1 FRAUD AND THE ACCOUNTING PROFESSION

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FRAUD AND THEACCOUNTINGPROFESSION

by:Dana Basney

MSBA, CPA, ABV, CVA, CIRA, CFF,CFE

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Dana Basney, MSBA, CPA, ABV, CIRA, CVA, CFF, CFE

Dana Basney is a retired Managing Director of CBIZ MHM, LLC and a former Shareholderof Mayer Hoffman McCann P.C. He has practiced public accounting for more than 37years. He is in charge of CBIZ MHM San Diego’s litigation support, due diligence, andvaluation departments.

Dana holds a Bachelor's Degree in Liberal Arts from Bates College in Lewiston, Maineand received a Master's Degree in Business Administration and Accounting from SanDiego State University.

Dana is a licensed CPA and a Certified Reorganization and Insolvency Accountant, aswell as a Certified Valuation Analyst. He is a member of The American Institute ofCertified Public Accountants, The California Society of Certified Public Accountants, TheInstitute of Managerial Accountants, The Association of Insolvency Accountants, TheInstitute of Business Appraisers, Inc., and the Bankruptcy Forum. He has served on theFamily Law Bar's Business Valuation Subcommittee and has previously chaired the SanDiego Chapter of the CPA Society’s Ethic2s Committee and the San Diego LitigationSupport Interest Group of the CPA Society.

Dana has extensive litigation experience and has served as an expert witness in financialand valuation matters on numerous occasions as well as a court appointed mediator andspecial master. Dana is also an instructor with the UCSD Extension Program teachingAdvanced Accounting Topics and CPA Society approved course on Professional Conduct& Ethics for Accountants.

Dana may be reached at: [email protected] or 858.795.2018

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5 TO 7% OF THE ECONOMY IS BEINGSTOLEN!

Estimates for fraudlosses range from5 to 7% of the U.S.

economy.

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5 TO 7% OF THE ECONOMY IS BEINGSTOLEN!

Fraud losses were estimated to have beenapproximately $994 billion in 2008.

Fraud losses were estimated to have beenapproximately $652 billion in 2006.

Estimates range from 600 billion to almost atrillion dollars.

Obtained from the ACFE’s 2008 Report to the Nation, page 8.Used with the permission from the Association of Certified Fraud Examiners.

Fraud appears to be a growth industry!

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THE CPA’S RESPONSIBILITY TO FINDFRAUD

The public expects the accountingprofession to find fraud and asset

misappropriations.

This is perceived by the public to be thereason that the profession exists.

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FRAUD DETECTION

As CPAs and auditors we take pride in catchingbig perpetrators!

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THE BEAR FACTS TELL US SOMETHINGDIFFERENT!

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In reality, CPA’s and outside Auditors have notbeen very effective in finding fraud.

FRAUD DETECTION

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THE PROFESSION HAS NOT BEENEFFECTIVE IN FRAUD DETECTION

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In the 2014 Report to the Nation on Occupational Fraud and Abuse, the percentage of frauddetected by outside auditors was only 3.0%, which is down from the 2010 report at 4.6%. The

survey showed the initial detection of fraud was found to be as follows:

INITIAL DETECTION OF OCCUPATIONAL FRAUDS

Median Loss and Median Time toDetection By Detection Method

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THE PROFESSION WAS NOT PREPARED

In a recent Poll, SmartPros asked275 accounting professionals:

" How would you rate the fraudtraining you received while inschool?”

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THE RESPONSE

Excellent……………………………………4%

Good…………………………………….….12%

Decent…………………………………….…7%

Bad………………………………………….12%

What Fraud Training?...65%

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The Profession has Not Been ProperlyPrepared or Trained to find Fraud!THE PROFESSION HAS NOT BEEN PROPERLY

PREPARED OR TRAINED TO FIND FRAUD!

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THE PROFESSION DISCOVERS FRAUD!

Belatedly, as a result of the Sarbanes-Oxley Legislation, the profession was

forced to acknowledge fraud and to shiftits focus to the detection of Fraud and

Internal Controls to prevent it.

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FRAUD WAS HARDLY NEW

In 1626 the Island of Manhattan waspurchased for trinkets valued at 60gilders which is approximately $24 fromthe Carnarsie Indians by the Dutch.

Most people think the Indians weredefrauded!

The Profession’s focus on it was!

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FRAUD WAS HARDLY NEW

In reality, the Dutch were defrauded- TheCarnasie Indians were from Brooklyn anddidn’t own Manhattan Island

The Carnarsie land was not evenconnected to Manhattan Island!

Most people would be wrong!

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THE PROFESSION DID NOTPREPARE PROPERLY

“Having lost sight of ourobjective, we redoubled

our efforts.”-Mark

Twain

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WE FOCUSED ONTHEORETICAL CONCEPTS

A Greatly Expanded Body of Accounting Rules (GAAP) hasnot significantly prevented fraud

There were168 FASB Standards (Pre-Codification)

The new GAAP Codification released on July 1, 2009 hasalready had over 60 updates

There are 117 SEC Staff Accounting Bulletins (SAB)

There are 121 Statements on Auditing Standards (SAS)

There are 49 FASB Interpretations (FIN)

There are 52 Accounting Research Bulletins (ARB)

There are 31 Opinions (APB)

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AND MORE THEORETICAL CONCEPTS

A Greatly Expanded Body of Accounting Rules (GAAP) has notsignificantly prevented fraud

There are 30 Auditing Interpretations (AIN)

There are 15 ACSEC Practice Bulletins (PB)

There are 17 Statements on Standards for Attestation Engagements(SSAE)

There are 192 Ethics Interpretations

There are 8 Concept Statements (CON)

There are 20 Statements on Standards for Accounting and ReviewServices (SSARS)

There are 4 Statements on Quality Control Standards (SQCS)

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AND EVEN MORETHEORETICAL CONCEPTS

A Greatly Expanded Body of Accounting Rules (GAAP)

has not significantly prevented fraud

There are 3 Independence Standards Boards (ISB)

Numerous Ethics Rules (ET), ISB Interpretations (ISBI),

Professional Issues Task Force Practice Alerts (PITF),

Emerging Issues Task Force Consensus Opinions (EITF),

Statements of Position – Auditing and Attestation (series

11,000) (SOP), Statements of Position - Accounting

(series 10,000) (SOP) and Technical Bulletins (FTB)

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THEORETICAL CONCEPTSHAVE DISTRACTED US

Why are we focusing on Goodwill?

Who cares if its impaired?

Who ever loaned money usingGoodwill as collateral?

Why are we obsessed with Goodwill?

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WHAT IS GOODWILL?

In essence, Goodwill is the excess of what you

paid over the fair market value of the assets you

acquired.

To put it another way:

GOODWILL IS CAPITALIZED STUPIDITY!

In the 1920’s Goodwill was routinely expensed.

Now we capitalize it and test it for impairment.

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THEORETICAL CONCEPTS HAVEDISTRACTED US FROM FINDING FRAUD

Nobody ever stole goodwill, yet it gets farmore of our attention than cash and revenuerecognition issues!

Has anybody ever had a client who’scapitalized leases were stolen?

Why are we obsessed with goodwill, capitalleases and things that nobody cares aboutand are not likely to be misappropriated?

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Is the Tail Waging the dog?

There are over 28 million privately heldenterprises in the United States

There are approximately 20,000 Publicly HeldCompanies in the United States

Until recently the Publically Held Companiesdominated The Accounting Standards MakingProcess

This may be changing with the advent of: The Private Companies' Council The AICPA’s New FAF for SME’s (Financial Accounting

Framework for Small and Medium Companies

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New Treatment of Goodwill For PrivateCompanies (A Partial return to Sanity!)

• ASU 2014 – 2 - Accounting for Goodwill

Was a Private Companies Council Creation ( PCC Issue 13-01B)

Effective after 12/15/2014 (Early Adoption Is Permitted)

Only applies to Private Companies

Allows an Election to Amortize Goodwill over ten years orless if the primary asset acquired had a shorter life.

Only requires testing for impairment if a triggering eventoccurs

FRAUD WAS NOT ADDRESSED!

Belatedly SAS 99 was passed in anattempt to sooth the public’s demand foraction by the accounting profession!

At Ford quality is job # 1 – At the AICPAfraud was job #99 and was onlyaddressed after extreme public outrage.

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LOOKING AT BOTH SIDES OFTHE SITUATION

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LOOKING AT BOTH SIDES OFTHE SITUATION

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YOU CAN ONLY COMETO ONE RATIONALCONCLUSION

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ONE CAN ONLY COME TO ONECONCLUSION

Focusing on esoteric and obscureaccounting theory has distracted

the profession from doing what thepublic expects of it.

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WE HAVE LOST SIGHT OF OUR PRIMARYFUNCTION

What we really need to do as aprofession, is to focus on

where the fraud is occurringand how to detect fraud!!!

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REVENUE RECOGNITION GAMES

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The National Commission of FraudulentFinancial Reporting sponsored a study ofincidences of fraudulent reporting, as reportedin SEC Accounting and Auditing EnforcementReleases from 1985 through 1997.

Inappropriate revenue recognition was foundin 50 percent of the cases.

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COSO Findings in Fraudulent FinancialReporting: 1998 -2007

• Studied 347 alleged cases of public companyfraudulent financial reporting

• Found That the CEO and/or CFO had some levelinvolvement in 89% of the fraud cases

• Most common fraud technique– Improper revenue recognition (60%)

– Overstatement of existing assets

– Capitalization of expenses

• 60% of fraud firms changed auditors during fraudperiod

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The PCAOB’s Report on 2004, 2005, and 2006 Inspections of Firms whoaudit no more that 100 issuers, was released in October 2007. The PCAOBInspections identified deficiencies relating to testing of issuers’ revenues,including failures to:

• Perform any or adequate substantive procedures to test existence,completeness and valuation of revenue

• Review contracts or appropriately evaluate the specific terms andprovisions

• Test whether revenue was recorded in the appropriate period

• Corroborate management representations

• Perform adequate substantive analytical procedures on revenue


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INCIDENCE OF FRAUD SCHEMES

Source: Ten things about financial statement fraud – third edition; A Review of SEC Enforcement Release, 2000 -2008

By The Deloitte Forensic Center 2009

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TYPES OF REVENUE RECOGNITIONFRAUD IN 2007 & 2008



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INCIDENCE OF TOP FRAUD SCHEMESBY RELEASE DATE



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BREAKDOWN OF FRAUDS BY INDUSTRY

Of the 1,240 fraud schemes discovered the technology, media andtelecommunications had the highest number of frauds.



REVENUE RECOGNITION POLICIES

Recent pronouncements have attempted to address theRevenue Recognition problem:

In October 1997, the AICPA issued Statement of Position97-2 on Software Revenue Recognition to address revenuerecognition issues in the software industry.

In December 1999, the SEC issued Staff AccountingBulletin No. 101 on Revenue Recognition to “summarize”existing GAAP on the subject.

The SEC later amended SAB 101 with the issuance of SAB104. SAB 104 is a comprehensive pronouncementaddressing most revenue recognition schemes.

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ASC Revenue Recognition Policies

• Revenue Recognition is topic 605 in TheAccounting Standards Codification

• ASU 2014 -9 which is over 700 pages was issuedMay 28, 2014 and revised the Treatment ofRevenue from Contracts (ASC 606 and OtherAssets and Deferred Costs - ASC 340-40)

• ASC 606 is to be effective for Year Ends after12/15/2016

ASC Revenue Recognition Policies

• SAB 104 is now codified as topic 13 of StaffAccounting Bulletins and is included in theAccounting Standards Codification as topic 605-10-599.

• The SEC is reviewing ASC 606 to see if they willneed to amend or withdraw SAB 104. As of todayit is still in force.

• The implementation guide for ASC 606 contains66 examples of revenue recognition situationsand is similar to the approach taken in SAB 104

Fraud Considerations in the Audit

AU 240 Details 10 areas of fraud for the auditor to consider toassist him in finding Fraud1. Description and characteristics of fraud2. Importance of exercising professional skepticism3. Discussion among engagement personnel regarding the risks of

material misstatement due to fraud4. Obtaining the information needed to identify risks of material

misstatements due to fraud5. Identifying risks that may result in a material misstatement due

to fraud6. Assessing the identified risks after taking into account an

evaluation of the entity’s programs and controls7. Responding to the results of the assessment8. Evaluating audit evidence9. Communicating about fraud to management, the audit

commitment, and others10. Documenting the auditor’s consideration of fraud

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• IMPROPRER REVENUE RECOGNITION

The above quote was taken from Judge Markell’s decision in the NADN Bankruptcy Case.

NADN -The failure to defer revenue can have a dramaticeffect on Income

“Mr. Basney also opined that NADN was insolvent during allrelevant periods. In particular, he found that NADN had anegative stockholder equity of approximately $4.7 million inJanuary 2001, and a negative stockholder equity ofapproximately $8.3 million in May 2004. To arrive at hisconclusion, Mr. Basney had to significantly revise NADN’sfinancial reports, as they had shown a positive net worth atall relevant times, ranging from a low of approximately$800,000 on January 31, 2001, to a high of over $1.8 millionby May 2004.”

The above quote was taken from Judge Markell’s decision in the NADN Bankruptcy Case.

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• IMPROPRER REVENUE RECOGNITION

NADN -The failure to defer revenue can have a dramaticeffect on Income

“What accounts for these massive differences? Many things, none of which are particularlysavory. The chief subterfuge, however, was a standard ingredient in the traditional recipe forcooked books: NADN took long-term revenue and booked it as short-term income. Moreparticularly, it sold memberships and other packages that related to the long-term provisionof services, but booked all of that revenue as income in the year in which received, insteadof deferring a portion of it (thereby creating an offsetting liability for services) over the life ofthe receivable. By way of example, if a customer paid NADN for a five-year membership,NADN recorded all of that income in the year in which the customer paid. Proper accountingprocedures, however, would have required NADN to spread that income over the five-yearperiod, and to reflect the liability for unearned services as well. See, e.g.,SECURITIES&EXCHANGE COMM’N, STAFF ACCOUNTING BULLETIN 104 (2003), whichMr. Basney relied upon. By engaging in this practice, NADN artificially inflated its currentearnings, and understated its long-term liabilities. Mr. Basney estimated that NADNoverstated its earnings by as much as $3.5 million to $5 million a year during the period of2001 to 2004.”

IMPROPER DISCLOSURES

Improper disclosures are a big problem also.

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IMPROPER DISCLOSURES

Improper Disclosures is the second leadingcause of financial statement fraud after

revenue recognition and accounts for about16 % of all financial statement fraud based on

SEC Enforcement Action

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UNDISCLOSED EMPLOYMENTAGREEMENTS

Golden Parachutes are aconcern

Employee Stock Options maybe transferable

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Actual Litigation

Unasserted Potential Claims

UNDISCLOSED OR IMPROPERLYDISCLOSED LITIGATION

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THE PROFESSION NEEDS TOFOCUS ON FRAUD

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WHAT IS BEING STOLEN ISNO SURPRISE!

The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2006 Report tothe Nation, page 12. The sum of the percentages exceeds 100% as some schemes fell into multiple categories.

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THE BALANCE SHEET AUDIT

Typical audit procedures for cash were to geta bank confirmation and do a bankreconciliation.

These procedures do little to detect cashmisappropriations.

These procedures merely confirmed theamount of cash that has not yet been stolen!

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FRAUDULENT DISBURSEMENTS

Billing Schemes occur in over one-quarter of all the assetmisappropriation cases in the ACFE study.

The median loss attributed to billing schemes was $130,000,making them the second most expensive form of fraudulentdisbursement behind wire transfers, which had a median lossof $500,000.

Primarily detected in audits by data mining.

Billing schemes are the most common form offraudulent disbursement.

Many billing fraud schemes could be avoided bydoing proper vendor approvals.

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THE FAST WAY TO MISLEAD IS BYJOURNAL ENTRIES

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PCAOB Release 2007-001 (Jan 07)

Auditors should understand controls over journalentries

Auditors should test and document revenuerecognition policies

The Auditor should consider how managementcould perpetrate and conceal fraudulent financialreporting

During planning “The auditor should set asideany prior beliefs… that management is honestand has integrity”

Pretty much adopts SAS 99, but goes furtherto require:

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LOOK FOR JOURNAL ENTRYABNORMALITIES

Journal entries without documentary support

Journal entries that do not balance

Journal entries made by individuals who don’tnormally make such entries

Journal entries made near the end of anaccounting period

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DATA MINING – THE DEVIL IS IN THEDETAILS!

YOU HAVE TOLOOK FORFISHY STUFFTO FIND IT!

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DATA MINING

Look for Sequential Invoices

Vendor NameVendor

Class

Invoice

Number

Invoice

AmountInvoice Date

AARONSEN GROUP MIS 479 55,329.40 4/1/2004
















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DATA MINING

Look for Vendors & Employees that share an address

Vendor Name Vendor Address 1Employee

Name

Employee

Address 1

Employee

City

Invoice

Amount

SOUTH EDUCATORS 709 MALL BLVD X, Lynn 709 Mall Boulevard Savannah 1,917,034.00$

GREEN VAUGHN LLC 709 MALL BOULEVARD X, Lynn 709 Mall Boulevard Savannah 746,688.96

HOLIDAY INN NEWTON 399 GROVE STREET X, Brian 399 Grove St. New ton 305,620.00

THE INCENTIVE SHOP 706 DUNCAN AVENUE X, Phyllis 706 Duncan Ave. Pittsburgh 190,838.00

ALBERT GREENSTONE 750 PARK AVENUE, NE X, Ophelia 750 Park Ave Atlanta 52,174.23

R KEITH & LIZ SWICK RT 1 BOX 775 X, Elizabeth Route 1 Box 775 Clarksburg 24,874.06

TESTA CONSULTING SERVICES INC 40 24TH STREET X, Vincent 40 24th St Pittsburgh 20,538.24

CULINARY THOUGHTS 2927 AVENUE D. X, Michael 2927 Avenue D Katy 12,272.30

DAY'S LAWN CARE, INC 2343 NOTTINGHAM NW X, Toni 2343 Nottingham NW Massillon 11,523.60

LOIS NENES 2927 AVENUE D X, Michael 2927 Avenue D Katy 11,000.00

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DATA MINING

Look for round number amounts. Thievestend to be lazy and often take round dollaramounts such as $25,000.00 as opposed

to $24,986.34

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EXPENSE REPORT FRAUD

The above information was taken from page 27 of the 2006 Report to the Nation on Occupational Fraud andAbuse published by the Association of Certified Fraud Examiners.

Expense reimbursement frauds rankedsecond only to billing fraud in terms of

frequency, but they had the lowest medianloss at $25,000.

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DUE DILIGENCE TECHNIQUES WORKIN AUDITS ALSO

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SURPRISES ARE FUN FOR BIRTHDAY’SNOT ACQUISITIONS

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CATCHING FINANCIAL FRAUD

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ALL BIRDS IN THE FLOCK TENDTO LOOK ALIKE

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ALL BIRDS IN THE FLOCK TENDTO LOOK ALIKE

Get industry statistics to determineindustry cost

structure and operating ratios.

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BE OBSERVANT – LOOK AROUND!!!

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BE OBSERVANT!

Observe your surroundings - ask questions!

Always ask for a tour of the companyfacilities.

Never do procedures in your office – youshould always do it at the target’s offices.

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THOSE DOING DUE DILIGENCE OR AUDITSIN THEIR OWN OFFICES SHOULD BE SHOT!

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ALWAYS TAKE THE STAFF OUT TO LUNCH

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BE OBSERVANT – LISTEN!!!!!

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INVENTORY

Ask the Warehouse staff, not theCFO about obsolete inventory

Get an Inventory Ageing

Inquire about product changes

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ACCOUNTS PAYABLE

Pick top ten vendors – look for currentshipments if not why not?

Do search for unrecorded liabilities

Review contracts for volumediscounts and sales allowances whichare not recorded

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FIXED ASSETS

Do They Exist?

Are they obsolete and no longer inuse and should they be written downto Salvage Value?

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KEY CUSTOMERS

Obtain a list of top ten customersinquire as to current purchases

from key customers and to see ifany of these customers were

recently lost.

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INQUIRE INTO PERSONNEL TURNOVER

Turnover of key positionscan have big implications

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EAGLES SOAR MORE THAN EARNINGS!

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BASNEY’S RULE ONEXPLOSIVE GROWTH!

Beware of the Hockey Stick Scenario.

Explosive growth is easier to arrive atby manipulation than by perspiration!

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THE HOCKEY STICK SCENARIO

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Year 1 Year 2 Year 3 Year 4 Year of Sale

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PRIOR HISTORY

Year 1 Year 2 Year 3 Year 4Year

of Sale

Sales $8,500,000 $9,000,000 $9,500,000 $10,500,000 $12,300,000

Less COS (5,525,000) (5,850,000) (6,175,000) (6,825,000) (6,650,000)

Contribution Margin $2,975,000 $3,150,000 $3,325,000 $3,675,000 $5,650,000

Overhead 2,440,000 2,610,000 2,787,000 3,133,000 3,350,000

Officers' Salaries 500,000 500,000 500,000 500,000 500,000

Net Profit $35,000 $40,000 $38,000 $42,000 $1,800,000

THE HOCKEY STICK SCENARIO

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THE REALITY

Reported Earnings $1,800,000

Prebilled 1 Months Sales ($1,100,000)

Failed to Accrue

Subcontractor Fees ($500,000)

Failed to Accrue Payroll ($200,000)

Corrected Earnings --0--

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IGNORE MATERIALITY

That is whereyou will findyour Fraud!

Look for the“Immaterial Subsidiary”

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THE “IMMATERIAL SUBSIDIARY”

Original Financials

Sales Net income

Parent $100,000,000 $5,000,000

Subsidiary $10,000,000 $1,000,000

Consolidated $110,000,000 $6,000,000

Corrected Financials

Parent $100,000,000 $5,000,000

Subsidiary $6,000,000 ($3,000,000)

Consolidated $106,000,000 $2,000,000

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In this case the subsidiary was a governmentcontractor. The company received contractsfrom the government that had multiple phases.For each phase of the project a new contractwas signed. The subsidiary was recognizingrevenue for contract renewals that had not yetbeen signed, thus significantly overstatingrevenue according to GAAP.


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In another case I had, a $40 million subsidiary of abillion dollar company that was not audited as itwas “immaterial”.

The subsidiary had on its books a $2,000,000“Reserve for Contingencies”. They would adjustthe reserve up if they exceeded their earningsprojections and down if they did not meetexpectations, thus smoothing out earnings.


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INDICATIONS OF FRAUD

Some companies will purposefully have pooraccounting records because it causes difficultyfor tax auditors, however their sloppy recordswill make it easier for employees to steal fromthe company.

Dishonesty by management fostersdishonesty by employees.

Management is Dishonest

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Embezzlers usually try to ingratiatethemselves to management and theirco-workers. The embezzler is typicallythe nicest, most caring and best likedperson in the office.

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The Super NiceEmployee

If you don’t trustsomeone they can’t

steal from you!

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IT’S HARD FOR US TO COMPREHEND THAT SOMEOF THESE NICE PEOPLE BELONG IN JAIL!

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EMBEZZLERS DO NOT FIT CRIMINALSTEREOTYPES

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Thieves often appear to be the hardestworking individuals in the office.

As conscientious employees they earn moreresponsibilities.

The more responsibilities they have, the moreopportunities they have to steal.

The Super Conscientious Employee

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Living beyond one’s means(not reasonable based on known sources of income)

Source: Fraud Examination & Prevention. Albrecht & Albrecht. Page 98.

Expensive Cars Vacations Boats

ExpensiveArtwork orCollections

Move to a MoreExpensive

Home

HomeRemodeling

ExpensiveJewelry orClothing


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BOOKKEEPER PLEADS GUILTY TOSTEALING $6.9 MILLION

February 12, 2007

BOSTON -- Angela Buckborough Platt, a bookkeeper for aconstruction materials company pleaded guilty to embezzling $6.9million. Platt, 43, pocketed the money over six years while anaccountant for J & J Materials Corp. in Rehoboth, Mass.

Under the terms of the plea deal, Platt must pay back all of themoney and federal prosecutors will recommend a prison sentenceof no fewer than four years and seven months.

Prosecutors said Platt -- who made a $40,000 annual salary --wrote checks from company accounts to herself ranging from$2,000 to $5,000. She made weekly deposits in Rhode Islandbanks. Over time, Platt began writing checks that neared $50,000.

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AMONG THE ITEMS THAT PLATTPURCHASED WERE:

A 104-acre ranch in West Haven, Vermont, on which she built a logcabin, with a heated saltwater swimming pool, and two barns, one ofwhich housed a commercial-caliber arcade

A four-bedroom Colonial-style house on five acres of land in Foster,Rhode Island with a home movie theater

Thirty acres of undeveloped coastal land in Harrington, Maine The Platt’s became renowned for their practice of walking into a

restaurant and picking up the tab for every patron. A $15,000 fireworks show. 35 vehicles including cars, trucks, snowmobiles, and a replica of a 1923

Ford Model-T customized to look like a green goblin and 8 showhorses.

A life-size ceramic statue of Al Capone, complete with cigar. A performance by Bacharach and the "River Dance" Irish dance team. Platt, a Halloween and occult enthusiast, decorated her homes with six

talking trees modeled after the spooky "Wizard of Oz" characters and a

20-foot-tall smoke-breathing dragon.

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It is alleged that when asked how she came into her money,PLATT would offer one of two responses: that she was the“CEO of seven corporations,” or that she and her husband hadwon the lottery.

Her theft was discovered last June by another bookkeeper whowas newly hired to assist her.

J&J owner John Ferreira said he has received about $2 millionin restitution so far, most of it in real estate, cars, horses and

other items. He said Platt always “seemed like agood employee.”

PLATT“SEEMED LIKE A GOOD EMPLOYEE”

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FRAUD PREVENTION

Do background checks to insure the purityof your employees.

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FRAUD PREVENTION

The above graph was reprinted with permission from the Association of Certified FraudExaminers and is taken from their 2012 Report to the Nation, page 56.

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THE FRAUD TRIANGLE

Dr. Donald Cressey (1919-1987)His Research showed that there are three elements that must be present foroccupational fraud.

Opportunity

Pressure Rationalization

The FraudTriangle

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Create an environmentof honesty and

integrity.

There is something to besaid for the old adage:

“It’s hard to cheatan honest man.”

FRAUD PREVENTION

100

THE TREADWAY COMMISSION

Report ofThe National Commission on

Fraudulent Financial Reporting

October 1987

101

THE TONE AT THE TOP

The first three recommendations focus onan element within the company of overridingimportance in preventing fraudulentfinancial reporting: the tone set by topmanagement that influences the corporateenvironment within which financial reportingoccurs.

102

To set the right tone, top management must:

Identify and assess the factors that could lead to fraudulent financialreporting

all public companies should maintain internal controls provide reasonable assurance that fraudulent financial reporting will

be prevented or subject to early detection this is a broader concept than internal accounting controls all public companies should develop and enforce effective, written

codes of corporate conduct a company's audit committee should annually review the program

that management establishes to monitor compliance with the code The Commission also recommends that its sponsoring organizations

cooperate in developing additional

THE TONE AT THE TOP

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Organizational Ethics Policy

FRAUD PREVENTION

104

Title VIII: The Corporate and Criminal Fraud Accountability Act of2002 recognized the importance of encouraging people to come forwardand report fraud. This act provided that Employees of SEC companiesand accounting firms are extended “Whistleblower protection” that wouldprohibit the employer from taking certain actions against employees wholawfully disclose private employer information to, among other, parties ina judicial proceeding involving a fraud claim. Whistle blowers are alsogranted a remedy of special damages and attorney’s fees. The extent towhich this act will apply to non-SEC clients is still unclear.

FRAUD DETECTION

Tips are far and away the greatestsource of fraud detection!

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TIPS ARE THE MOST COMMON METHODOF FRAUD DETECTION

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The ACFE surveys show that tips account for the initial detection ofoccupational fraud more than any other means as follows:

INITIAL DETECTION OF OCCUPATIONAL FRAUDS

Employee Hotline

FRAUD PREVENTION


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FRAUD DETECTION

108

Source of Tips

Employee and Vendor Validations

Remember billing fraud is the mostcommon source of fraudulent

disbursements!

FRAUD PREVENTION

109

Do periodic reviews of the internal controlsand surprise audits. Let them knowsomebody is watching.

110

FRAUD PREVENTION

110

Surprise Audits

FRAUD PREVENTION


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112

FRAUD PREVENTION

112

Cross train employees to cover vacation time.

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FRAUD PREVENTION

113

Job Rotation / Mandatory Vacation

FRAUD PREVENTION


114

Perform a

certified audit

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FRAUD PREVENTION

115

External Audits

FRAUD PREVENTION


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Do periodic inventories

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FRAUD PREVENTION

117

Do periodic inventories.

Physically secure the premises of the business

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FRAUD PREVENTION

118

Do periodic inventories.Review the company’s computer security

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FRAUD PREVENTION

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QUESTIONS

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Documents

1 FRAUD AND THE ACCOUNTING PROFESSION