Fraud Examination - Case Study Example

Running header: Fraud Examination Student’s name: Instructor’s name: Subject code: Date of submission: Case 1: Fraud detection 1. Benford’s law – the law also known as the first digit law states that in numbers lists originating from most though not all real life sources of data, the first/leading digit will always be distributed in a precise but non uniform manner. In this regard, the first digit 1 will be 30% of the time with the larger digits occurring as the leading digits having their frequencies being lower and lower such that 9 as a first digit would only occur less than 5% of the time. According to the law, the distribution of first digits is similar to the widths of the logarithmic scale’s gridlines. 2. Situations where it is appropriate to use Benford’s law: Benford’s law may be used to detect fraud relating to accounts payable, accounts receivable, expenses and sales data all of which are Based on values from two multiplying two variables together in terms of quantities and prices (Albrecht and Chad, 2011). However, the prices and quantities should not be used alone as they will not conform to this law but they are likely to comply on multiplying them together. Where the transactions do not comply with Benford’s law, it doesn’t mean they are fraudulent but it gives a reason to investigate. However, Benford’s law will not be appropriately applied in detecting fraud involving the following; i) Fraud involving check numbers and invoice numbers ii) Fraud influenced by human thought for instance prices set through psychological thresholds e.g. $2.33 iii) Accounts containing large numbers of firm specific numbers such as accounts set up for recording $200 refunds. iv) Frauds that contain built in maximum /minimum v) Frauds where no transactions were recorded In other words, Benford’s law will be most appropriately used in detecting fraud involving values distributed across multiple orders of magnitude. Case 2: 1. What the CFO could do to investigate the potential problems in the procurement department of bucket corp.; Investigating procurement fraud is one of the most difficult task to undertake and hence utmost care need to be taken in carrying it out. The CFO could undertake the following steps in investigating whether there is procurement fraud in the company; i) Establish and evaluate the allegation fraud in a bid to establish its credibility. This could be done from the company’s intelligence databases, internal as well as external confidential sources. It is important that the CFO checks for the company’s previous investigation records in a bid to establish whether a particular company has previously been involved in fraud. ii) Investigation –after evaluation, the CFO should determine whether it is appropriate to carry out investigations. This should be undertaken in an ethical and professional manner while ensuring that all relevant company policies as well as legal requirements have been observed. The investigator should also ensure that there is no conflict of interest among those involved in the investigation. iii) In doing the research, the CFO ought to establish whether there is any conflict of interest between the companies and the procurement department personnel 2. I think it is possible that there is fraud involved in this case. This is based on the fact that there seems to be a particular supplier who is favored and hence supplies bigger quantities than the rest. In addition, the prices are not uniform and there seems to be relatively large differences in prices of the same items. As such, there is need to investigate why there are differences in prices and why the quantities supplied by one vendor who is being offered the best prices are greater than the rest of suppliers’ supplies. Case 3: 1. Inventory fraud The fact that sales have been increasing at a rate of 3 percent annually while inventory has risen at a rate of 29% annually is a sign that fraud could be occurring. This is because the rise in inventory is not matched by an equivalent/ reasonable rise in sales. It means that either proceeds from sales are being embezzled, that inventory or sales figures have been tailor made to reflect a certain situation which is an indication of fraud. 2. Assuming that fraud has been occurring, the following steps could be used to investigate; i) Undertake physical observation of inventory by undertaking physical count. ii) Undertake analytical procedures. this would involve comparison of present inventories with previous periods iii) Look for other sighs of inventory fraud signs including decline in inventory turnover, decline in shipping costs as a percentage of inventory, An increase in inventory that does not match the increase in total assets, a decline in cost of sales as a percentage of sales as well as whether the cost of goods sold on the books agree with tax returns iv) Other investigative procedures will involve scanning the books for large adjustments after physical inventory counting, drops in gross margins, recurring issues with out of stock inventory, check for purchase orders and invoices lacking corresponding delivery records and discrepancies between amounts due according to the purchase order, invoice as well as payment records. Case 4: Project plan for implementing the six step data driven approach Step Estimated duration Estimated cost Types of team members to be involved Step 1:Understanding the business 3 days $,1000 -business experts -fraud detectors -database programmers -Auditors -other interested parties Step 2: Identification of possible frauds that can exist 1 week $3,000 Business experts from related fields Database programmers Fraud detectors Auditors Database programmers Security personnel Step 3: catalog possible fraud symptoms 3 days $700 -Fraud detectors and examiners -Auditors -Database programmers Step 4:use of technology to gather data about symptoms 2 weeks $5,000 -Fraud detectors and examiners -Auditors -Database programmers Step 5: Analyzing result 2 days $1,500 -Security personnel - Auditors -Fraud detectors/examiners -Data base programmers Step 6:Investigating symptoms 3 weeks $8,000 -security personnel -Fraud investigators/detectors/examiners -Auditors -prosecutors -database programmers 2.The software package that I will need to purchase to complete the investigation include data analysis software such as ACL Audit analytics, Picalo, Case ware’s IDEA and Micro office +active data. The aim of securing this software is for use in data analysis and data mining functions that will be useful in making decisions regarding fraud (Judie, 2012). 3. The following techniques should be run in step 4&5, i) Digital analysis ii) Stratification and summarization iii) Trending and text matching iv) Discovery of outliers Case 5: How to use invigilation to help determine if inventory is being stolen or shipped or shipped to an unknown location and how to carry out the investigative procedure; I would apply this theft investigation technique by ensuring close supervision of those I suspect to be perpetrating the fraud during the fraud examination period. I would ensure I put in place strict temporary controls on those handling inventory in every step from purchase to when it is shipped to the time it is handed to the customer during the entire investigation period. I would ensure that detailed records are maintained before, during and after the investigative procedure in a bid to analyze the results of the procedure. The procedure would involve putting in place guards and auditors to monitor every movement of goods in and out of the company while ensuring all relevant records and documents are checked and maintained and equipment regularly reviewed. It is important that I restrict invigilation to the high risk areas due to its expensive nature including areas with poor controls, receipts and loading of goods including areas that have poor controls on accounting records. In a bid to ensure invigilation succeeds, I would increase temporary controls necessary for removing opportunities. In addition, I would ensure that past records are analyzed to establish the operating profile for the section being investigated. This would include such items as normal losses, number and nature of daily transactions, number and types of exceptional transactions as well as number of vehicle movements in and out of the company. I believe that such invigilation measures will not only detect inventory fraud but will also prevent it from occurring thus making the invigilation a success. Case 6: 1. The considerations you should take into account when investigating McKnight’s computer including the legal strategic and other concerns you should be aware of include; i) Ensure that you have the legal right of seizing the hardware by checking with the company’s policy and legal counsel ii) On seizing the computer’s hard drive, you should exercise due care in respect of chain of custody, evidence marking among other related issues. Ensure you take pictures of seizure site as well as neutral witness be present in the scene. iii) It is important to take a snapshot of the computers active memory before you turn it off and be careful of actions taken on the computer since they will overwrite empty space that has the potential of invalidating the hard drive’s admissibility in court. iv) When putting the computer off, cut the power to it to avoid overwriting important parts of the disk v) Ensure you make a clone of the hard drive on which to carry out your investigative work while sealing the original disk away in a bid to ensure you do not interfere with evidence. vi) The device should be searched manually as well as automatically 2. The software to be investigated includes the computer’s hard drive. The following procedures are recommended to be carried on the hard disk; i) Secure the device and perform the initial tasks ii) Clone the hard disk and calculate a CRC checksum iii) Search the hard drive manually iv) Check the hard drive using automated procedures. 3. I don’t think it is possible for the company to approach eBay for information on this case. This is because eBay would want to maintain the buyers and sellers information as confidential. Case 7 2. Whether surveillance was the proper method to use in this case Surveillance implies watching and recording the physical facts, acts and movements which form part of fraud. In this case, the suspect in question has been observed through surveillance committing worker’s compensation fraud by working while at the same time receiving disability benefits. Surveillance has been able to show exactly what the man is doing and the fact that it does not match with his disability claim. As such, surveillance was the proper method to use in this case especially because if it was proper carried out, then the investigator was able to keep a proper surveillance log which could be used to substantiate the facts of the case. Such facts would include the scene the worker is working in, details of all activities that the worker is involved in including date and day when he is observed working, collaborating witnesses details, where the investigation is being carried from and its distance from the seen and such related details. This way, the investigator could be able to prove beyond reasonable doubt that the worker is involved in workers compensation fraud especially because documentary evidence could be supported by tape recordings as well as collaborating witnesses. 3. The restrictions to be careful about in carrying out surveillance includes; i) The investigator should ensure strict adherence to the company’s policy regarding surveillance ii) The investigator should ensure that all legal requirements are observed in carrying out surveillance especially as regards the workers privacy in a bid to avoid related legal issues that may arise iii) It is important that the investigator ensures that the involved worker is not aware that he is being investigated so that this does not interfere with evidence. In addition, if the suspect becomes aware, this might compromise the investigator’s security. Case 8 1. If check number 65 was not properly signed and was paid to a fictitious vender, I would contribute that fraud exists in the population. This is because through discovery sampling, the check is a representative of the whole sample implying that if the representative of the sample has been found to be fraudulent, inference can be made that the sample is fraudulent (Wells, 2010). If the sample is deemed fraudulent, the same can be inferred of the whole population and hence it is right to conclude that fraud exists in the population. 2. I have discovered that no fraud exists in the sample of 15 checks I evaluated; I would not conclude that no fraud exists in the population. However, I would still examine the whole population so that I can be absolutely sure that there is no fraud. However, this sample will have enabled me to decide how much risk I will be willing to assume. Case 9 1. What is wrong with the surveillance log? The surveillance log is not detailed enough so that it can be as reliable, credible and persuasive as possible as a source of evidence. To be considered a good surveillance log, the log should have been more detailed by including details such as the following in addition to the ones that have already been provided; -details of all activities involving the suspect should have been recorded in way of notes or film or tape, such details should have included dates and particular day of surveillance, names of the observer as well as those of collaborating witnesses, the position from which investigation was carried out as well as the distance from the scene, the time when the surveillance began and ended, a detailed time log of all the movements and activities of the suspect. 2. The surveillance log ought to be detailed enough so that it can effectively collaborate the evidence with the claims of fraud. In other words, a detailed surveillance log will is likely to capture even the finest details that relate to the case in question. As such, it will be more credible, accurate and persuasive and is more likely to arrive at a conviction as opposed to surveillance logs that are not detailed. In other words, any piece of evidence ought to not only be relevant but also material hence the need to keep a detailed surveillance log. Case 10 1. What the audit personnel should have done with their documents if they had suspected that fraud had occurred; based on the fraud examiner’s responsibilities regarding documents; it would have been the responsibility of the auditor to keep the documents as confidential as possible. This would prevent the suspects involved from accessing the documents and hence doing anything to conceal the evidence. As such, it would have been wise for the auditors to withdraw the documents to a safe place. It would also have been wise for them to make copies of all the documents involved. This would act as back up evidence just incase the suspects altered the original documents. In addition, the auditors would carry their investigations on the copies to avoid altering the original documents hence ensuring they remain as authenticated as possible. Case 11 1. John and most other fraud examiners prefer documents over witnesses. This is because documentary evidence as opposed to witness evidence is more reliable and persuasive. In other words, documentary evidence is deemed more relevant while containing admissible direct and circumstantial evidence of the facts in issue and can also be authenticated. It is possible to authenticate any documentary evidence by any witness by stating that the document is what it purports to be based on her/his personal knowledge of the document (Hopwood, 2011). The witness can confirm that the document is an accurate copy or original not forged or altered. Such a person could be its author, custodian, typist or such other person. As such, fraud examiners find it easier to convict the concerned persons of fraud using documentary evidence than using witness evidence (Richard,2009). Unlike documentary evidence, witnesses are less reliable and persuasive. This is because they can willingly alter evidence or forget some details thus lowering the degree to which such evidence can be considered reliable and persuasive. 2. Elements of good documents include the following i) The documents should be relevant. This implies that the documents will tend to prove or disapprove the fact in issue. They must be hopefully convincing and compelling. ii) Such evidence must also be weighty or material meaning it is not limited to one isolated piece of evidence but relates to several interconnected parts. iii) The documents also have to be tightly organized and clearly presented. iv) The examiners should make copies of the original documents on which to do their investigations v) The documents should be securely locked in a bid to prevent their destruction by those suspected of fraud Case 12 1. The suspect has been acting strangely of late including crying in the toilet and other related behavior. The suspect also has an income of $249,000 from unknown sources over the last year. This could serve to explain that the suspect knows that he is being investigated for fraud and he fears of the consequences of investigations since he knows that he is guilty of the funds embezzlement. The change in behavior may be tactical by the employee in trying to portray himself as innocent and hence being wrongly targeted. This may be aimed at hiding the fact that he has indeed embezzled the said funds. In addition, the suspect has had income from unknown sources worth $249,000 over the last year. This may serve to indicate that the employee has indeed been involved in the fraud hence the reason the sources of the funds can not be explained. In other words, the change in behavior and the presence of unexplained income are a pointer to the suspect being guilty of the embezzlement allegations. However, this should not be a conclusion but should only be treated as an indicator hence triggering the need to actually investigate the employee for the fraud since the change in behavior could be caused by other factors and the income could from other sources other than fraud. 2. I can not conclude from the fact that the employee has been acting strangely and that he has had income from unexplained sources that the employee has actually been involved in funds embezzlement. This is because the change in behavior could be caused by other factors such as problems at home while the extra income could be from other sources such as windfall gains. As such, I would only treat these facts as pointers towards the possibility of the employee being involved in the fraud and hence as a whistle that calls for more investigation of the issue in order to establish whether it is the employee who is involved in the fraud and hence the cause of the above facts or they are caused by other factors. Case 13 1. Some behavioral and lifestyle changes that I should look for includes a) A change in the employee’s or the suspect’s lifestyle that should be investigated include the employee /suspect living beyond their means such as driving very expense cars should be investigated. Other lifestyle changes that should be investigated include living in very expensive house, wearing expensive clothes and jewellery as well as working for long periods without taking leaves. In addition, if the employee/suspect is always the first to arrive in the office or the last to leave, the lifestyle should be investigated. b) Behavioral symptoms to be investigated include substance abuse, gambling habits as well as other addictions, the suspects criminal records, chronic legal problems faced by the suspect, infidelity, weak code of ethics where a person is willing to engage in dishonest behavior in other parts of their life, the employees propensity to work out of the system and following rules that not everyone abides by, the suspects poor work performance, the employees excessive drive to achieve , the suspect’s over protectiveness of data as well as key documents in a bid to conceal their fraudulent activities, the suspect’s persistent demoralization or constant showing of dissatisfaction with their status in the workplace and feeling unfairly treated as well as being the first one in and the last one out (Singleton, 2010). Case 14: Comparative net worth Assessment Year 1 Year 2 Year 3 Assets Residence $50,000 $50,000 $200,000 Stocks and bonds 10,000 10,000 10,000 Automobiles 15,000 15,000 40,000 Cash 5,000 8,000 20,000 Total assets 80,000 83,000 270,000 Liabilities Mortgage balance 40,000 30,000 0 Auto loan 8,000 5,000 0 Student loans 10,000 8,000 0 Total liabilities 58,000 43,000 0 Net assets/net worth 27,000 40,000 270,000 Income Salary 30,000 35,000 40,000 Other 0 1,000 1,000 Total income 30,000 36,000 41,000 Expenses Mortgage payments 5,000 5,000 0 Car payments 1,000 5,000 2,500 Students loan 1,000 1,000 500 Other living expenses 15,000 15,000 20,000 Total living expenses 22,000 26,000 23,000 Net income 8,000 10,000 18,000 Expected income(=net income +reduction in liabilities+ increase in assets +other living expenses) $8,000 10,000 $18,000+43,000-0+187,000) =248,000 Unexplained income= expected income-net income 0 0 230,000 There has been an unexplained increase in income for the third year with which the employee has financed purchase of new assets as well as the payment /settling of his liabilities. The liabilities reduced by $43,000 to 0 from $43,000 in the second year while the assets shot up to $270,000 from just $83,000 in the second year. However, the clearing of liabilities as well as the increase in liabilities is not supported by a corresponding increase in the employee’s income. The employee only had a net income of $18,000 during the year despite indication that payments worth $248,000 were made during the year. In addition, there is noted a change in lifestyle in that the employees living expenses increased from $15,000 in the second year to $23,000. The change in the living house, automobiles and cash available is also suspect. As such, a comparative comparison of the employee’s net income gives indication that he could be involved in defrauding the company. As such, this calls for the employee’s investigation in order to reveal the source of the unexpected income as well as the changed lifestyle and action taken appropriately. References: Albrecht, S & Chad, O2011, Fraud examination, Sydney, Cengage learning Judie, M2012, Introduction to fraud examination, London, Rutledge. Wells, T2010, Principles of fraud examination, New York, John Willey & Sons. Hopwood, W2011, Guided solutions for forensic accounting and fraud examinations, New York, McGraw Hill. Richard, R2009, Forensic accounting and fraud examination, Sydney, Prentice Hall. Singleton, A2010, Fraud auditing and forensic accounting, London, Rutledge. Read More