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Computer Forensics Principles and Practicesby Volonino, Anzaldua, and Godwin Chapter 11: Fraud and Forensic Accounting Investigation
Objectives Understand the challenges of fraud investigationsDescribe the common types of fraud committed against and on behalf of companies and organizations Explain the characteristics and symptoms of fraud © Pearson Education Computer Forensics: Principles and Practices
Objectives (Cont.) Identify the role of computer forensics in fraud detection and deterrence Understand the purposes of forensic accounting investigations and how to participate in them © Pearson Education Computer Forensics: Principles and Practices
Introduction In crimes of fraud, the intent or conscious desire to deceive is essential to prosecuting these types of white collar crimes. This chapter helps you understand fraud and forensic accounting cases, what they are about, and how to utilize tools to help collect e-evidence in these cases. Corporate Fraud (Criminal Cases & Charging Documents of the President’s Corporate Fraud Task force). Introduce the chapter. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud InvestigationsQuestions to ask when fraud is suspected: Has fraud been committed? Is fraud still going on? Who might have done it? Who might have been involved? Did someone break into the network? Did an employee gain access to a system beyond the level of their authority? How? Has someone overridden the controls in a financial system? How? How do we prevent what has happened from happening again? Discuss the questions that should be asked at the outset of a fraud investigation, and the challenges it presents. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Scope of fraud Fraud is on the rise both in scope and scale Corporate and occupational fraud Examples illustrate the complexity and challenges of investigating these types of fraud cases Bank Fraud and Conspiracy – Kenneth J. Flury, Oct 2005 Multinational fraud case involving 19 computers in 18 countries Accounting fraud at Cisco Systems Corporate fraud at Prudential Insurance Co. Fraud and corruption among San Diego city employees Share with students some of the examples from the book or from your own experience that can illustrate how difficult it can be to investigate these types of fraud cases. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Fraud to trial process Most investigations of fraud originate from one of six sources: Internal audits Outside or external audits Regulatory inquiries, primarily by the SEC Shareholder actions, such as class action lawsuits Complaints from customers or vendors Anonymous tips Note: Fifth Amendment Right Against Self-Incrimination Outline the sources of where an investigation may begin. You might share with students the site for the President’s Corporate Fraud Task Force: © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Special protection considerations Occupational investigations must be kept secret to avoid harming an employee’s reputation Investigation team must understand law of privilege and how it relates to contemporaneous documents and work product of the case A work product may not be released, even through subpoena Discuss some of the special protection considerations that you should take into account when investigating fraud. Refer to Table 11.1 for an outline of examples in each element category the types of cases that an element might apply to. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Legal elements of fraud Fraud depends on intentional (willful) acts of misrepresentation Specific elements required to prove fraud: A material false statement An intent to deceive A victim’s reliance on the statement Damages to the victim Outline the legal elements of fraud. © Pearson Education Computer Forensics: Principles and Practices
Investigator IndependenceForensics experts are needed in fraud investigations because of their specialized experience and objectivity Their reports carry an impartiality that might not be true of reports from an internal audit Explain the importance of the independence of investigators of fraud cases. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Intent is usually proven circumstantially Ways to help prove intent include: Motive Opportunity Repetitive acts Concealment Showing the victim relied on the false statement and was harmed There is no fraud if victim is not damaged Explain the responsibility of the plaintiff in a case to prove intent and show that the defendant’s acts of fraud were deliberate. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Fraud claims have to meet tougher requirements than many other civil actions A fraud plaintiff has to detail: What misrepresentations were made To whom the misrepresentations were made How they were false Why the plaintiff relied on them Explain what responsibilities the plaintiff has in making a case against fraudulent actions. © Pearson Education Computer Forensics: Principles and Practices
Challenges of Fraud Investigations (Cont.)Handling a fraud suspect Make copies of all suspicious paper documents secretly and keep the copies in a secured location Don’t tell the suspect that she is going to be interviewed to avoid destruction of evidence Do not interview the suspect in his office or other familiar “comfortable” location Don’t show the suspect the evidence, unless necessary for a confession Have a verbal confession converted into a written statement and then signed Discuss some of the suggested procedures for handling a fraud suspect and evidence of that fraud. © Pearson Education Computer Forensics: Principles and Practices
In Practice: Bank Fraud and ConspiracyIn 2004, Kenneth J. Flury obtained stolen CitiBank debit card account numbers, PINs, and personal identifier information He encoded blank cards with the stolen information He was indicted by a federal grand jury in the Shadowcrew investigation, a long-term online undercover investigation Have the students read the case in the book and discuss in groups and then as a class. © Pearson Education Computer Forensics: Principles and Practices
In Practice: Fifth Amendment Right Against Self-IncriminationFifth Amendment to the Constitution guarantees that one cannot be compelled to be a witness against himself Fourteenth Amendment applies that guarantee to state courts Refusing to testify based on this guarantee is called “taking the Fifth” The right does not apply in all situations Have the students read the In Practice in the book and discuss in groups and then as a class. © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud Fraud can be categorized based on who committed the fraud and who was victimized Internal fraud is committed by someone within an organization External fraud is committed by an outside party When fraud is committed against a company, the company is the victim When fraud is committed on behalf of a company, the victims may be shareholders or employees Discuss ways of categorizing fraud depending on who committed the fraud and who was victimized. © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud (Cont.) Fraud Category Examples Computer crime HackingPhishing Insider fraud (e.g., employees and managers) Theft of intellectual property Payroll fraud Extortion Expense account abuse Misappropriation of assets External fraud (e.g., vendors or customers) Bribery Kickbacks Conflicts of interest Discuss the types of fraud and some of the examples provided. Table 11.2 contains an extended list of examples in these areas. Provide some of your own if you know of any. (Continued) © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud (Cont.) Fraud Category Examples MisconductConflict of interest Corruption Insider trading Customer fraud Check fraud Credit card fraud Fraudulent merchandise returns Identity theft Continue discussing types of fraud. © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud (Cont.) Types of fraud committed against a companyOperating-management corruption Misappropriation of assets Conflict of interest Bribery Extortion Kickbacks Theft of trade secrets Discuss some of the different types of fraud that can occur against a company. © Pearson Education Computer Forensics: Principles and Practices
In Practice: Kickback and Embezzlement Red FlagsRed flags of kickbacks require a closer look at suspect’s activities Red flags include not taking time off, personal financial problems, extravagant lifestyle Behavior that could indicate embezzlement may also be zealous actions of dedicated employee Red flags include missing documents, delayed bank deposits, large drop in profits Have the students discuss in groups and then as a class some of the red flags that might tip off kickback or embezzlement activity. © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud (Cont.) Three main types of fraud committed for a company Senior management financial reporting fraud Accounting cycle fraud Bribery Healthcare fraud defined as Misrepresentation of fact for payment of a claim Theft of money or property belonging to a health plan or health insurance company Discuss types of fraud committed for a company. Introduce health care fraud. © Pearson Education Computer Forensics: Principles and Practices
Common Types of Healthcare FraudDescription Perpetrated By Phantom billing Charging for services not performed Billing or healthcare provider Upcoding Charging for a more expensive service Doctor shopping Visiting multiple doctors to get multiple prescriptions Patient Unnecessary care Giving unnecessary surgeries, tests, or other procedures Healthcare provider Misrepresenting services Performing uncovered services but billing insurance companies for different services Discuss the most common types of healthcare fraud. Continue the discussion on the next slide. (Continued) © Pearson Education Computer Forensics: Principles and Practices
Common Types of Healthcare Fraud (Cont.)Description Perpetrated By Unbundling Charging separately for procedures that are actually part of a single procedure Billing or healthcare provider Masquerading as health-care professionals Delivering healthcare services without proper licenses Fraudster Identity theft Using another person’s health insurance card or identification to obtain health care or to impersonate that individual Patient © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud (Cont.) Relationship of job level and type of fraud committed Senior management—financial statement fraud Operating management—bribery and corruption Administrative management—asset misappropriation Employees—embezzlement Nonemployees—conflict of interest Medical doctors or healthcare providers—phantom billing, upcoding, unnecessary care Explain the relationship between a particular job level and the most likely type of fraud to occur at that level. © Pearson Education Computer Forensics: Principles and Practices
In Practice: Fraudulent Dossier about Saddam’s RegimeBritish government maintained that trusted intelligence sources had produced a report on Saddam Hussein Analysis of document revealed report was created by Foreign Office and Downing Street staffers Have the students read the In Practice in the book and discuss in groups and then as a class. © Pearson Education Computer Forensics: Principles and Practices
Types of Fraud (Cont.) Why fraud is not reportedInsufficient police resources to investigate it Concern that a lengthy investigation will be expensive and not worth the cost Concern that the news will harm the brand image or business reputation and scare away customers Discuss the most common reasons fraud is not reported. © Pearson Education Computer Forensics: Principles and Practices
Characteristics and Symptoms of FraudThree factors common in all fraud: Pressure Opportunity Rationalization Explore the factors common in all forms of fraud. © Pearson Education Computer Forensics: Principles and Practices
Characteristics and Symptoms of Fraud (Cont.)Pressures that most commonly drive people to commit fraud are financial Financial pressures include Greed or living beyond one’s means High bills, personal debt, or poor credit Personal financial losses or unexpected financial needs Vices or addictions Expensive extramarital relationships Discuss some of the pressures that can cause fraud to occur. Provide some of your own if you have them. © Pearson Education Computer Forensics: Principles and Practices
Characteristics and Symptoms of Fraud (Cont.)Weaknesses in organizations that create opportunities to commit fraud include: Lack of controls that prevent or detect fraud Overriding of internal controls Failure to search out and discipline fraud perpetrators Lack of access to information Lack of an audit trail, of which the perp is aware Discuss the situations where opportunities to commit fraud arise. © Pearson Education Computer Forensics: Principles and Practices
Characteristics and Symptoms of Fraud (Cont.)Rationalization for fraud Most difficult to investigate because it cannot be seen Certain questionable behaviors can be rationalized and eventually escalate into massive fraud Case of Jack Abramoff –Formerly Powerful republican lobbyist Discuss how employees can rationalize fraud and thus be able to carry it out. © Pearson Education Computer Forensics: Principles and Practices
In Practice: Jack AbramoffAbramoff’s s indicated that he blatantly deceived Indian tribes and did business with people linked to the underworld Choctaw Indians gave Abramoff more than $80 million between 2000 and 2003 Abramoff pleaded guilty to engaging in conspiracy involving corruption of public officials, fraud, and tax evasion Have the students read the In Practice in the book and discuss in groups and then as a class. © Pearson Education Computer Forensics: Principles and Practices
Fraud Investigation and DeterrencePerception of detection can be an effective deterrent to fraud Companies need to educate employees that computer forensics experts can find out everything they do and tie it to a particular person Explain and provide examples of how fraud investigation can be a deterrent to employees committing fraud. © Pearson Education Computer Forensics: Principles and Practices
Digital Forensic AccountingForensic accounting involves identifying, collecting, analyzing, and interpreting financial data with reports and expert opinions that will stand up in legal actions Three high-profile forensic accounting cases: Adelphia Global Crossing Tyco Discuss the three cases. © Pearson Education Computer Forensics: Principles and Practices
Digital Forensic Accounting (Cont.)General purposes of forensic accounting investigations Fraud investigation Dispute analysis or litigation Data recovery SEC Relaxes Policy on Routine Inspection Explain the purposes of forensic accounting investigations. © Pearson Education Computer Forensics: Principles and Practices
Reasons for Forensic Accounting InvestigationsForensics Investigator Hired By To investigate suspicions that fraud has occurred Management To provide expert witnesses in court to help quantify damages from a contract that has gone bad or some other business dispute Lawyer To investigate a company before entering into a contract Investors, venture capitalists, potential business partners To investigate a company before contemplating a merger Discuss the different reasons that a forensic accounting investigation might be instigated. Continue on the next slide. (Continued) © Pearson Education Computer Forensics: Principles and Practices
Reasons for Forensic Accounting InvestigationsForensics Investigator Hired By To investigate a company before contemplating a merger Investors, venture capitalists, potential business partners To investigate a company before investing in their stock Financial services To determine whether a company problem was due to error or fraud Lawyers, prosecutors © Pearson Education Computer Forensics: Principles and Practices
Comparison of Forensic Accounting Fraud and InvestigationFraud Examination A broad discipline applying accounting skills to legal matters in a wide range of issues A focused discipline relating entirely to the issue of fraud Addresses a past event Addresses past, present, and future events Uses financial information Uses financial and nonfinancial information Produces information about finances Produces information about finances, people, and their actions For use in judicial proceedings For use in business and government internal proceedings and private and judicial proceedings Illustrate the differences between forensic accounting and fraud examinations. © Pearson Education Computer Forensics: Principles and Practices
Summary More and more frauds are perpetrated using computers and networks Fraudster could be disgruntled employee, greedy executive, or unethical business partner Pressure, opportunity, and rationalization are elements of every fraud Cybercrime.gov Behavioral Red Flag © Pearson Education Computer Forensics: Principles and Practices
Summary (Cont.) Prosecutor must show intent and deceit in order to prove fraud E-evidence can show intent and deceit “Forensic” in financial investigations implies that the information can be used in court Forensic accounting is the investigation and analysis of financial evidence Requires proper procedures and detailed evidence to ensure admissibility © Pearson Education Computer Forensics: Principles and Practices
Fraud Video Links Fraud Investigation & Dispute ServicesForensic Accountant-David Malamed James Bierstaker Forensic Jonathan Barnett - WTC7 forensic engineer – REVISITED DELOITTE FINANCIAL ADVISORY SERVICES ESTABLISHES DELOI The Profiles Series - Association of Certified Fraud Examine Princeton University Exposes Diebold Flaws © Pearson Education Computer Forensics: Principles and Practices
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