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Dr. Ted M. Hammett, DBA CPA Assoc. Professor – Accounting University of Arkansas – Monticello 1.

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Presentation on theme: "Dr. Ted M. Hammett, DBA CPA Assoc. Professor – Accounting University of Arkansas – Monticello 1."— Presentation transcript:

1 Dr. Ted M. Hammett, DBA CPA Assoc. Professor – Accounting University of Arkansas – Monticello 1

2  General Definition a deception made for personal gain Seven Specific Parts of Fraud 1. A representation… 2. about a material point… 3. which is false… 4. and intentionally or recklessly so… 5. which is believed… 6. and acted upon by the victim… 7. to the victim’s damage. 2

3 Fraud is… intentional. to trick or deceive someone out of his/her assets. theft. a crime. Fraud is not… taken by physical force. a mistake or error. victimless. insignificant because no one is hurt. acceptable or justifiable. 3

4 Fraud Triangle Pressure RationalizationOpportunity 4

5 Divided into four main groups: 1. Financial pressures 2. Vices 3. Work-related pressures 4. Other pressures 5

6 Financial Pressures Common Financial Pressures: 1. Greed 2. Living beyond one’s means 3. High bills or personal debt 4. Poor credit 5. Personal financial losses 6. Unexpected financial needs 6

7 Vice Pressures Worse kind of pressures to commit fraud Examples include:  Gambling  Drugs  Alcohol  Expensive extramarital relationships 7

8 Vice Pressures Real-life examples:  Dad that embezzled his six-year-old son’s allowance  Women who stole money to fund her children's drug addiction  Man that used company money to fund his drug addiction  The parents who took their new-born baby from the hospital with heroine under its tongue 8

9 Work-related Pressures “Get even with the employer” Motivated by these factors:  Getting little recognition  Feeling job dissatisfaction  Fear of losing one’s job  Being overlooked for a promotion  Feeling underpaid 9

10 Other Pressures Spouse Pressures  Spouse’s lifestyle demands Life Pressures  Family Crisis Social Pressures  “Being successful” 10

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12 Six major factors that increase opportunity:  Lack of controls  Inability to judge performance quality  Fail to discipline fraudsters  Lack of access to information  Ignorance, apathy and incapacity  Lack of audit trail 12

13  Common Rationalizations for fraud “No One will miss it” “I will pay it back” “I deserve it” “They owe it to me” The list goes on….. And on. 13

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15  Any fraud that targets individuals as victims. Two Primary Types of Consumer Fraud 1.Identity Theft 2.Consumer Scams 15

16 Seriousness of the Problem The US Federal Trade Commission released a statistical survey in 2004 with the following findings:  Nearly 25 million adults—11.2% of the adult population—were victims of fraud during the year studied.  34% of American Indians and Alaska Natives were victims  17% of African American were victims  14% of Hispanics were victims  6% of non-Hispanic, whites were victims 16

17 Numbers of Victims in the Top 10 Frauds 1. Advance-fee loan scams—4.55 million victims 2. Buyers’ clubs—4.05 million victims 3. Credit card insurance—3.35 million victims 4. Credit repair—2 million victims 5. Prize promotions—1.8 million victims 17

18 Numbers of Victims in the Top 10 Frauds 6. Internet services—1.75 million victims 7. Pyramid schemes—1.55 million victims 8. Information services—0.8 million victims 9. Government job offers—0.65 million victims 10. Business opportunities—0.45 million victims 18

19 US FTC’s Response to Consumer Fraud Consumer Sentinel – a complaint database developed by the US Federal Trade Commission that tracks information about consumer fraud and identity theft and makes it available to law enforcement partners across the US and throughout the world. 19

20 The most common type of consumer fraud. 40% of the frauds reported to the FTC over the last few years have involved some type of identity theft. 20

21 Circumstances when someone uses another person’s name, address, Social Security number, bank or credit card account number, or other identifying information to commit fraud or other crimes 21

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24 Discovery Gain Information Phase:  Searching trash  Stealing mail  Phishing  Scanning credit card information Information Verification Phase:  Telephone scams (Pretexting)  Trash searches 24

25 Action Accumulating Documentation Phase:  Perpetrator gets the tools to commit the fraud (applying for credit cards, a driver’s license, or fake check in the victim’s name) Cover-up or Concealment Actions Phase:  Perpetrator takes steps to cover or hide the financial footprints left throughout the identity theft process.  Example: Changing the billing address on a credit card so that the statements go to the fraudster’s address. 25

26 Trial 1 st Dimensional Actions Phase:  First attempts to test the stolen information.  If the test works, the fraudster attempts more 2 nd Dimensional Actions Phase:  Actions taken after the tests are successful  The fraudster usually attempts face-to-face transactions 3 rd Dimensional Actions Phase:  Fraudster opens bank accounts, establishes phone accounts, secures auto loans, etc. 26

27 Personal Information  Financial Gain The perpetrator may…  Buy large-ticket items  Take out car, home, or other loans  Establish phone or wireless services  Use counterfeit checks or debit cards  Open new bank accounts  File for bankruptcy  Report victim’s name to police  Open new credit card accounts  Change victim’s mailing address 27

28 Summary - Stealing a Victim’s Identity  Dumpster diving  Skimming  Social engineering  Stealing wallets/purses  Sneak into a victim’s home and steal information  Shoulder surfing  Phishing  Steal mail 28

29 Minimizing the Risk  Guard your mail from theft  Opt out of preapproved credit cards  Check you personal credit information at least annually  Guard Social Security card and number  Safeguard all personal information  Guard trash from theft  Protect wallet and other valuables  Protect the home, computer, passwords 29

30 When identity theft is committed, the perpetrator can be prosecuted criminally and/or civilly. For prosecution, it is necessary to show the perpetrator acted with intent to defraud— usually easy to prove if evidence of the fake identity used to purchase an item, open an account, or obtain a credit card is collected. 30

31 Once Identity Theft Occurs Victims should…  Contact the Federal Trade Commission  Contact local FBI and/or US Secret Service agencies  Contact the credit reporting agencies  Contact the local Postal Inspection Service  Contact the Social Security Administration  Contact personal financial institutions  Change personal identification information 31

32 Foreign Advance-Fee Scams Nigerian Money Offers Clearinghouse Scam Purchase of Real Estate Scam Sale of Crude Oil at below market price Disbursement of money from wills 32

33 Work-at-Home Schemes Multilevel Marketing Pyramid Scheme Chain Letter, Mail Stuffing, Product Testing, and Craft Assembly 33

34 Bogus Mystery Shopping Scams  Perpetrators promise victims a job to stroll through stores, enjoy the displays, shop for merchandise, and file reports about their experiences.  Fraudsters promise victims compensation ranging from $10–$40 an hour, plus the opportunity to keep all products evaluated.  Although some mystery shoppers’ advertisements are legitimate, the majority are not. 34

35 Telemarketing Frauds Fraudsters set up giant rooms (referred to as boiler rooms) in rented offices where they train salespeople to find and defraud victims Unwary investors lose about $1 million every hour to investment fraud promoted over the telephone Telemarketing scams on the elderly 35

36 Safeguards Against Telemarketing Frauds Never give a Social Security, credit card, or other information over the phone unless you initiate the call. Put your information on the “do no call” registry 36

37 Investment Scams  Unreasonable promised rates of return  Investments that do not make sound business sense  Pressure to get in early on the investment  Use of a special tax loophole or a tax avoidance scheme  A business with a history of bankruptcy or scandals 37

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39 Bankruptcy or Divorce Resulting from Fraud When too few assets are left to pay the creditors and debtors as a result of fraud occurs and, bankruptcy is generally filed. When a marriage partner discovers his/her spouse has committed fraud, he/she often files for divorce. 39

40 Bankruptcy and Divorce used to Perpetrate Fraud During bankruptcy and divorce, an automatic stay is often granted. Some debtors use this time to fraudulently transfer assets to other organizations Some marriage partners fraudulently transfer assets to other (usually related) individuals. 40

41 Bankruptcy and Divorce used to Conceal Fraud Generally results in the books and record or the debtor or marital partner being destroyed, inaccurate, or hard to locate. 41

42 Definition When people or organizations are unable to pay their debts and have more liabilities than assets, they can file for bankruptcy by filing a bankruptcy petition with the courts. 42

43 Reasons behind Filing for Bankruptcy  Gives a debtor relief from creditor collection and foreclosure actions  Protects creditors from unfair collection efforts by other creditors  Allows the debtor to work out an orderly plan to settle debts or liquidate assets and distribute the proceeds to creditors in a way that is intended to treat creditors fairly. 43

44 Concealment of Assets, False Oaths and Claims, and Bribery (18 USC 152) It is a crime to…  Conceal property of a debtor’s estate from creditors  Make a false oath or account in a bankruptcy case  Give, offer, receive, or attempt to obtain money or property, remuneration, compensation, reward, advantage or promise thereof for acting or forbearing to act in a bankruptcy case. 44

45 Embezzlement Against the Debtor’s Estate (18 USC 153) It is a crime for such persons to “knowingly and fraudulently appropriate to [their] own use, embezzle, spend, or transfer” any property, or to hide or destroy any document, belonging to the debtor’s estate. 45

46 Adverse Interest and Conduct of Officers (18 USC 154) It is a crime to knowingly…  Purchase, directly or indirectly, any property of the debtor’s estate of which the person is an officer in a bankruptcy case  Refuse to permit a reasonable opportunity for the inspection by parties in interest of the documents and accounts relating to the affairs of the estate in the person’s charge when directed by the court to do so. 46

47 Bankruptcy Fraud It is a crime to do any of the following to execute or conceal a fraud scheme:  File a bankruptcy petition.  File a document in a bankruptcy proceeding.  Make a false or fraudulent representation, claim, or promise with respect to a bankruptcy proceeding, either before or after the bankruptcy petition is filed 47

48 Offenses Leading to Revocation of Debt Discharge (Section 1144 of the Bankruptcy Code) Example: If a debtor lied about (usually by understating) the amount of his or her assets in order to get debts forgiven, the forgiveness or discharge of the debts could be revoked. 48

49 Fraudulent Transfers (Section 548 of the Bankruptcy Code) A transfer made, or obligation incurred, within one year before the bankruptcy petition’s filing date that was:  Made with the actual intent to hinder, delay, or defraud creditors  Made for less than reasonably equivalent value 49

50 The parties involved in the bankruptcy process:  Bankruptcy court  U.S. Trustee  Court-appointed or panel trustee  Examiners  Debtors  Creditors  Adjusters (operations or field agents) 50

51 Bust-out Intentionally obtaining loans or purchasing inventory on a credit basis and concealing, or absconding with, the proceeds from the loan or sale of the inventory or with the inventory itself before creditors are paid. 51

52 Indicators of a bust-out  A company’s only listed address and phone number are a post office box and an answering service  A new company is owned and managed by persons from another state  A sudden change is made in a company’s management  Credit references either cannot be verified or seem too eager to provide favorable references 52

53 Indicators of a bust-out  The size of orders placed on credit and the credit balances with suppliers suddenly and dramatically increase.  The inventory is suddenly deleted, without explanation.  “Customers” have a history of buying goods at unreasonable discounts. 53

54 Ways assets or income may be concealed Cash may be diverted to another entity Inventory may be shipped to an off-site location Assets or income may be shifted to another entity controlled by the debtor Sales may not be reported properly Payment may be made to fictitious persons 54

55 Indicators of Concealment  Transfers of property or large payments to related parties or individuals, such as insiders, shareholders, or relatives.  Frequent and unusual transfers between bank accounts, particularly between business and personal accounts.  Numerous transactions made in cash that normally are made on account (sales, purchases, etc.)  Unusually large and unexplainable payments to vendors. 55

56 Indicators of Concealment  Unusual or rapid reductions in assets.  Increases in operating losses that are not explained by economic factors.  Inconsistencies between financial statements or tax returns and the official forms filed for the bankruptcy or records filed in divorce cases.  Travel to offshore tax havens or locations that allow secret bank accounts.  Missing, inaccurate, or damaged records. 56

57 Common Tax Fraud Schemes  Deliberately underreporting or omitting income  Overstating tax deductions  Keeping two sets of books  Making false entries in books and records 57

58 Common Tax Fraud Schemes  Claiming personal expenses as business expenses  Claiming false deductions  Hiding or transferring assets or income  Illegal money laundering schemes 58

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60  New and innovative technologies for which security developments often lag transaction developments.  Complex information systems that make installing controls difficult.  The transfer of large amounts of information, a factor that poses theft and identity risks such as illegal monitoring and unauthorized access. 60

61  Removal of personal contact, which allows for easier impersonation or falsified identity.  Lack of “brick-and-mortar” and other physical facilities that facilitate falsifying Web sites and business transactions 61

62  Inability to distinguish large and/or established companies from new and/or smaller companies, making it easy to deceive customers by falsifying identity and/or business descriptions.  Electronic transfer of funds, allowing large frauds to be committed more easily.  Compromised privacy, which results in easier theft by using stolen or falsified information. 62

63  The perceived distance that decreases the personal contact between customer and supplier.  Transactions between anonymous or unknown buyers and sellers—you can’t see who you are hurting.  New economy thinking contends that traditional methods of accounting no longer apply. 63

64 In e-commerce, Be careful about what you reveal in communicating on the internet. ENCRYPTION  Look for the “https:” prefix when sending very sensitive information such as your credit card number or social security information. 64

65  Identity Theft is the most common form of fraud  Buy a shredder  Get on a do not mail list for pre-approved credit cards  Have mail delivered to a post office box or get a lock box for your home.  Don’t put out-going mail in your mail box take it to the post office 65

66  Always Be Alert  If it is too good to be true – IT PROBABLY IS!!  If you are a victim of fraud you have avenues to get help – But be aware that it will take time to get recovery and you may not be able to completely recover. 66

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