The Department of Accounting

1
The Department of Accounting Information
Systems at North Dakota State University
presents

• ACCT 410/610 Fraud Examination
• Topic 2 January 23, 2003
• A course developed taught by
• Thomas Buckhoff, Ph.D., CFE, CPA
• EideBailly Professor of Forensic Accounting

2
Administrative Items

• Questions concerning Syllabus?
• Assignments due today
• Check e-mails and course website
  regularly--especially day of class.

3
Agenda for Today

• Prevalence of fraud
• What is a CFE video
• Differentiate between
• Financial auditing
• Fraud auditing
• Fraud examination
• Types of financial crimes
• Exercises 1 and 2

4
Prevalence of Fraud
5
The Cheater Principle

• Businesses across the country are reporting an
  upturn in old-fashioned cheating Bypassing toll
  booths, sneaking onto golf courses, stiffing
  restaurants, and driving away from the pump
  without paying.
• Source Wall Street Journal

6
ACFE Fraud Survey (2002)

• 600 billion lost to fraud annually
• Median losses by type of scheme
• Asset misappropriations 80,000
• Corruption 530,000
• Fraudulent statements 4,250,000
• Small businesses are the most vulnerable to
  fraud
• 11.5 of schemes detected during
  external audits

7
KPMG Fraud Survey (1998)

• Why did most of the frauds occur?
• Poor or non-existing internal controls
• 62 of respondents reported that they had
  suffered losses due to fraud during the past
  year.
• Median loss per incident 116,000.
• Only 4 of frauds were discovered during
  financial statement audits.

8
Average Fraud Losses by Type of Scheme
9
Why Dont Auditors Detect Fraud?

• Asset-Theft Fraud
• Financial statements are fairly presented
• Financial Statement Fraud
• Financial statements are not fairly presented
• Auditors focus on outcomes of transactions rather
  than the reasons underlying them.

10
What is fraud examination?

• Fraud examination encompasses
• Fraud detection
• Fraud investigation
• Fraud prevention
• Skills required of forensic accountants
• Financial expertise
• Fraud knowledge
• Knowledge of legal system
• Ability to work with people

11
Fraud Research Conclusions

• Fraud is a serious problem.
• Smaller organizations are most vulnerable to
  fraud.
• Few frauds are discovered during audits.
• Rate of fraud will likely rise.

12
The Corporate Cop

• In 1986 Donald Cressey suggested to Joe Wells
  that the world needed a new kind of cop which
  combined criminal justice expertise with
  accounting expertise. Such was the genesis of
  the Association of Certified Fraud Examiners.

13
Video The Certified Fraud Examiner (CFE)

• Discusses types of services offered by Certified
  Fraud Examiners
• Reviews the requirements for becoming a CFE.

14
The Legal Elements of Common Financial Crimes

• Prosecuting financial crimes requires an
  understanding of the legal elements of common
  financial crimes.

15
Financial Crimes

• Fraud Falsely representing a fact to get
  another person to surrender something of value.
• Tax evasion Fraud committed in conjunction with
  failure to file or pay taxes.

16
Financial Crimes

• Bribery Something of value is used to influence
  the action of others.
• Embezzlement Conversion of an organizations
  assets/funds for personal use.

17
Financial Crimes

• Larceny Person wrongfully takes anothers money
  or property with the intent of stealing.
• Forgery Person passes a false or worthless
  instrument with the intent to defraud the
  recipient.

18
Financial Crimes

• Extortion Person illegally obtains property
  from another by threat or force.
• Kickback Person who sells an item pays back a
  portion of purchase price to the buyer.

19
Financial Crimes

• Racketeering Running an illegal business for
  personal profit (e.g. drug trafficking).
• Money Laundering Transfer of money from illegal
  sources into legitimate channels.

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Exercise 1 Statute Contruction on p. 1.8 of the
Student Workbook

• Whoever, knowingly and with intent to defraud the
  United States, or any agency thereof, possesses
  any false, altered, forged, or counterfeited
  writing or document for the purpose of enabling
  another to obtain from the United States, or from
  any agency, officer, or agent thereof, any sum of
  money, shall be fined not more than 10,000 or
  imprisoned not more than five years, or both.
• List the elements of the above statute.

21
Statute Construction Exercise

• Elements of the fraud statute
• Intent to defraud
• Suspect knowingly used
• false documentation
• to get money

22
Arkansas Sexual Harassment Statute

• Requisite elements
• Refusal to submit to unwelcome sexual advances or
  sexual favors
• Resulted in a tangible job detriment

23
Paula Jones vs. William Clinton

• Judge Susan Webber Wright dismissed the lawsuit
• The Courtfinds nothing in plaintiffs
  employment records, her own testimony, or the
  testimony of her supervisors showing that
  plaintiffs reaction to Governor Clintons
  alleged advances affected tangible aspects of her
  compensation, terms, conditions, or privileges of
  employment.

24
In-class Exercise 2

• Koller Court Case, p. 1.3 of Student Workbook

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Koller Court Case

• 1. What was Koller convicted of?
• Drug Trafficking and Money Laundering

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Koller Court Case

• 2. What federal judge presided over Kollers
  trial?
• Terence T. Evans

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Koller Court Case

• 3. What appellate judge wrote the decision?
• Fairchild

28
Koller Court Case

• 4. What legal issues did Koller appeal?
• Government acted in an outrageous manner.
• There wasnt sufficient evidence to prove money
  laundering.

29
Koller Court Case

• 5. What was the courts ruling?
• Original convictions
• and sentences were
• affirmed.

30
Summary

• Fraud is a growing problem.
• Fraud examination is currently a career path in
  high demand.
• Fraud examiners need to know and understand the
  types of financial crimes commonly committed in
  business today.

31
Fraudwise

• Specializing in fraud detection, investigation,
  and prevention consulting services
• Senior Consultant
• Thomas Buckhoff, Ph.D., CFE, CPA
• 2974 Southgate Drive
• Fargo, ND 58103-3524
• 701-231-8512
• www.fraud-wise.com