. d. In what ways would investigating the financial results and operating characteristics help determine the value of Bred-X’s mineral prospects? It is imperative that a prudent financial analyst should access the current and historical financial reports of a company and should be able to analyze the future prospects of the same institution. This will provide the necessary grounds to establish the market value of the institution. With this in mind, the financial analyst can therefore provide a fair value of the company based on its net assets and not future prospects. The operating environment should have been analyzed and clearly necessary assurances for an extraordinary item; huge gold deposits discovery, should have been instituted even by the auditors of the Bred-X since their implications was defying the rules of trade where returns were expected to increase beyond 100% return on investment. Financial result analysis either horizontal or vertical will ensure that the attributed values of the company are verifiable through trends analysis. 2. How were the Gold industry and Canadian stock market affected by this fraud? The Gold industry requires utmost confidence between dealers and this requires that the sellers and buyers are not in a state of panic with regards to the product quality. The Canadian Gold market must have faced a decline in its activity since most buyers could be scared to deal with the quality issues in the market and could not trust the sellers. Canadian stock market also might have experienced decline in its trading activities since the regulatory role in the capital market has been betrayed by a shrewd player. It will be necessary that new corporate governance policies are put in place. 3. Elements common for both a perfect fraud storm and the Bred-X scandal. Pressure Most of the management of Bred-X did have the urge to be rich and coupled with their creed. This made them team up and alter the sample composition at the gold site consequently resulting in indicative findings of a huge gold deposit at the site which was not the case. The main drive was greed mainly shown in the way they made quick billions of dollars with the increasing share price. Opportunity The weakness in the sample collection and analysis at the Bred- X’s management coupled with the weaknesses in the share trading regulations at the Canadian stock market gave the necessary opportunity for the management of Bred-X to defraud the Canadian Investors. If the gold sample analysis was undertaken by an independent geological firm then they could have no interest in altering the sample composition. Also if the Canadian stock market had checks on the company directors not being allowed to dispose shares substantially in the short period of time then nothing major could have occurred at Bred-X. Also if the market had a proactive surveillance team, the sale of huge number of shares by the directors of a company whose share prices were significantly increasing should have signaled them that something was not right within the company. Rationalization Bred-X’s management have no excuse other than deliberate defrauding of the Canadian investors in order to enrich themselves. This is unethical conduct and against most of the global corporate governance regulations. There is no rationalization than greed and self-centeredness. 4. What were some of the perpetrators’ motivations to commit fraud? Bred-X’s management have been driven by greed since they were in positions of management and consequently being the highest rewarded individuals in the company. Also lack of ethical culture in the institution might have contributed to the management committing of fraud. Financial needs are everywhere and consequently the main contributory factors to almost all fraud cases. Lastly the lapse in the internal controls systems in Bred-X’s corporate management and the Canadian Stock market provided the necessary opportunity for the same fraud to thrive . Case study 4: Enron Fraud 1. What important internal controls were ignored when LJM1 was created? Internal controls are measures of controls aimed at protecting the assets of an organization. Enron’s LJM1 was created as in investment which was an asset to Enron but there was no clear investment policy at Enron therefore diversifying to information technology based investment was as result of unclear guidelines on the investments of Enron. Secondly Enron did not institute a sober management policy at LJM1 consequently leading to decline in its value at LJM1 as a result of poor management decision of insuring itself. The LJM1 had no management board that could support its strategic decision making therefore all decisions were done by an individual whose interest was to fleece the company. The initial design for SPE’s should have been to enhance the business of Enron but not to diversify its operations. 2. How might Enron’s harsh performance review committee have aided company executives in committing fraud? The performance review committee of Enron being very harsh did not provide the necessary job security for most employees therefore becoming a motivation for employees to steal from Enron whenever the opportunity aroused. Most of the responsible officers of the Enron’s SPEs took the opportunity to steal from Enron since their contracts could change any time the performance review committee could meet. Most of the financial management employees of Enron partook the falsifying of records since they wanted the institution to reflect a better performance this could have been a way to ensure they were ranked as better performers. 3. What are some of the factors that could explain why falsifying financial statement is occurring so frequently? Falsifying the financial records of the institution usually is as a result the high stakes associated to better financial performance like huge rewards to employees and better corporate image. In Enron the performance review team rewards were very hash and unfair to employees. For an industry leader like Enron and other corporations, it is necessary that they reflect the public expectations in their results consequently; they resorted to falsifying of records where the actual results are varied. The fraudulent operations of the management and the ultra vires SPE investments required that the SPE losses could not be reflected in the Enron’s books of accounts since they were not authorized as it should have been in the first instance. 4. Could lack of clarity in financial reporting serve as a red flag in alerting fraud examiners in the possibility of fraud at Enron? Why and why not? Yes, financial reporting requires that an entity discloses all its debts and liabilities based on fundamental assumptions of materiality and matching concepts. Non disclosures of all the individual liabilities and assets of the company can be an indicator of fraud. Clarity will indicate all the necessary details in the financial report that will always indicate a true and fair view of the Company’s financial position. References Brigham, E., & Ehrhardt, M., 2008. Financial management: theory and practice. Texas: Cengage Learning. Brealey, R., & Myers, S., 2003. Principles of corporate finance. New York: McGraw-Hill. Correia. C., 2008. Financial management. Johannesburg: Juta and Company Ltd. Fabozzi, F., & Peterson, P., 2003. Financial management and analysis. New York: John Wiley and Sons. Helfert, E., 2001. Financial analysis: tools and techniques: a guide for managers. New York: McGraw-Hill. Kochis, T., 2006. Wealth Management: A Concise Guide to Financial Planning and Investment Management for Wealthy Clients. London: CCH. Lim, P., 2007. Financial Planning Demystified. New York: McGraw-Hill. McLaney, E., 2009. Business finance: theory and practice. Toronto: Pearson Education Peirson, G., 2008. Business Finance. Canberra: McGraw-Hill. . Read More