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Fraud Investigations & Detection George Jordan : Manager – Forensic Accounting Services Tele: 832-320-3441

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Presentation on theme: "Fraud Investigations & Detection George Jordan : Manager – Forensic Accounting Services Tele: 832-320-3441"— Presentation transcript:

1 Fraud Investigations & Detection George Jordan : Manager – Forensic Accounting Services Tele:

2 The Smell Test Forensic accounting services generally involve the application of specialized knowledge and investigative skills possessed by CPAs to collect, analyze, and evaluate evidential matter and to interpret and communicate findings in the courtroom, boardroom or other legal/administrative venue. Source: aicpa.org

3 The “Onion” Theory

4 Crook(s) use the “Onion” Theory to plan scheme Fraudulent audit evidence is “layered”, like onion As the auditor “peels” off one layer of audit evidence, the crook(s) makes sure another “layer” is readily available

5 Nature of Fraud Intentional Act vs. Error or Mistake Ingenious schemes, limited only by human imagination Gaining advantage through false suggestions and suppression of truth By using surprise, trick or cunning, or any other unfair means

6 ©2012 Association of Certified Fraud Examiners, Inc.6 The typical organization loses an estimated 5% of its annual revenues to occupational fraud. The Cost of Occupational Fraud

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8 ©2012 Association of Certified Fraud Examiners, Inc.8 Initial Detection of Occupational Frauds

9 Perpetrators ©2012 Association of Certified Fraud Examiners, Inc.9

10 10 Recovery of Victim Organization’s Losses

11 Problems Dealing with Fraud

12 No Accident Fraud is an “intentional” act, often involving detailed planning and concealment Crooks “anticipate” the routine procedures, evidence is often fabricated Exploits weaknesses in routine procedures or internal controls Breach of trust

13 Fraud Engineering Fraudulent schemes are “engineered” (meticulously designed) to perpetrate and conceal the theft, including an exit strategy complete with “fall guys” and “alibis”

14 Intent Derived in large part from testimonial evidence/interviewing process Difficult to prove because of the very nature of fraudulent conduct…and bad actors are generally reluctant to admit wrong doing!

15 Fraud in Public Sector Anticipated funding cuts place added pressure on Public Sector Entities to find and “deter” fraud. Fraud “robs” Public Sector Entities of precious, limited resources. Expect heightened public scrutiny

16 Detection/Solutions

17 Goal of an Anti-fraud program Cost vs. Benefit You can’t completely prevent fraud. Anti-fraud program should be aimed at reducing the likelihood that if fraud occurs, it will not go undetected for an unreasonable amount of time.

18 Things to Look For Lifestyle changes Financial duress Vendor relationships/patterns Smell Test

19 Lifestyle Changes Spending habits: people generally spend what they steal. The more they steal, the more they spend. Fraud almost always starts small and grows. Behavioral changes: look for signs of drug abuse, gambling or other patterns (dress, work habits, or attitude toward others)

20 Keep an Eye on Vendors Examine/Monitor Vendors – Identify unusual patterns (ie recurring, even amounts) – Verify physical address (vs. employee addresses) – Examine cancelled checks (counter signatures) – Web search for derogatory information – Verify receipt of goods or services

21 Smell Test Sometimes “things” just don’t seem right. The Smell Test is based on a hunch, feeling or instinct.

22 Hotline - Tip The most effective crime detection devise is the Hotline. Expands your view to all the “eyes” in your organization. Cost effective Provides a vehicle for honest employees to contribute to the well being of the school

23 FRAUD ISSUES Texas crimes are primarily contained in Statutes Texas Statutes Texas Penal Code (Covers most criminal conduct)

24 Texas Criminal Statutes Criminal Statutes Impacting Government – Theft (31.03) – Misapplication of Fiduciary Property (32.45) – Forgery (32.21) – Tampering with Governmental Record (37.10) – Credit Card or Debit Card Abuse (32.31) – Fraudulent Use or Possession of Identifying Info (32.51) – Engaging in Organized Criminal Activity (71.02)

25 Punishment Ladder Texas Criminal Statutes Crime LevelMinimumMaximumFineConfinement Class C Misdemeanor$0.00$19.99$500None Class B Misdemeanor$20.00$499.99$2,000Up to 180 Days County Class A Misdemeanor$500.00$1,499.99$4,000Up to 1 Year County State Jail Felony$1,500.00$19,999.99$10, – 2 Years SJF 3 rd Degree Felony$20,000.00$99,999.99$10,0002 Years – 10 Years TDC 2 nd Degree Felony$100,000.00$199,999.99$10,0002 Years – 20 Years TDC 1 st Degree Felony$200, $10,0005 Years – Life TDC

26 Theft (32.03) Elements – Unlawfully appropriates property with intent to deprive owner of property – Unlawfully appropriates means: Without owner's consent; OR Property is stolen AND actor appropriates knowing it was stolen; OR Police represents as stolen AND actor appropriates believing it was stolen. – Intent to Deprive means to: Withhold permanently, OR Withhold for so long major value/enjoyment is lost; OR Restore property only upon reward/compensation; OR Dispose of property making recovery unlikely. Punishment – – Value Ladder – Increased if Public Servant or Non-Profit – 2 nd Degree Felony if under $200,000 AND from an ATM – Other increases for Copper, Livestock, etc. Texas Criminal Statutes

27 Punishment Ladder (Public Servant/Non-Profit) Texas Criminal Statutes Crime LevelMinimumMaximumFineConfinement Class B Misdemeanor$0.00$19.99$2,000Up to 180 Days County Class A Misdemeanor$20.00$499.99$4,000Up to 1 Year County State Jail Felony$500.00$1,499.99$10, – 2 Years SJF 3 rd Degree Felony$1,500.00$19,999.99$10,0002 Years – 10 Years TDC 2 nd Degree Felony$20,000.00$99,999.99$10,0002 Years – 20 Years TDC 1 st Degree Felony$100, $10,0005 Years – Life TDC

28 Misapplication Fiduciary Property /Financial Instit.(32.45) Elements – Intentionally, knowingly, OR recklessly, – Misapplies Property, – That he/she holds as a fiduciary OR property of a financial institution, – In a manner that involves substantial risk of loss, – Either to owner, OR to a person for whose benefit the property is held. Texas Criminal Statutes

29 Misapplication Fiduciary Property /Financial Instit.(32.45) Elements – Intentionally, knowingly, OR recklessly, – Misapplies Property (aka deal with property contrary to), an agreement concerning the property, OR a law prescribing custody/disposition of the property. – That he/she holds as a fiduciary OR property of a financial institution, – In a manner that involves substantial risk of loss, – Either to owner, OR to whose benefit property is held. Texas Criminal Statutes

30 Misapplication Fiduciary Property /Financial Instit.(32.45) Elements – Intentionally, knowingly, OR recklessly, – Misapplies Property (aka deal with property contrary to), an agreement concerning the property, OR a law prescribing custody/disposition of the property. – That he/she holds as a fiduciary OR property of a financial institution, Trustee/guardian/executor/conservator/receiver Attorney/agent under durable power of attorney Person acting as fiduciary - NO commercial bailee Agent acting on behalf of fiduciary – In a manner that involves substantial risk of loss, – Either to owner, OR to whose benefit property is held. Punishment - Value Ladder Texas Criminal Statutes

31 Forgery (32.21) Elements – Forges – A Writing – With intent to Defraud or Harm Another Texas Criminal Statutes

32 Forgery (32.21) Elements – Forges Alter, make, execute, or authenticate any writing so that it purports, OR – Act of another who did not authorize, OR – Executed at time/place or in sequence other than the case, OR – Copy of original when no original existed Issue, publish, or otherwise utter writing that is forged, OR Possess writing that is forged with intent to utter – A Writing Printing or any other method of recording information; OR money, coin, token, stamp, seal, credit card, badge, & trademark; OR symbols of value, right, privilege, or identification. – With intent to Defraud or Harm Another Texas Criminal Statutes

33 Forgery (32.21) (Continued) Punishment – Class A Misdemeanor – State Jail Felony (Credit Card, Check, Security Agreement, Mortgage, etc) – 3 rd Degree Felony (Stock, Bonds) – Increased again if against Elderly Person Texas Criminal Statutes

34 Tampering with Governmental Record (37.10) Elements – Knowingly makes false entry in / false alteration of GR (GR) – Makes, presents, or uses any record, document, or thing with knowledge of its falsity and with intent that it be taken as a genuine GR – Intentionally destroys, conceals, removes, or otherwise impairs the verity, legibility, or availability of a GR; – Possesses, sells, or offers to sell a GR or a blank GR form with intent that it be used unlawfully; – Makes, presents, or uses a GR with knowledge of its falsity; or – Possesses, sells, or offers to sell a GR or a blank GR form with knowledge that it was obtained unlawfully. Punishment – – Value Ladder Texas Criminal Statutes

35 Tampering with Governmental Record (37.10) Punishment – Generally a Class A Misdemeanor, but – If Intent is to defraud or harm another is a State Jail Felony, but – Public School Record or Assessment Instrument under Chapter 39 Educ Code 3 rd Degree Felony, but If Intent is to defraud or harm another is a 2 nd Degree Felony, but Class C misdemeanor if GR that is required for enrollment of a student in a school district and was used by the actor to establish the residency of the student. Intent – Is presumed to intend to defraud or harm another if the person: acts with respect to two or more of the same type, or blank GR forms, and if each GR or blank GR form is a license, certificate, permit, seal, title, or similar document issued by government. Texas Criminal Statutes

36 Credit Card or Debit Card Abuse (32.31) Elements – Presents Uses a Credit Card or Debit Card (CC/DB) Not Issued to him AND Not with Consent of Owner, OR CC/DB is Expired/Revoked/Cancelled AND Knows it – Steals CC/DB OR Receives CC/DB if knows it is stolen and plans to use it – Sells CC/DB if not Issuer – Buys CC/DB from person knows is not Issuer – Possesses CC/DB (Not his & No Consent & Intends to Use) – Possesses 2+ incomplete CCs/DBs (Not his & No Consent & Intends to Use) – Provides Goods/Services if knows CC/DB Stolen – Lies about Providing Goods/Services in writing Punishment – State Jail Felony OR – 3 rd Degree if Elderly Person Texas Criminal Statutes

37 Fraudulent Use or Possession of Identifying Info.(32.51) Elements – With the intent to harm or defraud another, – Obtains, possesses, transfers, or uses an item of identifying information of another without other person's consent, OR identifying information of deceased, if obtained w/o legal authorization, OR identifying information of a child younger than 18 years of age. Texas Criminal Statutes

38 Fraudulent Use or Possession of Identifying Info.(32.51) (Continued) Other Points – Intent to Harm is presumed if possess three or more Does not apply to business doing legal business activity – Identifying Information identifies a person either by itself or with other info: Name and date of birth, OR Unique biometric data (fingerprint, voice print, or retina/iris image), OR Unique electronic ident #, address, routing code, or financial account #, OR Telecommunication identifying information or access device, OR SSN or other government-issued ID # – Telecommunication Access Device (TAD) means: Card, code, account #, personal ID #, electronic serial #, mobile ID#, or means of account access that alone or in conjunction with another TAD may be used to: – Obtain money, goods, services, or other thing of value, OR – Initiate transfer of funds (without paper) Texas Criminal Statutes

39 Fraudulent Use or Possession of Identifying Info.(32.51) (Continued) Punishment – State Jail Felony(Less than 5) – 3 rd Degree Felony(5, but less than 10) – 2 nd Degree Felony(10, but less than 50) – 1 st Degree Felony(50 or more) – Next Higher Level if victim is Elderly Person – Restitution can include Lost income Other expenses incurred (no atty fees) Texas Criminal Statutes

40 Involving Law Enforcement Make sure Case is Well Documented Written summary w/ all names & contact info If any evidence is available, Obtain & Preserve – Personnel File, Snapshot of Server/ s – Computer – TURN OFF, Unplug, Secure – Do not alter original evidence (notes, highlight, etc) Try to avoid interviewing Target /other witnesses – Ask witnesses to write down what they remember

41 Fraud Detection The Smell Test George Jordan : Manager – Forensic Accounting Services Tele:


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