Fraud Investigations & Detection George Jordan : Manager – Forensic Accounting Services Tele: 832-320-3441 E-mail: [email protected]@WeaverLLP.com

FraudInvestigations & Detection

George Jordan: Manager – Forensic Accounting ServicesTele: 832-320-3441E-mail: [email protected]

mailto:[email protected]

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

The “Onion” Theory

The “Onion” Theory

• 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

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

©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


Initial Detection of Occupational Frauds

Perpetrators



Recovery of Victim Organization’s Losses

Problems Dealing with Fraud

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

Fraud Engineering

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

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!

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

Detection/Solutions

Goal of an Anti-fraud program

Cost vs. BenefitYou 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.

Things to Look For

• Lifestyle changes• Financial duress• Vendor relationships/patterns• Smell Test

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)

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

Smell Test

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

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

FRAUD ISSUES

• Texas crimes are primarily contained in Statutes

• Texas Statuteshttp://www.statutes.legis.state.tx.us/

• Texas Penal Code (Covers most criminal conduct)http://www.statutes.legis.state.tx.us/?link=PE

http://www.statutes.legis.state.tx.us/

http://www.statutes.legis.state.tx.us/?link=PE

http://www.statutes.legis.state.tx.us/?link=PE

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)

Punishment Ladder


Crime Level Minimum Maximum Fine Confinement

Class C Misdemeanor $0.00 $19.99 $500 None

Class B Misdemeanor $20.00 $499.99 $2,000 Up to 180 Days County

Class A Misdemeanor $500.00 $1,499.99 $4,000 Up to 1 Year County

State Jail Felony $1,500.00 $19,999.99 $10,000 180 – 2 Years SJF

3rd Degree Felony $20,000.00 $99,999.99 $10,000 2 Years – 10 Years TDC

2nd Degree Felony $100,000.00 $199,999.99 $10,000 2 Years – 20 Years TDC

1st Degree Felony $200,000.00+ $10,000 5 Years – Life TDC

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– 2nd Degree Felony if under $200,000 AND from an ATM– Other increases for Copper, Livestock, etc.


Punishment Ladder (Public Servant/Non-Profit)


Crime Level Minimum Maximum Fine Confinement

Class B Misdemeanor $0.00 $19.99 $2,000 Up to 180 Days County

Class A Misdemeanor $20.00 $499.99 $4,000 Up to 1 Year County

State Jail Felony $500.00 $1,499.99 $10,000 180 – 2 Years SJF

3rd Degree Felony $1,500.00 $19,999.99 $10,000 2 Years – 10 Years TDC

2nd Degree Felony $20,000.00 $99,999.99 $10,000 2 Years – 20 Years TDC

1st Degree Felony $100,000.00+ $10,000 5 Years – Life TDC

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.



– 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.



– 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


Forgery (32.21)• Elements

– Forges– A Writing– With intent to Defraud or Harm Another


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


Forgery (32.21)(Continued)• Punishment

– Class A Misdemeanor– State Jail Felony (Credit Card, Check, Security Agreement, Mortgage, etc)– 3rd Degree Felony (Stock, Bonds)– Increased again if against Elderly Person


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


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

• 3rd Degree Felony, but• If Intent is to defraud or harm another is a 2nd 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.


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– 3rd Degree if Elderly Person


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.


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)


Fraudulent Use or Possession of Identifying Info.(32.51)(Continued)• Punishment

– State Jail Felony (Less than 5)– 3rd Degree Felony (5, but less than 10)– 2nd Degree Felony(10, but less than 50)– 1st Degree Felony (50 or more)– Next Higher Level if victim is Elderly Person– Restitution can include

• Lost income• Other expenses incurred (no atty fees)


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/E-mails– 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

Fraud Detection The Smell Test

George Jordan: Manager – Forensic Accounting ServicesTele: 832-320-3441E-mail: [email protected]

mailto:[email protected]

Documents

Fraud Investigations & Detection George Jordan : Manager – Forensic Accounting Services Tele: 832-320-3441 E-mail: [email protected]@WeaverLLP.com