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Prevention and Detection of Fraud

Presentation by Bob Jensen Trinity University San Antonio, TX 78212 rjensen@trinity.edu


http://www.trinity.edu/rjensen/

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Prevention and Detection of Fraud


Bob Jensens main directory to fraud links
http://www.trinity.edu/rjensen/fraud.htm
The

Enron, Andersen, and Worldcom Scandal Modules --http://www.trinity.edu/rjensen/FraudEnron.htm


Bob Jensen's Enron

Quiz (and answers) ---

http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

November 16, 2005 in Trinidad

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Prevention and Detection of Fraud


Cooking

the Books --http://www.trinity.edu/rjensen/fraud001.htm#Cooking


Fraud

Updates and Other Updates to the Accounting and Finance Scandals --http://www.trinity.edu/rjensen/FraudUpdates.htm to the Core: Mutual Fund, Investment Banking Scandals, and Security Analysis Frauds --http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten

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Prevention and Detection of Fraud


Future

of Auditing --http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing
Fraud

Detection and Reporting --http://www.trinity.edu/rjensen/FraudReporting.htm


American

History of Fraud --http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm


Accounting

Humor http://www.trinity.edu/rjensen/fraud001.htm#Humor
Selected

Scandals in the Largest Remaining Public Accounting Firms --http://www.trinity.edu/rjensen/fraud001.htm#others

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Prevention and Detection of Fraud


The

Andersen, Enron, and WorldCom Scandals http://www.trinity.edu/rjensen/FraudEnron.htm The Saga of Auditor Professionalism and Independence http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
 Risk-Based

Auditing Under Attack --http://www.trinity.edu/rjensen/fraud001.htm#RiskBasedAuditing


What's

Right and What's Wrong With (SPEs), SPVs, and VIEs --http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

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Good News

Globally Networked Databases and Online Financial Reporting


and Enterprise Resource Planning (ERP) Installations for Smaller Enterprises

 

Dawning of the Age of XBRL Dawning of the Age of Continuous Auditing and Auditbots

Dawning of Age of Customized Reporting and Aggregations




Dawning of the Age of P2P File Sharing


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Good News

 

Harmonization of Accounting Standards Is a More Serious Goal New Spirit of Reform and Ethics Awareness

Expansion of Assurance Services




Some Things Do Get Better Under Threatening Litigation Storm Clouds (There are signs that the Sarbanes Oxley legislation is working --500 companies, including Kodak, find internal control deficiencies)


Lifelong Learning Alternatives in the Age of Distance Education


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Bad News
Systemic Accounting Problems That Cannot ( or Otherwise Will Not Likely) Be Solved Systemic Problem: All Aggregations Combine Different Measurements With Varying Accuracies Systemic Problem: All Aggregations Leave Out Important Components Systemic Problem: All Aggregations Ignore Complex & Synergistic Interactions of Value and Risk Systemic Problem: Disaggregating of Value or Cost is Generally Arbitrary Systemic Problem: Systems Are Too Fragile Systemic Problem: More Rules Do Not Necessarily Make Accounting for Performance More Transparent Systemic Problem: Economies of Scale vs. Consulting Red Herrings in Auditing Systemic Problem: Intangibles Are Intractable
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Bad News

White Collar Crime Pays Big Even If You Get Caught Profitable Looting in the Capital Markets: Crime Keeps on Paying Debate Topic: Punishing the Many for Crimes of a Few Accounting Education Shares Some of the Blame Accounting Tricks and Creative Accounting
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Bad News

Outrageous Executive Compensation Schemes That Reward Failure and Fraud Corporate Boards and the SEC Will Not Solve Corporate Governance the Crisis Incompetent and Corrupt Audits are Routine (Clients give a grade C-) Whistle Blowing is Not Rewarded

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Bad News

Cost Cutting Pressures Create Moral Hazards Computer Security is Becoming More Fragile in the Age of Electronic Warfare Collision of Security and Privacy and Freedom Criteria Investment Banking and Security Analysis Professions Are Rotten to the Core

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Bad News

Dawning of the Age of Unaccountable Contracting Failed Education Systems In the Early Years Leave Weak Foundations to Build Upon Media Coverage is Very, Very Good and Very, Very Bad From Enron to Earnings Reports CPA = Career Passed Away The Three Cs of Fraudulent Financial Reporting (Warning Signs) Will public accounting audit services survive? Insurance Versus Assurance?

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Enhancing Auditors Capabilities to Detect Fraud


EY Faculty Connection Fall 2005

We should use major fraud cases to teach accounting principles throughout our curriculum. Students will understand accounting principles better when they see how they have been abused. For example, the difference between assets and expenses can be effectively taught using WorldCom. (Steve Albrecht) ************* We can teach a dedicated fraud course where students learn why and how fraud is committed and how to prevent, detect and investigate fraud. (Steve Albrecht) ************* In our classes, we should use pedagogical tools such as inquiry, data mining and brainstorming that our students will be using as professionals to detect fraud. (Steve Albrecht)

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Joint IASB-FASB Projects

From Paul Pacter's (Deloitte ) site on international accounting on October 29, 2005 --http://www.iasplus.com/index.htm We have updated the following agenda project pages to reflect discussions at the joint IASB-FASB meeting on 24-25 October 2005 in Norwalk, CT, USA: Conceptual Framework Financial Instruments Performance Reporting Revenue Recognition Short-term Convergence - IAS 12 Income Taxes
Bob Jensen's threads on accounting standard setting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

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Key Reform Measures and Events

AICPA Launches Web Site to Promote Audit Quality -- http://cpcaf.aicpa.org/ PCAOB Audit Inspections Were Tough!!! Audits focus more on fraud under SAS 99 The Sarbanes-Oxley regulation requires that all CEOs must sign off on the validity of the transactions EU 8th Directive may require audit firm rotation
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ACCOUNTING FOR DERIVATIVES

Bob Jensen's threads on Enron are at http://www.trinity.edu/rjensen/fraud.htm Bob Jensen's threads on Derivative Financial Instruments Fraud are at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds Also note http://www.trinity.edu/rjensen/Fraud.htm#FrankPartnoyTestimony How Enron Used SPEs and Derivatives Jointly is Explained at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm Bob Jensens threads on derivatives accounting are at http://www.trinity.edu/rjensen/caseans/000index.htm

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Frank Partnoys Works

Of all the many documents and books that I have read about derivative financial instruments, the most important have been the books and documents written by Frank Partnoy. Some of his books are listed at the bottom of this message.

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Frank Partnoys Works

The single most important document is his Senate Testimony. More than any other single thing that I've ever read about the Enron disaster, this testimony explains what happened at Enron and what danger lurks in the entire world from continued unregulated OTC markets in derivatives. I think this document should be required reading for every business and economics student in the world. Perhaps it should be required reading for every student in the world. Among other things it says a great deal about human greed and behavior that pump up the bubble of excesses in government and private enterprise that destroy the efficiency and effectiveness of what would otherwise be the best economic system ever designed.

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Frank Partnoys Works

Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002 --http://www.senate.gov/~gov_affairs/0124 02partnoy.htm
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Frank Partnoys Works

       

FIASCO: The Inside Story of a Wall Street Trader FIASCO: Blood in the Water on Wall Street FIASCO: Blut an den wei en Westen der Wall Street Broker. FIASCO: Guns, Booze and Bloodlust: the Truth About High Finance Infectious Greed : How Deceit and Risk Corrupted the Financial Markets Codicia Contagiosa His other publications include the following highlight: "The Siskel and Ebert of Financial Matters: Two Thumbs Down for the Credit Reporting Agencies" (Washington University Law Quarterly)

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REASONS FOR NEW STANDARDS

Undisclosed Assets and Liabilities Unbooked Assets and Liabilities Meaningless Measures of Value & Risk Rise in Scandals in the 1980s & 1990s Complex Frauds --- Partnoys Fiasco Explosion of Swap Contracts Evolution Toward Fair Value Accounting
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PROBLEMS WITH NEW STANDARDS

Complex Contracts & Technical Jargon Complex Scoping of Coverage --- NPNS Complex Hedge Accounting Rules Many Derivatives Are Difficult to Value Difficult to Find Embedded Derivatives Complex Effectiveness Testing Rules Continuous Stream --- DIG, Amendments Implementation Failures --- Freddie Mac, etc. Held-to-Maturity Interim Distortions Hedge Acctg. Denied to Most Macro Hedges
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Differences Between Standards FAS 133 vs. IAS 39 vs. CICA 13

Differences are relatively minor Links to Major Differences


http://www.trinity.edu/rjensen/caseans/canada.htm

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PwC Corporate Crime Survey 2003


http://www.trinity.edu/rjensen/FraudCorporateCrimeReport2003.pdf Percentage of Increase Between 2001 and 2003

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KPMG Fraud Survey 2003


http://www.messageaware.com/BeAware/Compliancy/KPMG%20Fraud%20Report.pdf

Percentage of Increase Between 2002 and 2003

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KPMG Fraud Survey 2003


http://www.messageaware.com/BeAware/Compliancy/KPMG%20Fraud%20Report.pdf

Percentage of Increase Between 2002 and 2003

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KPMG Fraud Survey 2003


http://www.messageaware.com/BeAware/Compliancy/KPMG%20Fraud%20Report.pdf

Percentage of Increase Between 1998 and 2003

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PwC Corporate Crime Survey 2003


http://www.trinity.edu/rjensen/FraudCorporateCrimeReport2003.pdf Percentage of Respondents Reporting Frauds to Survey in 2003

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PwC Corporate Crime Survey 2003


http://www.trinity.edu/rjensen/FraudCorporateCrimeReport2003.pdf Percentage of Respondents Reporting Types of Crime

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PwC Corporate Crime Survey 2003


http://www.trinity.edu/rjensen/FraudCorporateCrimeReport2003.pdf Percentage of Respondents Reporting Crime Losses

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PwC Corporate Crime Survey 2003


http://www.trinity.edu/rjensen/FraudCorporateCrimeReport2003.pdf Percentage of Respondents Reporting Detection Successes

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PwC Corporate Crime Survey 2003


http://www.trinity.edu/rjensen/FraudCorporateCrimeReport2003.pdf Percentage of Respondents Corrective Policies and Measures

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KPMG Fraud Survey 2003


http://www.messageaware.com/BeAware/Compliancy/KPMG%20Fraud%20Report.pdf

Methods of Uncovering Fraud

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KPMG Fraud Survey 2003


http://www.messageaware.com/BeAware/Compliancy/KPMG%20Fraud%20Report.pdf

Factors Contributing to Fraud

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Association of Certified Fraud Examiners


Fraud Prevention and Detection Resources

  

Association of Certified Fraud Examiners --http://www.acfe.com/home.asp In particular note the Code of Business Ethics and Conduct --http://www.acfe.com/documents/code_of_business_ethics.pdf Fraud Resources Center --- http://www.acfe.com/fraud/fraud.asp Fraud Prevention Check-Up --http://www.acfe.com/fraud/check.asp Fraud Prevention CD-ROM --- http://www.acfe.com/fraud/cd.asp How to Prevent Small Business Fraud --http://www.acfe.com/documents/smallbusinessfraudexcerpt.pdf Other Downloads --- http://www.acfe.com/fraud/downloads.asp Also note the explosion of salaries of Certified Fraud Examiners --http://www.acfe.com/documents/2005comp-guide.pdf CFE Career Center http://www.acfe.com/career/career.asp

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Theft of Assets --http://www.acfe.com/documents/smallbusinessfraudexcerpt.pdf

Cash skimming and larceny (off-book fraud) Unrecorded sales (onsite and remote) Off-hours sales Mailroom theft (checks, rebates) Cash deposit lapping Deposits in transit Cash round-off Casino-style trickery

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Theft of Assets --http://www.acfe.com/documents/smallbusinessfraudexcerpt.pdf

Skimming receivables Forcing account balances Unauthorized write-offs Debits to aging or fictitious accounts Receivables lapping (kiting) Stolen statements

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Theft of Assets --http://www.acfe.com/documents/smallbusinessfraudexcerpt.pdf

Inventory theft Crime partners checking out at cash register Out the back door Declaring good merchandise unrepairable Replacing good parts with new parts

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Types of Asset Theft Schemes


Factors Contributing to Fraud

Expense account fraud Credit card fraud Payroll fraud (FAMU) Workers Compensation fraud Conflicts of interest (family & friends consulting) Kickbacks Financial and tax reporting fraud

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Enron Quiz Question 1

What is the main temptation of white collar criminals? There will be white collar crime as long as it pays big even when caught Whistle blowers not rewarded

Why do auditors often lose professionalism?

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Main Lessons Learned From Enron http://www.citizenworks.org/corp/reforms.php

CRACK DOWN ON CORPORATE CRIME 1. Force Corporate Crooks to Pay it Back 2. Toughen the Punishments for Corporate Crooks and Crooked Corporations 3. Increase the Corporate Crime Investigation and Prosecution Budget. 4. Track the Cost and Extent of Corporate Crime 5. Punish the Aiders and Abettors of Corporate Crime 6. Crack Down on International Corporate Bribery.

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Main Lessons Learned From Enron http://www.citizenworks.org/corp/reforms.php

PROTECT WORKERS AND INVESTORS 1. Strengthen Pension Protections 2. Expand Whistleblower Protections 3. Protect the Rights of Shareholders 4. Curb CEO Pay 5. Expand Disclosure Standards 6. Stop Corporate Tax Dodgers

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Main Lessons Learned From Enron http://www.citizenworks.org/corp/reforms.php

ROLL BACK THE TIDE OF DEREGULATION 1. Reverse Electricity Deregulation 2. Regulate OTC Derivatives 3. Protect Main Street From Wall Street

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Main Lessons Learned From Enron http://www.citizenworks.org/corp/reforms.php

REDUCE EXCESSIVE CORPORATE POWER AND INFLUENCE OVER GOVERNMENT 1. Cut Corporate Welfare 2. Slow the Revolving Door Between Business and Government 3. Create a Public Interest Counterweight to the Corporate Lobbyists 4. Get Corporations out of Elections 5. Restore Direct Citizen Control over Corporations Through Their Charters 6. End Corporate Personhood

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Main Lessons Learned From Enron http://www.citizenworks.org/corp/reforms.php

Restore audit quality (analytics vs. detail testing) Restore competence to audit committees Independent corporate boards Restore reasonable compensation controls Eliminate golden parachutes Improve audit reviews and inspections Prison terms correlated with amounts stolen Tough internal controls and independent auditing Reward whistleblowers
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Main Lessons Learned From Enron http://www.citizenworks.org/corp/reforms.php

Rotate auditors and possibly audit firms Ethics tone at the top Up experience requirements for auditors Up training and technical skills More skills in derivatives, VIEs, re-insurance, leasing More skills in detecting earnings managment More computer systems skills More centralized controls of local offices Competency over customer relations & back slapping
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