presented by felix j lozano iii cpa cfefelix j. …– ski iskimming – larceny – fraudulent...

Presented By

Felix J Lozano III CPA CFEFelix J. Lozano, III, CPA, CFE

JUNE 4, 2009

1

Professional Certifications

• Certified Public Accountant (CPA)• Certified Fraud Examiner (CFE)Certified Fraud Examiner (CFE)• Series 7 & 66 Licenses – Registered

Representative (NASD)Representative (NASD)• Group 1 License – Texas Department of

Insurancesu a ce

2

Professional Organizationsg

• American Institute of Certified Public Accountants (AICPA)

• Texas Society of Certified Public Accountants (including Litigation Services Section)Section)

• Dallas Chapter of TSCPA• Financial Consulting Group L C• Financial Consulting Group, L.C.• Association of Certified Fraud Examiners

3

Professional Appointments

• Nexia International Chairman Audit Committee• Nexia International – Chairman, Audit Committee• YMCA of Metro Dallas County – Chairman, Audit

Committee & Board Member• YMCA of Metro Tarrant County – Past Chairman

of the Board, past Chairman of Finance Committee

• TCU Young Alumni Association – Past Board Member

• Hispanic Chamber of Commerce Past Board• Hispanic Chamber of Commerce – Past Board Member

4

Today’s Topicsy p

• FraudFraud – Definition/Theory– StatisticsStatistics– Types of Fraud

• Dealing with Fraud• Dealing with Fraud– Prevention

D t ti– Detection• Examples

5

Fraud Trivia #1

Who is Jérôme Ker iel?Kerviel?

6

Bull Market Make Heroes

Scott Sullivan, WorldCom: 1998 CFO of the Year

Andrew Fastow, Enron: 1999 CFO of the Year

Mark Swartz, Tyco: 2000 CFO of the Year

7

Bear Markets Make CrooksF CFO’ f th YFormer CFO’s of the Year

Scott Sullivan, 2002: Indicted andScott Sullivan, 2002: Indicted and charged with fraud.

Andrew Fastow, 2002: Indicted and charged with conspiracy, fraud, g p y, ,money laundering, insider trading.

Mark Swartz, 2002: Indicted and charged with fraud.

8

Elements of a Fraud

• A representation • About a material point• Which is false• Intentionally or recklessly so• Relied upon by the victim• To the victim’s damage

9

Theory of Fraud Causationy

Donald R. Cressey

• Known for his studies of organized crimeorganized crime

• Served as organized crime consultant to the President's Commission on LawCommission on Law Enforcement and Administration of Justice in 1966 and 1967

• Cressey’s hypothesis later• Cressey s hypothesis later became known as the “Fraud Triangle”

10

Why do People Steal?y pPRESSURE

Fraud Triangle

PERCEIVED

Triangle

PERCEIVEDOPPORTUNITY

RATIONALIZATON

11

Fighting FraudWhat Have We Done?What Have We Done?

• Treadway Commission ’87• COSO ’87• SAS 53 ’88• Certified Fraud Examiner ’88• SAS 82 ’96• Sarbanes Oxley ’02• SAS 99 ’02

12

Fraud Trivia #2

Which of theseWhich of these is not a real

SCAM?SCAM?A. Vishingg

B. Romance

C. Texas Hold’m

D. Work at home

13

Organization Type of Victimsg yp

14

*Obtained from 2008 Certified Fraud Examiners report “2008 Report to the Nation on Occupational Fraud and Abuse”

Based on Size of Victim Organizationg


15

*Obtained from 2008 Certified Fraud Examiners report 2008 Report to the Nation on Occupational Fraud and Abuse

Initial Detection of Occupational FraudFraud


16


Loss Based on Perpetrator's Incomep

17


Fraud Trivia #3

Who is this famous man, and what didand what did

he li h?accomplish?

18

Tenure of Perpetratorp

19


Age of Perpetratorg p

20


Education of Perpetratorp


21


Position of Perpetrator – Median Loss


22


Position of Perpetrator - Frequencyp q y


23


Gender of Perpetratorp

24


Fraud Trivia #4Who is this man?

His name has recently become synonymous withbecome synonymous with fraud, as he has plead guilty to 11 counts including money laundering and

j ll itiperjury as well as securities, mail, and wire fraud. He will be facing up to 150 years in prison on these chargesprison on these charges.

25

Number of Perpetratorsp

26


Perpetrators’ Criminal Historiesp

27


Distribution of Dollar Losses

28


Fraud Trivia #5What 2002 movie was based on a young conbased on a young con artist who successfully impersonated an airline pilot, doctor, assistant pattorney general and history professor, cashing more than $2.5 million in fraudulent checks in 26fraudulent checks in 26 countries?

a The Magnificent Frauda. The Magnificent Fraudb. Catch Me if You Canc. The Bourne Identity

29

d. Gangs of New York

Behavioral Red Flags

Behavioral Red Flags Present During Fraud Schemes

19%20%

34%39%

Control issues, unw illingness to share dutiesWheeler-dealer attitude

Financial diff icultiesLiving beyond means

ags

15%14%

15%17%

19%

Addiction problemsIrritability, suspiciousness, defensiveness

Unusually close association w ith vendor/customerDivorce/family problems

Other

havi

oral

Red

Fl

7%7%8%9%

0% 10% 20% 30% 40% 50%

Refusal to take vacationComplaining about inadequate payPast employment related problems

Past legal problems

Beh

0% 0% 0% 30% 0% 50%

Percent of Cases

*The sum of percentages in this table exceeds 100% because in several cases the perpetrator exhibited more than one behavioral red flag.

30

**Obtained from 2008 Certified Fraud Examiners report “2008 Report to the Nation on Occupational Fraud and Abuse”

Fraud Schemes• Asset Misappropriation• CorruptionCorruption• Financial Statement Fraud

31


Fraud Trivia #6Fraud Trivia #6

Approximately how pp ymuch does the US lose due to fraud each year?

a. More than $50 billionb More than $200 billionb. More than $200 billionc. More than $500 billiond More than $900 billiond. More than $900 billion

32

Misappropriation of Assetspp p

• Cash fraud schemesSki i– Skimming

– Larceny– Fraudulent disbursements

• Accounts receivable schemes– Improper posting of credits

• Discount• Discount• Return• Write-off

• Inventory and other asset schemes– Appropriating inventory and supplies for personal use

• Stealing inventory• Theft of scrap proceeds

33

p p

A/R Fraud - Lapping/ pp g

Customer C Customer C Customer A Customer A Customer B Customer B

Owes

$100

Owes

$100

Owes

$100

Owes

$100

Customer B Owes

$100

Customer B Owes

$100

Customer A Pays $100 -A/R Clerk

Customer A Pays $100 -A/R Clerk

Customer B P $100

Customer B P $100

Customer C Pays $100

C t C C t C

pockets the money

pockets the money

Pays $100Pays $100 Pays $100

Customer C

Owes $100

on the books

Customer C

Owes $100

on the booksCustomer A is credited

$100 Owes

Customer A is credited

$100 Owes

Customer B is credited

$100 - Owes

Customer B is credited

$100 - Owes

34

$100 - Owes $0

$100 - Owes $0

$0$0

Healthsouth, Inc. Trick,

Entr One A/REntry One A/RRevenue

Entry Two Fixed AssetsCashCash

Entry Three CashEntry Three CashA/R

35

Healthsouth, Inc. Trick,

Entr One A/REntry One A/RRevenue

Entry Two Fixed AssetsCashCash

Entry Three CashEntry Three CashA/R

36

Fraud Trivia #7Fraud Trivia #7

In 2008, the US Postal ,Service announced that only __% of all identify theft actsidentify theft acts were connected to the mail.

a. 2%b. 5%c. 10%

%37

d. 15%

Financial Statement Fraud• Fictitious revenues

– Involves the sale or goods or services which never occurredg• Timing differences

– Improper matching of revenues– Early revenue recognition– Recording expenses in the wrong periodRecording expenses in the wrong period

• Concealed liabilities and expenses– Liability/expense omissions– Returns and allowances and warranties

I di l• Improper disclosure– Liability omissions– Significant events – Management fraud– Accounting changes

• Improper asset valuation– Inventory– Fixed Assets

38

Corruptionp

• Bribery• Illegal gratuitiesIllegal gratuities• Economic extortion• Conflicts of interest• Conflicts of interest

39

Fraud Trivia #8

What firm has not been involved in legalWhat firm has not been involved in legal problems in the past 10 years?a Arthur Andersena. Arthur Andersenb. KPMG

PWCc. PWCd. E&Ye. Deloitte & Touchef. None of the above

40

Fraud Trivia #9

What initiated the investigation into former governor Eliot Spitzer?Spitzer?

a. He bounced a checkb. Bank filed a SARc. He confessed to his

wifewifed. Internal audit

investigation

41

Fraud Prevention

• What You Can Do– Tone at the Top– Code of

Ethics/ConductEthics/Conduct– Background Checks– Appropriate pp p

Compensation– Constant Training

System of Internal– System of Internal Controls

– Consequences

42

Fraud DetectionFraud Detection

• What You Can DoWhat You Can Do– Internal Audit– Separate Fraud p

Department– Software Tools

M it i– Monitoring– Whistleblower Policies

External Audit– External Audit– Foster an Open

Culture

43

Fraud Trivia #10

In 2008, the ACFE reported that most pfraud is discovered by a tip. The second-most common way is by: y ya. IRS auditb Nosy supervisorsb. Nosy supervisorsc. Accidentd. Disgruntled employee

44

Firm Experiences with Fraud

• Financial Statement Fraud – 2007 Client• Neurologist’s Office Case• Fort Worth ISD Case

45

Financial Statement Fraud

• Compilation Client• Inflating Accounts Receivableg• $123,000• WP Accounting Services

Identified

46

Neurologist’s Office Case

• Business Manager• 25 yearsy• Refinance of Home Loan• Credit Report• HIPPA Audit • $176,000

47

Fort Worth ISD Case

• Construction Fraud• Collusion

– Construction Superintendent– Concrete Vendor

• $7.6 Million Fraudulent Charges• 14 Month Investigation

FBI d DA’ Offi• FBI and DA’s Office• Project Team

– Construction Auditor– Engineer– CPA’s

• Jail Term – 96 Months for both Defendants

48

presented by felix j lozano iii cpa cfefelix j. …– ski iskimming – larceny – fraudulent...

Documents