Anti-Fraud Risk and Control Workbook (Wiley)

195 Pages·2009·2.9 MB·English

by  Peter Goldmann

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Anti-Fraud Risk and
Control Workbook
PETER GOLDMANN
JOHN WILEY & SONS, INC.
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Copyright © 2009 by Peter Goldmann. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Goldmann, Peter, 1953-
Anti-fraud audit and control workbook / Peter Goldmann.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-49653-4 (pbk.)
1. Fraud—United States—Case studies. 2. Fraud—United States—Prevention. 3. Auditing. 4. Forensic accounting.
I. Title.
HV6695.G585 2009
658.4'73—dc22
2009015536
Printed in the United States of America
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Contents T
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Preface vii
A Short History of Fraud viii
About This Book x
About White-Collar Crime 101 LLC xi
Acknowledgments xiii
Chapter 1 Why No Organization Is Immune to Fraud 1
What Is Fraud? 2
Myths and Realities about Fraud
Myth #1: Ethics and Compliance Training “Has Us Covered” 3
Myth #2: Our Finance Staff Are Qualifi ed to Protect
Us Against Fraud 4
Myth #3: We Have Very Little Fraud Here 4
Myth #4: Fraud Is a Necessary Cost of Doing Business 5
Myth #5: Implementing Controls and Training Is Costly 6
The Urgency of Detecting and Preventing Fraud 6
Tone at the Top 7
Review Points 8
Chapter Quiz 9
Chapter 2 The Human Element of Fraud 11
Who Commits Internal Fraud? 12
The Fraud Personality: Soft Indicators 12
The Fraud Personality: Hard Indicators 14
Why People Steal 14
The Fraud Triangle 15
Case Study #1: Pain, Pills, and Petty Cash 16
Other Fraud Triangle Factors 18
A Triangle or a Diamond? 18
The Trust Factor 19
Case Study #2: The Trusted Thief 19
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S People: The Key to Detection and Prevention 20
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N Case Study #3: Demise by Personal Debt 21
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N Review Points 21
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C Chapter Quiz 22
Chapter 3 Internal Fraud: Employee Level 25
How Big a Problem Is Internal Fraud? 25
Overview of Employee-Level Fraud 26
Embezzlement 26
Accounts Payable (AP) Fraud 27
Case Study #4: Shell Game in the Big Apple 28
Case Study #5: Health Care Fraud 31
Accounts Receivable Fraud 32
Case Study #6: Robbing Peter to Pay Paul 33
Kickback Schemes 33
Inventory/Supply Schemes 33
Case Study #7: Kickbacks Fly When Controls Are Weak 34
Check Fraud and Tampering 35
Travel and Entertainment (T&E) Fraud 39
Payroll Schemes 41
Case Study #8: Wining and Dining on Customer Dollars 41
Theft of Confi dential Information 42
Case Study #9: The New Employee 42
Case Study #10: Information Is as Good as Gold 43
Insider Abuse of Computer Systems 44
Case Study #11: But She Was Such a Nice Lady! 44
Red Flags of Employee-Level Fraud 45
Preventing Employee-Level Fraud 49
Accounts Payable Fraud-Prevention Checklist 50
Specifi c Employee-Level AP Fraud Controls Checklist 51
P-Card Fraud-Prevention Checklist 53
Accounts Receivable Fraud-Prevention Checklist 55
Kickback Scheme Prevention Checklist 55
Inventory Theft and Fraud-Prevention Checklist 56
Check Fraud-Prevention Checklist 56
ACH Fraud-Prevention Checklist 57
T&E Fraud-Prevention Checklist 57
Payroll Fraud-Prevention Checklist 58
Confi dential Information Theft Prevention Checklist 58
Review Points 59
Chapter Quiz 61
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Chapter 4 Internal Fraud: Management Level 67 S
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T&E Fraud and Abuse 67 T
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Bribery 70 O
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The Greatest Corruption Story of All Time 72
Confl icts of Interest 73
Case Study #12: Brenda Belton’s Confl ict of Interest Scheme 74
Misuse of Organization-Owned Assets 74
Fraudulent Financial Reporting 75
Case Study #13: The Great Buca Restaurant Fraud 77
Red Flags of Management-Level Fraud 78
Preventing Management-Level Fraud 81
Anti-Embezzlement Controls 82
Bribery and Kickback Schemes 84
Abuse of Organization-Owned Assets 84
Confl icts of Interest 84
Financial Statement Fraud 85
Review Points 89
Chapter Quiz 89
Chapter 5 External Fraud: Protecting Against Dishonest
Outsiders 93
Types of External Fraud 93
Vendor and Billing Fraud 93
Social Engineering and Pretexting 95
Case Study #14: The Phoner Toner Scam 97
Bank Employee Collusion with Outsiders 97
Case Study #15: The Frito Fraud 98
Customer-Perpetrated Fraud 98
Theft of Confi dential Information 99
The “SCAM” Model 100
Red Flags of External Fraud 101
Preventing External Fraud 103
Review Points 105
Chapter Quiz 106
Chapter 6 Conducting a Successful Fraud Risk
Assessment 109
Procedures for Conducting a Fraud Risk Assessment 111
Step 1: Create an FRA Team 111
Step 2: Identify the Organization’s Universe of Potential Risks 111
Step 3: Analyze the Likelihood of Each Scheme or Scenario Occurring 113
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S Step 4: Assess the Materiality of Risk 113
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N Step 5: Assess Risks within the Context of Existing Anti-Fraud
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N Controls 113
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C The Roles of the Board and Management in Fraud Risk
Assessments 114
Review Points 115
Chapter Quiz 116
Chapter 7 Basic Fraud Detection Tools and Techniques 119
Basic Fraud Detection 120
Case Study #16: I’m the Boss, and I Can Use Any Vendors I Want 125
Review Points 126
Chapter Quiz 127
Chapter 8 Advanced Fraud Detection Tools and
Techniques 129
Internal Audit and the Audit Plan 129
Essentials of Fraud Auditing 131
Auditing for Fraud in Accounts Payable 132
Auditing for Payroll Fraud 133
Essentials of Automated Auditing 135
Review Points 136
Chapter Quiz 137
Appendix A Answers to Chapter Quizzes 139
Appendix B Answer Key for Case Studies 143
Appendix C An Introduction to Cyber Fraud 149
Resources 163
Notes 165
Glossary 171
About the Author 175
Index 177
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Preface E
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“ Few people begin their careers with the goal of becoming liars, cheats, and
thieves. Yet that turns out to be the destiny of all too many. ”
— Joseph T. Wells, Founder and Chairman,
Association of Certifi ed Fraud Examiners
This quote says it all when we refer to the perpetrators of fraud. The world ’ s
great anti- f raud guru, Joe Wells, teaches us the critical reality that most people are
either honest or want to be. They don ’ t, as Wells points out, set out to be career
fraudsters.
The problem is that life ’ s inevitable curveballs sometimes are all it takes to push
a fundamentally moral, honest individual to cross the line from integrity to crime.
The Anti - Fraud Risk and Control Workbook is designed to give internal auditors,
accountants, and other fi nancial professionals in all organizations a foundation of
practical knowledge about the fraud that can impact their organizations.
This book appears at a time when the need for awareness about the mechanics
of major types of internal and external fraud and the red fl ags that raise suspicion
is more acute than in recent memory. For years, the incidence of fraud has been
steadily increasing and along with it, the number of dollars lost to these crimes.
And while this is clear evidence that fraud fl ourishes during periods of economic
growth and prosperity, it virtually explodes when the economy turns south.
N aturally, we all hope that the recession that commenced in 2007— o r any
future recession for that matter— w on’ t motivate too many fundamentally honest
people to add further credence to Joe Wells ’ s apt observation. However, regardless
of the economy’s vicissitudes in coming months and years, history proves that the
“ f raud problem” will undoubtedly worsen. The key for management is to acknowl-
edge this, raise the task of fraud risk mitigation much higher on the organization ’ s
priority list, and allocate the human and fi nancial resources necessary to at least
eliminate as many of the identifi able fraud risks threatening it now and in the
future.
T he following pages are the product of several years of research and writing
about ways to battle the seemingly relentless assault on institutions of all kinds
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E by fraudsters of all kinds. It is hoped that some of the many fraud - fi ghting tools
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A from the contents of this book will assist dedicated managers in safeguarding their
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— Peter Goldmann, June 2009
(cid:2) A Short History of Fraud
Fraud against organizations of all kinds has been around forever. However, with the
rapid growth of Western capitalism in the 19 th and 20 th centuries, the tempt ations for
employees a nd outsiders to steal from the increasingly numerous institutions spawned
by the explosive success of free market commerce began to spread.
E ven seemingly honest employees and outsiders, such as vendors or customers,
found themselves increasingly tempted to exploit opportunities in the fi nancial and
operational functions of corporations, banks, government agencies, and non- profi t
organizations to enrich themselves illegally.
By the early 1920s, Western fi nancial markets had become relatively modern.
They had fueled the capitalization and rapid growth of major industries such as
automobiles, broadcasting, construction and oil, transportation and chemicals.
However, along with the industrial race to technological modernization and
the huge fortunes amassed by investment banks, their corporate clients, and the
wealthy individuals who traded stocks and bonds, came rampant greed on the part
of the “ haves ,” while America ’ s “ have - nots, ” whose ranks swelled through the dev-
astation of the Great Depression, became increasingly motivated to defraud “ the
system .”
The boom ended with a disastrous bust starting on October 29, 1929 when
Wall Street experienced its fi rst bona fi de crisis. Not long after that—1933 to be
exact — the world ’ s fi rst major anti- f raud legislation was passed. The genesis of the
Securities Act of 1933 was nicely summarized by Deepa Sarkar while a student at
the Securities Law Clinic at Cornell University Law School:
I n the period leading up to the stock market crash, companies issued stock and
enthusiastically promoted the value of their company to induce investors to
p urchase those securities. Brokers in turn sold this stock to investors based on
promises of large profi ts but with little disclosure of other relevant information
about the company. In many cases, the promises made by companies and bro-
kers had little or no substantive basis, or were wholly fraudulent. With thousands
of investors buying up stock in hopes of huge profi ts, the market was in a state of
speculative frenzy that only ended . . . w hen the market crashed as panicky inves-
tors sold off their investments en masse .
In reaction to this calamity, and at President Franklin Roosevelt ’ s instigation,
Congress set out to enact laws that would prevent speculative frenzies. After a
series of hearings that brought to light the severity of the abuses leading to the
crash, Congress enacted the Securities Act of 1933. 1
U nfortunately, while the “ ’ 3 3 Act, ” as it was often called, did signifi cantly reduce
insider trading, phony securities schemes, and other investment scams, it failed to
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