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Computer Forensics Principles and Practices by Volonino, Anzaldua, and Godwin Chapter 11: Fraud and Forensic Accounting Investigation.

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Presentation on theme: "Computer Forensics Principles and Practices by Volonino, Anzaldua, and Godwin Chapter 11: Fraud and Forensic Accounting Investigation."— Presentation transcript:

1 Computer Forensics Principles and Practices by Volonino, Anzaldua, and Godwin Chapter 11: Fraud and Forensic Accounting Investigation

2 © Pearson Education Computer Forensics: Principles and Practices 2 Objectives Understand the challenges of fraud investigations Describe the common types of fraud committed against and on behalf of companies and organizations Explain the characteristics and symptoms of fraud

3 © Pearson Education Computer Forensics: Principles and Practices 3 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

4 © Pearson Education Computer Forensics: Principles and Practices 4 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 Presidents Corporate Fraud Task force).

5 © Pearson Education Computer Forensics: Principles and Practices 5 Challenges of Fraud Investigations 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? Questions to ask when fraud is suspected:

6 © Pearson Education Computer Forensics: Principles and Practices 6 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 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

7 © Pearson Education Computer Forensics: Principles and Practices 7 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-IncriminationFifth Amendment Right Against Self-Incrimination

8 © Pearson Education Computer Forensics: Principles and Practices 8 Challenges of Fraud Investigations (Cont.) Special protection considerations Occupational investigations must be kept secret to avoid harming an employees 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

9 © Pearson Education Computer Forensics: Principles and Practices 9 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 victims reliance on the statement Damages to the victim

10 © Pearson Education Computer Forensics: Principles and Practices 10 Investigator Independence Forensics 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

11 © Pearson Education Computer Forensics: Principles and Practices 11 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

12 © Pearson Education Computer Forensics: Principles and Practices 12 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

13 © Pearson Education Computer Forensics: Principles and Practices 13 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 Dont 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 Dont show the suspect the evidence, unless necessary for a confession Have a verbal confession converted into a written statement and then signed

14 © Pearson Education Computer Forensics: Principles and Practices 14 In Practice: Bank Fraud and Conspiracy In 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

15 © Pearson Education Computer Forensics: Principles and Practices 15 In Practice: Fifth Amendment Right Against Self-Incrimination Fifth Amendment to the Constitution guarantees that one cannot be compelled to be a witness against himself Fifth 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

16 © Pearson Education Computer Forensics: Principles and Practices 16 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

17 © Pearson Education Computer Forensics: Principles and Practices 17 Types of Fraud (Cont.) Fraud CategoryExamples Computer crimeHacking Phishing 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 (Continued)

18 © Pearson Education Computer Forensics: Principles and Practices 18 Types of Fraud (Cont.) Fraud CategoryExamples MisconductConflict of interest Corruption Insider trading Customer fraudCheck fraud Credit card fraud Fraudulent merchandise returns Identity theft

19 © Pearson Education Computer Forensics: Principles and Practices 19 Types of Fraud (Cont.) Types of fraud committed against a company Operating-management corruption Misappropriation of assets Conflict of interest Bribery Extortion Kickbacks Theft of trade secrets

20 © Pearson Education Computer Forensics: Principles and Practices 20 In Practice: Kickback and Embezzlement Red Flags Red flags of kickbacks require a closer look at suspects 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

21 © Pearson Education Computer Forensics: Principles and Practices 21 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

22 © Pearson Education Computer Forensics: Principles and Practices 22 Common Types of Healthcare Fraud FraudDescriptionPerpetrated By Phantom billingCharging for services not performed Billing or healthcare provider UpcodingCharging for a more expensive service Billing or healthcare provider Doctor shoppingVisiting multiple doctors to get multiple prescriptions Patient Unnecessary careGiving unnecessary surgeries, tests, or other procedures Healthcare provider Misrepresenting services Performing uncovered services but billing insurance companies for different services Billing or healthcare provider (Continued)

23 © Pearson Education Computer Forensics: Principles and Practices 23 Common Types of Healthcare Fraud (Cont.) FraudDescriptionPerpetrated By UnbundlingCharging 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 theftUsing another persons health insurance card or identification to obtain health care or to impersonate that individual Patient

24 © Pearson Education Computer Forensics: Principles and Practices 24 Types of Fraud (Cont.) Relationship of job level and type of fraud committed Senior managementfinancial statement fraud Operating managementbribery and corruption Administrative managementasset misappropriation Employeesembezzlement Nonemployeesconflict of interest Medical doctors or healthcare providers phantom billing, upcoding, unnecessary care

25 © Pearson Education Computer Forensics: Principles and Practices 25 In Practice: Fraudulent Dossier about Saddams Regime British 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

26 © Pearson Education Computer Forensics: Principles and Practices 26 Types of Fraud (Cont.) Why fraud is not reported Insufficient 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

27 © Pearson Education Computer Forensics: Principles and Practices 27 Characteristics and Symptoms of Fraud Three factors common in all fraud: Pressure Opportunity Rationalization

28 © Pearson Education Computer Forensics: Principles and Practices 28 Characteristics and Symptoms of Fraud (Cont.) Pressures that most commonly drive people to commit fraud are financial Financial pressures include Greed or living beyond ones means High bills, personal debt, or poor credit Personal financial losses or unexpected financial needs Vices or addictions Expensive extramarital relationships

29 © Pearson Education Computer Forensics: Principles and Practices 29 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

30 © Pearson Education Computer Forensics: Principles and Practices 30 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 Case of Jack Abramoff – Formerly Powerful republican lobbyist

31 © Pearson Education Computer Forensics: Principles and Practices 31 In Practice: Jack Abramoff Abramoffs 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

32 © Pearson Education Computer Forensics: Principles and Practices 32 Fraud Investigation and Deterrence Perception 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

33 © Pearson Education Computer Forensics: Principles and Practices 33 Digital Forensic Accounting Forensic 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

34 © Pearson Education Computer Forensics: Principles and Practices 34 Digital Forensic Accounting (Cont.) General purposes of forensic accounting investigations Fraud investigation Dispute analysis or litigation Data recovery SEC Relaxes Policy on Routine Inspection

35 © Pearson Education Computer Forensics: Principles and Practices 35 Reasons for Forensic Accounting Investigations ReasonsForensics 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 Investors, venture capitalists, potential business partners (Continued)

36 © Pearson Education Computer Forensics: Principles and Practices 36 Reasons for Forensic Accounting Investigations ReasonsForensics 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

37 © Pearson Education Computer Forensics: Principles and Practices 37 Comparison of Forensic Accounting Fraud and Investigation Forensic AccountingFraud 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 eventAddresses past, present, and future events Uses financial informationUses financial and nonfinancial information Produces information about financesProduces information about finances, people, and their actions For use in judicial proceedingsFor use in business and government internal proceedings and private and judicial proceedings

38 © Pearson Education Computer Forensics: Principles and Practices 38 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

39 © Pearson Education Computer Forensics: Principles and Practices 39 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

40 Fraud Video Links Fraud Investigation & Dispute Services Forensic 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 40


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