Week 2 - 3 Occupational Fraud, Red Flags Prevention

FORENSIC ACCOUNTING
AQ068-3-3
Occupational Fraud
Learning Outcome
• Students should be able compare various

type of fraud
– Employee fraud/asset misappropriation
• Students should be able to identify red

flags of Occupational Fraud and
prevention technique
Slide 2 of 33
Forensic Accounting AQ068-3-3 Occupational Fraud, Red Flags and Prevention
LEARNING OUTCOME
• Students should be able to apply the

knowledge of the fraud triangle model to
the economic crime
• Interpret types of fraud
• Generalize the elements of Employee
Fraud
• Explain the motives behind fraud
• Identify red flags of occupational frauds
• Integrate Prevention Techniques Slide 3 of 33
Topic & Structure of the lesson
• Employee fraud and corporate culture
• Employee fraud scheme
• Vendor fraud
• What are companies doing to
help stop fraud?
• Tax fraud
• Methods of proof
Slide 4 of 33
Key Terms you must be able to
use
• Fraud triangle
• Pressure
• Opportunity
• Rationalization
• Skimming
• Check tampering
• Check washing
• Check laundering
Slide 5 of 33
COMMON LAW CRIMES
• Larceny
 - Intentional taking away of an employer’s cash without
the consent and against the will of the employer
 Fraudulent disbursements
 Cash receipt schemes
• Skimming
 Theft of cash from a victim entity prior to its entry in an
accounting system
– “Off-book”
 No direct audit trail
 Its principal advantage is its difficulty to be detected.
Slide 6 of 33
• Burglary
• Conspiracy
• Embezzlement
• Fraud
• Robbery
• Extortion
• Arson
• Solicitation
• Aiding and Abetting
Slide 7 of 33
FRAUD FOR AND AGAINST
THE COMPANY
• Corporate frauds can be classified into two
broad categories:
• frauds directed against the company - the
company is the victim
• frauds that benefit the company –
company intended beneficiary
Slide 8 of 33
FRAUDS FOR THE COMPANY
• Smoothing profits
• Check kiting
• Price fixing
• Cheating customers by using devices such as short
weights ,counts, and measures; substituting cheaper
materials; and false advertising
• Violating governmental regulations
• Corrupting customer personnel
• Political corruption
• Padding costs on government contracts
Slide 9 of 33
EMPLOYEE FRAUD
Slide 10 of 33
EMPLOYEE FRAUD SCHEME
Revenue Cycle Fraud

• Basic sales skimming
• Advance sales skimming
• Cash box robbery
• Shortchange sales
• Mail room theft
– Accepting cash in mail – cash theft
Slide 11 of 33
• Basic Sales Skimming - does not record
sale but pocket cash
• Prevention: customer audit-reward without
sales receipts
• Advanced Sales Skimming – Gives the

customer fake receipts
• Prevention: Pre number receipts
Slide 12 of 33
Check Washing
Slide 13 of 33
• Check Washing
– Using chemical to remove payee name –
organized crime
• Check tempering
– Altering stolen customer checks and them
cashing them using false identity
Slide 14 of 33
Accounts Receivables Frauds
• Fraudulent credit approvals
– Prevention: Credit Department Controls
• Improper credits
• Improper write-offs
• Lapping
• Account receivable clerk steals incoming
payments and then hides the theft by
manipulating the customer account record
Slide 15 of 33
Expenditure Cycle Frauds
• Abuse of company credit cards or expense account
• Theft of company checks
• Fraudulent returns
• Theft of inventory
• Improper hiring
• Improper changes to employee personnel files for
pay rise
• Improper work related reporting
• Unauthorized purchases
• Fraudulent purchases to related parties
Slide 16 of 33
Production Cycle and Other
Frauds
• Production cycle fraud involves theft of
raw materials and finished goods.
• Waste, Scrap, and Spoiled Goods
• Other Types of Employee Fraud
• Financial Statement Fraud
• Insider Trading
• Employee Fraud in General
– Many other employee fraud schemes are not
discussed here. Slide 17 of 33
VENDOR FRAUD
• Short shipments A company is susceptible to paying

for goods not received if it does not count its incoming
shipments and match the counts against purchase
orders and vendors’ invoices.
• Balance due billing Some vendors send their
customers statements that show only the balance due.
Companies whose vendors bill this way are at high risk
for being overbilled.
• Substandard goods Vendors can ship substandard
goods if the receiving company does not have a method
of receiving and inspecting goods.
• Fraudulent cost-plus billing
Slide 18 of 33
Payroll Frauds
• When it comes to the payroll, there are as

many ways to cheat as there are
employees
• Improper hiring, Improper changes to
personal files, improper work related
reporting
Slide 19 of 33
• RED FLAGS AND PREVENTION
• Week 3
Slide 20 of 33
RED FLAGS
• Research shows that the fraud triangle is

helpful in determining which employee
may defraud the company
• Habitual lying
• Impulsiveness
• Aggressive
• Lack of responsibility
• Strong disregard need of others
Slide 21 of 33
RED FLAGS
• The corporate culture can actually supply

the pressure that could drive employees to
commit fraud.
• Bad example from top management
• Poor compensation
• Excessive Pressure to perform
• Corporate financial problem
• Hostile Work environment
Slide 22 of 33
The Audit Processes In
Detecting And Preventing
Employee Fraud
• Audit Trail (most important element in detecting
fraud.)
• Chain of Custody is part of the audit trail.
• Authorizations and approvals are also
important parts of the audit trail.
• The internal audit helps ensure that the audit
trail is generated.
• Physical Security and Monitoring
• Fraud Reporting Hotlines, Training, and
Education
Slide 23 of 33
Employee Fraud Methods In
Electronic AISs
• Input manipulation (the most common mode of
attack)
– Abuse of Access Privileges
– Unauthorized Access.
• Direct File Alteration (bypass normal access
software)
• Program Alteration (requires access and
technical skill)
• Data Theft (hard to detect and prove)
• Sabotage (typically by disgruntled employees)
Slide 24 of 33
What are Companies Doing to
Help Stop Fraud?
FRAUD PREVENTION
• Reviewed or strengthened internal controls
• Instituted periodic compliance audits
• Created an employee hotline
• Appointed compliance personnel
• Established a Code of Conduct for all employees
• Conducted background checks for hires with
budgetary responsibilities
• Instituted fraud awareness training
• Tied employee evaluations to ethics or compliance
objectives Slide 25 of 33
• Mr Hippy uncovered theft when his bookkeeper unexpectedly missed a few days of
work and when Mr Hippy opened his bank statement. The simple act of thumbing
through cancelled checks from one month’s bank statement prompted a phone call to
his attorney who directed him to a forensic accountant. The internal fraud was
revealed. He felt frustrated for allowing this to happen and the lesson cost him
several hundreds of dollars in uninsured loses.
• The forensic accountant uncovered evidence of a simple but effective embezzlement
scheme. The bookkeeper had set up vendors that were very similar to existing real
vendors. For example, if the real vendor was ABC Service Company then a fake
vendor was established called ABC Service Co. The bookkeeper set up bank
accounts for the fake vendors. That was the hard part. The rest was easy. The
business owner signed hundreds of checks to the fake vendors thinking the checks
went to legitimate business activity.
• Since that worked so well, the bookkeeper began forging checks to pay the vendors,
personal expenses, and provide cash gifts to family and friends. And, since all that
worked without detection by the business owner, the bookkeeper took an
unauthorized increase in salary.
• It was bold. It was also easily discovered and should have been easily prevented.
The bookkeeper was quickly arrested and has spent time in jail. Slide 26 of 33
•
appraise on the fraud prevention
steps that were ignored
• Do a background check on the employee
(before hiring, reference check)
• Separate functions and duties
• Vendor communications should be
monitored
• Force vacations
Slide 27 of 33
• OTHER TYPES OF FRAUD
Slide 28 of 33
TAX FRAUD -DEFINITION
• As an intentional wrongdoing on the part

of a taxpayer with the specific purpose of
evading tax owing
• The tax fraud requires both underpayment
of tax and fraudulent intent
• To determine whether fraud is present the
court look for objective manifestations of
fraudulent intent called badges or indicia
Slide 29 of 33
PRINCIPAL TAX EVASION
CRIME
• Willful attempt to evade or defeat the
imposition of tax
• Making false statements on returns
• Aiding in the preparation of fraudulent tax
returns
Slide 30 of 33
Principal Tax Evasion Crimes
• Once a criminal tax investigation has

begun, full payment of taxes, penalties,
and interest will not prevent
prosecution.
• While the filing of an amended return is
not considered an admission of guilt with
respect to a crime it can be used to
determine the amount of the
underpayment.
Slide 31 of 33
QUESTION AND
ANSWER SESSION
Slide 32 of 33
Next Session
FINANCIAL STATEMENT
FRAUD
Slide 33 of 33

Week 2 - 3 Occupational Fraud, Red Flags Prevention

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Week 2 - 3 Occupational Fraud, Red Flags Prevention

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FORENSIC ACCOUNTING

• Students should be able compare various

• Students should be able to identify red

• Students should be able to apply the

Revenue Cycle Fraud

• Advanced Sales Skimming – Gives the

• Short shipments A company is susceptible to paying

• When it comes to the payroll, there are as

• Research shows that the fraud triangle is

• The corporate culture can actually supply

• As an intentional wrongdoing on the part

• Once a criminal tax investigation has

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