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Felix J. Lozano III, CPA, CFE MAY 26, 2011

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Felix J. Lozano III, CPA, CFE MAY 26, 2011

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    1. 1 Felix J. Lozano III, CPA, CFE MAY 26, 2011

    2. 2

    3. 3 Occupational Fraud Defined

    4. 4 Fraud Trivia #1 Jérôme Kerviel (born January 11, 1977)[1] is a French trader who has been charged in the January 2008 Société Générale trading loss incident, resulting in losses valued at approximately €4.9 billion (U.S $7.55 billion).[2] Société Générale characterises Kerviel as a rogue trader and claims Kerviel worked these trades alone, and without its authorization. Kerviel, in turn, told investigators that such practices are widespread and that getting a profit makes the hierarchy turn a blind eye.[3] Until the discovery of fraud perpetrated by Bernard Madoff, it was reported to be the largest fraud in banking history Société Générale (Euronext: GLE) is one of the main European financial services companies and also maintains extensive activities in others parts of the world. It is headquartered in France with the main head office in Tours Société Générale in the business district of La Défense west of Paris. The three main divisions are (particularly in France and Eastern Europe), (Derivatives, Structured Finance and Euro Capital Markets) and Global Investment Management & Services. Société Générale is one of the oldest banks in France. The original name was Société Générale pour favoriser le développement du commerce et de l'industrie en France (English: General Company for the Support of the Development of Commerce and Industry in France). Société Générale is often nicknamed SocGen in the international financial world. The long term debt of the group is currently ranked AA by S&P, Aa2 by Moody's and AA- by Fitch.[2] The 2007 financial results were sharply lower, affected by depreciations and a fraud of €4.9 billion (or U.S. $7.55 billion )Jérôme Kerviel (born January 11, 1977)[1] is a French trader who has been charged in the January 2008 Société Générale trading loss incident, resulting in losses valued at approximately €4.9 billion (U.S $7.55 billion).[2] Société Générale characterises Kerviel as a rogue trader and claims Kerviel worked these trades alone, and without its authorization. Kerviel, in turn, told investigators that such practices are widespread and that getting a profit makes the hierarchy turn a blind eye.[3] Until the discovery of fraud perpetrated by Bernard Madoff, it was reported to be the largest fraud in banking history Société Générale (Euronext: GLE) is one of the main European financial services companies and also maintains extensive activities in others parts of the world. It is headquartered in France with the main head office in Tours Société Générale in the business district of La Défense west of Paris. The three main divisions are (particularly in France and Eastern Europe), (Derivatives, Structured Finance and Euro Capital Markets) and Global Investment Management & Services. Société Générale is one of the oldest banks in France. The original name was Société Générale pour favoriser le développement du commerce et de l'industrie en France (English: General Company for the Support of the Development of Commerce and Industry in France). Société Générale is often nicknamed SocGen in the international financial world. The long term debt of the group is currently ranked AA by S&P, Aa2 by Moody's and AA- by Fitch.[2] The 2007 financial results were sharply lower, affected by depreciations and a fraud of €4.9 billion (or U.S. $7.55 billion )

    5. 5 Jérôme Kerviel, the rogue trader who almost brought down Société Générale, was ordered to pay back $6.7 billion, the entire amount the French bank lost in unwinding his trades from January, 2008. He was also convicted of breach of trust, sentenced to at least three years in prison, and barred from finance for life. Wait, is that a punitive option? Because we have some names we'd like to suggest. The bank said the sum was "symbolic" and didn't expect to be paid back. The symbolism in question being a giant arrow aimed at Kerviel's head that says: Don't look at us, it's this guy's fault. France's banking commission has already fined Société Générale $5.5 million for inadequate supervision. Meanwhile, French populists have taken up Kerviel's cause: Except instead of stealing from the rich to give to the poor, the rich maybe knew he was sort of stealing, but let him because they wanted to get richer. Kerviel's lawyers argued that their client's higher-ups tacitly encouraged his activities, at least while it was working. He had been betting outside his limit for more than two years. In late 2007, the bank booked $1.9 billion in profit from his unauthorized deals. But the court ruled that that did not absolve Kerviel of the blame. “The lack of vigilance by the bank in monitoring the only existing limits, acting as alert signs, hardly exempted Jerome Kerviel from his duty to inform his hierarchy of the reality of his excesses or to come back within the limits imposed,” Judge Pauthe said. “By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future he mortgaged.” Jérôme Kerviel, the rogue trader who almost brought down Société Générale, was ordered to pay back $6.7 billion, the entire amount the French bank lost in unwinding his trades from January, 2008. He was also convicted of breach of trust, sentenced to at least three years in prison, and barred from finance for life. Wait, is that a punitive option? Because we have some names we'd like to suggest. The bank said the sum was "symbolic" and didn't expect to be paid back. The symbolism in question being a giant arrow aimed at Kerviel's head that says: Don't look at us, it's this guy's fault. France's banking commission has already fined Société Générale $5.5 million for inadequate supervision. Meanwhile, French populists have taken up Kerviel's cause:Except instead of stealing from the rich to give to the poor, the rich maybe knew he was sort of stealing, but let him because they wanted to get richer. Kerviel's lawyers argued that their client's higher-ups tacitly encouraged his activities, at least while it was working. He had been betting outside his limit for more than two years. In late 2007, the bank booked $1.9 billion in profit from his unauthorized deals. But the court ruled that that did not absolve Kerviel of the blame. “The lack of vigilance by the bank in monitoring the only existing limits, acting as alert signs, hardly exempted Jerome Kerviel from his duty to inform his hierarchy of the reality of his excesses or to come back within the limits imposed,” Judge Pauthe said. “By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future he mortgaged.”

    6. 6 Turn of the Century Bull Markets Make Heroes Scott Sullivan, WorldCom: 1998 CFO of the Year Andrew Fastow, Enron: 1999 CFO of the Year Mark Swartz, Tyco: 2000 CFO of the Year Kenneth Lonchar, Veritas Software Corp, 2001 CFO of the year (Received the CFO excellence award for Managing External Stakeholders). http://www.cfo.com/article.cfm/9431483%20?f=related In the Fall of 2002, it was discovered that he never actually obtained his MBA from Stanford University, as his resume said. He resigned as CFO after the disclosure of the faked credential. "He has apologized and recognized it was a mistake." Kenneth Lonchar, Veritas Software Corp, 2001 CFO of the year (Received the CFO excellence award for Managing External Stakeholders). http://www.cfo.com/article.cfm/9431483%20?f=related In the Fall of 2002, it was discovered that he never actually obtained his MBA from Stanford University, as his resume said. He resigned as CFO after the disclosure of the faked credential. "He has apologized and recognized it was a mistake."

    7. 7 Turn of the Century Bear Markets Make Crooks Scott Sullivan: Plead guilty as part of a plea agreement. Testified against CEO Bernie Ebbers and got a 5-year sentence. In January 2009 he was permitted to serve the last part of his sentence under home confinement. He now lives in Boca Raton and is on supervised release for three years. http://www.securitiesdocket.com/2009/08/03/former-worldcom-cfo-scott-sullivan-completes-sentence/ Andrew Fastow: 2004, plead guilty to wire and securities fraud. Got a 6-year sentence. As of February 2009, Fastow is Inmate #14343-179 at the ADX Florence in Florence, Colorado with a projected release date of December 17, 2011.[3] Although ADX Florence is known as a "super-max," there is also a minimum camp attached to the ADX Florence camp, which is where Fastow is said to be located. http://en.wikipedia.org/wiki/Andrew_Fastow Mark Swartz: 2005, found guilty of grand larceny and conspiracy. Sentenced to 8 – 25 years in jail. Pursuant to his criminal conviction, Swartz also paid criminal fines of $35 million. On October 16, 2008, the New York Court of Appeals Kozlowski's and Swartz's conviction. On June 8, 2009, the United States Supreme Court denied a petition by Swartz for a “last resort” writ of certiorari. http://www.sec.gov/litigation/litreleases/2009/lr21129.htm 2002 – CFO Magazine discontinued the award. Scott Sullivan: Plead guilty as part of a plea agreement. Testified against CEO Bernie Ebbers and got a 5-year sentence. In January 2009 he was permitted to serve the last part of his sentence under home confinement. He now lives in Boca Raton and is on supervised release for three years. http://www.securitiesdocket.com/2009/08/03/former-worldcom-cfo-scott-sullivan-completes-sentence/ Andrew Fastow: 2004, plead guilty to wire and securities fraud. Got a 6-year sentence. As of February 2009, Fastow is Inmate #14343-179 at the ADX Florence in Florence, Colorado with a projected release date of December 17, 2011.[3] Although ADX Florence is known as a "super-max," there is also a minimum camp attached to the ADX Florence camp, which is where Fastow is said to be located. http://en.wikipedia.org/wiki/Andrew_Fastow Mark Swartz: 2005, found guilty of grand larceny and conspiracy. Sentenced to 8 – 25 years in jail. Pursuant to his criminal conviction, Swartz also paid criminal fines of $35 million. On October 16, 2008, the New York Court of Appeals Kozlowski's and Swartz's conviction. On June 8, 2009, the United States Supreme Court denied a petition by Swartz for a “last resort” writ of certiorari. http://www.sec.gov/litigation/litreleases/2009/lr21129.htm 2002 – CFO Magazine discontinued the award.

    8. Current Crooks - Ponzi Schemes "Bernie" Madoff, 2009: Pleaded guilty to 11 federal crimes Robert Allen Stanford, 2009: Pleaded "not guilty" to charges of fraud, conspiracy and obstruction Nick Cosmo, 2009: Indicted on 10 counts of wire fraud and 22 counts of mail fraud Bernard Madoff- He was convicted of operating a Ponzi scheme that has been called the largest investor fraud ever committed by a single person. Federal prosecutors estimated client losses, which included fabricated gains, of almost $65 billion. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed. Robert Allen Stanford- is in a Texas jail awaiting trial after the government charged him with 21 criminal counts related to what it calls a $7 billion Ponzi scheme involving certificates of deposit issued by the Stanford International Bank in Antigua. Nick Cosmo-Owner of Agape World and Agape Merchant Advance, was indicted on April 23, 2009 on 10 counts of wire fraud and 22 counts of mail fraud in a reported $413 million Ponzi scheme. Cosmo is alleged to have conducted the scheme using his company Agape World Inc. in Hauppauge, New York, which claimed to make its profits via commercial bridge lending. He is currently released on a $1.25 million bail and is awaiting trial for sometime in September. If convicted, Cosmo faces a return to federal prison for as many as 30 years. He served 21 months for a prior fraud conviction and was released in August 2000. Bernard Madoff- He was convicted of operating a Ponzi scheme that has been called the largest investor fraud ever committed by a single person. Federal prosecutors estimated client losses, which included fabricated gains, of almost $65 billion. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed. Robert Allen Stanford- is in a Texas jail awaiting trial after the government charged him with 21 criminal counts related to what it calls a $7 billion Ponzi scheme involving certificates of deposit issued by the Stanford International Bank in Antigua. Nick Cosmo-Owner of Agape World and Agape Merchant Advance, was indicted on April 23, 2009 on 10 counts of wire fraud and 22 counts of mail fraud in a reported $413 million Ponzi scheme. Cosmo is alleged to have conducted the scheme using his company Agape World Inc. in Hauppauge, New York, which claimed to make its profits via commercial bridge lending. He is currently released on a $1.25 million bail and is awaiting trial for sometime in September. If convicted, Cosmo faces a return to federal prison for as many as 30 years. He served 21 months for a prior fraud conviction and was released in August 2000.

    9. Recent Oil and Gas Scheme http://www.huliq.com/40145/the-65m-oil-and-gas-fraud According to information presented in court, beginning in 1997 through July 2005, Sweesy devised and executed a scheme to defraud investors. Sweesy owned and operated Quality Petroleum, Inc., Americana Oil & Gas Corp., Ameri-Q Energy, Inc., and Prairie Resources, Inc. ("the companies"). Sweesy directed the activities of salespersons offering and selling fractional interests in oil and gas well programs throughout the United States. As part of the scheme, a virtual office facility operating out of La Jolla, California was established to make it appear to investors that two of the companies were formed and operating in California. Investors were also falsely told that their funds would be used to drill, test, complete, equip, and operate oil and gas well programs. Sweesy's guilty plea follows a related guilty plea by 36-year-old BLAKE LANG CUMMINGS of Allen, Texas. Cummings pleaded guilty to conspiracy in connection with the scheme on July 31, 2007. According to court documents, Cummings was employed by Americana, America-Q, and Prairie as a salesperson responsible for offering and selling fractional undivided working interests in various oil and gas well programs to Investors and managed other salespersons' activities at those companies. http://www.usdoj.gov/usao/txe/news_release/news/EDTX_Sweesy070108.html TUESDAY, JULY 1, 2008 - ULRIC JACK SWEESY a/k/a JACK TAYLOR of Richardson was sentenced to 20 years in prison and ordered to pay $63,095,560.32 in restitution.  On October 24, 2007, Sweesy admitted to obtaining over $65 million from investors in a fraudulent oil and gas well scheme.  BLAKE LANG CUMMINGS of Allen was sentenced to 5 years in prison and ordered to pay $50,219,049.00 in restitution.  Cummings pleaded guilty to conspiring to commit securities fraud on July 31, 2007.  Both men were sentenced today during an appearance before United States District Judge Marcia Crone. http://www.huliq.com/40145/the-65m-oil-and-gas-fraud According to information presented in court, beginning in 1997 through July 2005, Sweesy devised and executed a scheme to defraud investors. Sweesy owned and operated Quality Petroleum, Inc., Americana Oil & Gas Corp., Ameri-Q Energy, Inc., and Prairie Resources, Inc. ("the companies"). Sweesy directed the activities of salespersons offering and selling fractional interests in oil and gas well programs throughout the United States. As part of the scheme, a virtual office facility operating out of La Jolla, California was established to make it appear to investors that two of the companies were formed and operating in California. Investors were also falsely told that their funds would be used to drill, test, complete, equip, and operate oil and gas well programs. Sweesy's guilty plea follows a related guilty plea by 36-year-old BLAKE LANG CUMMINGS of Allen, Texas. Cummings pleaded guilty to conspiracy in connection with the scheme on July 31, 2007. According to court documents, Cummings was employed by Americana, America-Q, and Prairie as a salesperson responsible for offering and selling fractional undivided working interests in various oil and gas well programs to Investors and managed other salespersons' activities at those companies. http://www.usdoj.gov/usao/txe/news_release/news/EDTX_Sweesy070108.html TUESDAY, JULY 1, 2008 - ULRIC JACK SWEESY a/k/a JACK TAYLOR of Richardson was sentenced to 20 years in prison and ordered to pay $63,095,560.32 in restitution.  On October 24, 2007, Sweesy admitted to obtaining over $65 million from investors in a fraudulent oil and gas well scheme.  BLAKE LANG CUMMINGS of Allen was sentenced to 5 years in prison and ordered to pay $50,219,049.00 in restitution.  Cummings pleaded guilty to conspiring to commit securities fraud on July 31, 2007.  Both men were sentenced today during an appearance before United States District Judge Marcia Crone.

    10. Current Construction Scheme http://www.mondovisione.com/index.cfm?section=news&action=detail&id=87037 http://dallas.bizjournals.com/dallas/stories/2009/11/30/daily13.html November 30,2009-The Securities and Exchange Commission today charged a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares. The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market. "The company's financial results were largely fabricated and its public statements were intended to deceive," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud.“ According to the SEC's complaint, filed in U.S. District Court for the Northern District of Texas, several different illicit maneuvers were used by Home Solutions at various times between 2004 to 2007 at the direction of Fradella and other executives in order to mislead the public about the company's true financial condition. The SEC alleges that Fradella initiated an expense-deferral scheme to inflate earnings by expensing year-end bonuses when paid rather than when earned. Fradella, Home Solutions CFO Jeff Mattich, and Brian Marshall (who became a Home Solutions director and president of its largest subsidiary, Fireline Restoration Inc., after its acquisition by Home Solutions) together engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred. They also improperly caused millions of dollars of revenue from another public company to be booked as Home Solutions revenue. The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots. The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws and seeks permanent injunctive relief, financial penalties, and as to the individuals, full disgorgement with interest and officer and director bars. Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint: Former Home Solutions CFO and COO Rick O'Brien consented to a permanent injunction and a $130,000 penalty. Former Fireline controller Stephen Gingrich consented to a permanent injunction, a $25,000 penalty, and an administrative order barring him from practicing before the Commission as an accountant for at least three years. Former Fireline COO Thomas Davis consented to a permanent injunction, a $25,000 penalty, and payment of disgorgement and interest of $32,850. Jeff Craft, a business partner of Marshall, consented to a permanent injunction. http://www.mondovisione.com/index.cfm?section=news&action=detail&id=87037 http://dallas.bizjournals.com/dallas/stories/2009/11/30/daily13.html November 30,2009-The Securities and Exchange Commission today charged a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares. The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market. "The company's financial results were largely fabricated and its public statements were intended to deceive," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud.“ According to the SEC's complaint, filed in U.S. District Court for the Northern District of Texas, several different illicit maneuvers were used by Home Solutions at various times between 2004 to 2007 at the direction of Fradella and other executives in order to mislead the public about the company's true financial condition. The SEC alleges that Fradella initiated an expense-deferral scheme to inflate earnings by expensing year-end bonuses when paid rather than when earned. Fradella, Home Solutions CFO Jeff Mattich, and Brian Marshall (who became a Home Solutions director and president of its largest subsidiary, Fireline Restoration Inc., after its acquisition by Home Solutions) together engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred. They also improperly caused millions of dollars of revenue from another public company to be booked as Home Solutions revenue. The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots. The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws and seeks permanent injunctive relief, financial penalties, and as to the individuals, full disgorgement with interest and officer and director bars. Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint: Former Home Solutions CFO and COO Rick O'Brien consented to a permanent injunction and a $130,000 penalty. Former Fireline controller Stephen Gingrich consented to a permanent injunction, a $25,000 penalty, and an administrative order barring him from practicing before the Commission as an accountant for at least three years. Former Fireline COO Thomas Davis consented to a permanent injunction, a $25,000 penalty, and payment of disgorgement and interest of $32,850. Jeff Craft, a business partner of Marshall, consented to a permanent injunction.

    11. 3 Texas Lawyers Fall Victim to Cashier’s Check Scam – March 5, 2010 http://www.wfaa.com/news/crime/Lawyers-fall-victim-to-cashiers-check-scam-86690237.html NEWS 8 INVESTIGATES DALLAS — Clever con games apparently aren't just the stuff of movies. Three Texas lawyers were all targets of a sophisticated scheme using distance, the Internet and the quirks of American law to steal money. While two of them escaped, one did not. It started with a cashier's check over $100,000. It was the most enticing piece in a con game designed to deprive ethical lawyers of their money. "It's funny," said Raul Loya, an attorney. "You would think that lawyers would be smarter, but it's funny they fall victim." All three attorneys lived in different cities and worked at separate firms, but they all got the same e-mail purporting to be from prospective clients in Hong Kong. "I got back, I looked at the check, looked authentic [and] deposited the check," said Sheldon Goldstein, an attorney. The e-mails said the client needed help in collecting money from an American client. "I've met tons of my clients that are from out of state and out of the country," said Richard Howell, the last attorney to fall victim to the scam. "That's not unusual at all." "They spend a lot of time setting hook before the start reeling you in," Loya said. The fake company has a web site and an officer signs a contract with the lawyer for his services. Documents arrive via courier. Then, in each case, a check arrived for over $100,000. Goldstein told the company his retainer was only $3,000. "She wrote back and said just take out your $3,000 and send me the balance," he said. That was exactly what he did. Howell, of Houston, deposited his check for $182,000 in his firm's trust account, too. His bank assured him the check was real. He recorded the conversation. With the money in their accounts, attorneys are ethically bound to send it on to their clients quickly. After being guaranteed the check was good, Howell wired everything but his fee back to Hong Kong. Goldstein waited for the check to clear, but it was bogus. "There were a whole slew of these fake cashier's checks that were going around this part of the country," he said. Howell's bank suddenly changed its mind. The check for $182,000 was no good. The Hong Kong company couldn't be found. He had been taken. A secret service agent told him he wasn't the only one. "He's got several law firms involved with over $23 million that have been taken away from," he said. Loya never did anything with his $389,000 check. "This is as bogus as a $3 bill," he said. "... I think what this tells us is that anyone can fall victim, anyone." faa.com/news/crime/Lawyers-fall-victim-to-cashiers-check-scam-86 The SEC's investigation is continuing. http://www.wfaa.com/news/crime/Lawyers-fall-victim-to-cashiers-check-scam-86690237.html NEWS 8 INVESTIGATES DALLAS — Clever con games apparently aren't just the stuff of movies. Three Texas lawyers were all targets of a sophisticated scheme using distance, the Internet and the quirks of American law to steal money. While two of them escaped, one did not. It started with a cashier's check over $100,000. It was the most enticing piece in a con game designed to deprive ethical lawyers of their money. "It's funny," said Raul Loya, an attorney. "You would think that lawyers would be smarter, but it's funny they fall victim." All three attorneys lived in different cities and worked at separate firms, but they all got the same e-mail purporting to be from prospective clients in Hong Kong.

    12. 12 Elements of a Fraud A representation About a material point Which is false Intentionally or recklessly so Relied upon by the victim To the victim’s damage

    13. 13 Donald R. Cressey Born in 1919 in Fergus Falls, Minnesota, he obtained his bachelor's degree from Iowa State College in 1943 and earned his Ph.D. from Indiana University in 1950.[4] He taught sociology at the University of California, Santa Barbara.[4] Along with Edwin Sutherland, he co-authored Principles of Criminology, for 30 years the standard text in criminology.[4][1][2] He also wrote Other People's Money, a study of embezzlement, and co-authored the popular textbook Social Problems.[2] After his retirement, he was president of the Institute for Financial Crime Prevention, a foundation for the research of white-collar crime.[4] He served as a consultant on organized crime for the President's Commission on Law Enforcement and Administration of Justice in 1966 and 1967.[4] Based on research conducted in this capacity he wrote the acclaimed Theft of the Nation, a treatise on the Cosa Nostra, and later the smaller Criminal Organization, in which he extended his conceptualization of organized crime to include criminal groups other than the Cosa Nostra. Cressey is credited with the theory of the "fraud triangle," three elements that must be present for occupational fraud.[5]. Cressey was one of the “nations leading experts on the sociology of crime”. He authored a few books including Other People’s Money, Theft of the Nation, and co-authored Principles of Criminology with Edwin H. Sutherland. Cressey is honored by many anti-fraud organizations, including the Association of Certified Fraud Examiners. Born in 1919 in Fergus Falls, Minnesota, he obtained his bachelor's degree from Iowa State College in 1943 and earned his Ph.D. from Indiana University in 1950.[4] He taught sociology at the University of California, Santa Barbara.[4] Along with Edwin Sutherland, he co-authored Principles of Criminology, for 30 years the standard text in criminology.[4][1][2] He also wrote Other People's Money, a study of embezzlement, and co-authored the popular textbook Social Problems.[2] After his retirement, he was president of the Institute for Financial Crime Prevention, a foundation for the research of white-collar crime.[4] He served as a consultant on organized crime for the President's Commission on Law Enforcement and Administration of Justice in 1966 and 1967.[4] Based on research conducted in this capacity he wrote the acclaimed Theft of the Nation, a treatise on the Cosa Nostra, and later the smaller Criminal Organization, in which he extended his conceptualization of organized crime to include criminal groups other than the Cosa Nostra. Cressey is credited with the theory of the "fraud triangle," three elements that must be present for occupational fraud.[5]. Cressey was one of the “nations leading experts on the sociology of crime”. He authored a few books including Other People’s Money, Theft of the Nation, and co-authored Principles of Criminology with Edwin H. Sutherland. Cressey is honored by many anti-fraud organizations, including the Association of Certified Fraud Examiners.

    14. 14 Why Do People Steal? http://en.wikipedia.org/wiki/Donald_R._Cressey Donald R. Cressey (April 27, 1919 – July 21, 1987) was an American penologist, sociologist, and criminologist who made innovative contributions to the study of organized crime, prisons, criminology, the sociology of criminal law, white-collar crime. Cressey is credited with the theory of the "fraud triangle," three elements that must be present for occupational fraud. The Cressey Award is bestowed annually by the Association of Certified Fraud Examiners on one of its members for lifetime achievement in the detection and deterrence of fraud.http://en.wikipedia.org/wiki/Donald_R._Cressey Donald R. Cressey (April 27, 1919 – July 21, 1987) was an American penologist, sociologist, and criminologist who made innovative contributions to the study of organized crime, prisons, criminology, the sociology of criminal law, white-collar crime. Cressey is credited with the theory of the "fraud triangle," three elements that must be present for occupational fraud. The Cressey Award is bestowed annually by the Association of Certified Fraud Examiners on one of its members for lifetime achievement in the detection and deterrence of fraud.

    15. 15 Why Do People Steal? http://www.nysscpa.org/cpajournal/2004/1204/essentials/p38.htm The fraud triangle could be enhanced to improve both fraud prevention and detection by considering a fourth element. In addition to addressing incentive, opportunity, and rationalization, the four-sided “fraud diamond” also considers an individual’s capability: personal traits and abilities that play a major role in whether fraud may actually occur even with the presence of the other three elements. Many frauds, especially some of the multibillion-dollar ones, would not have occurred without the right person with the right capabilities in place. Opportunity opens the doorway to fraud, and incentive and rationalization can draw the person toward it. But the person must have the capability to recognize the open doorway as an opportunity and to take advantage of it by walking through, not just once, but time and time again. Accordingly, the critical question is, “Who could turn an opportunity for fraud into reality?” Using the four-element fraud diamond, a fraudster’s thought process might proceed as follows (Exhibit 1): Incentive: I want to, or have a need to, commit fraud. Opportunity: There is a weakness in the system that the right person could exploit. Fraud is possible. Rationalization: I have convinced myself that this fraudulent behavior is worth the risks. Capability: I have the necessary traits and abilities to be the right person to pull it off. I have recognized this particular fraud opportunity and can turn it into reality http://www.nysscpa.org/cpajournal/2004/1204/essentials/p38.htm The fraud triangle could be enhanced to improve both fraud prevention and detection by considering a fourth element. In addition to addressing incentive, opportunity, and rationalization, the four-sided “fraud diamond” also considers an individual’s capability: personal traits and abilities that play a major role in whether fraud may actually occur even with the presence of the other three elements. Many frauds, especially some of the multibillion-dollar ones, would not have occurred without the right person with the right capabilities in place. Opportunity opens the doorway to fraud, and incentive and rationalization can draw the person toward it. But the person must have the capability to recognize the open doorway as an opportunity and to take advantage of it by walking through, not just once, but time and time again. Accordingly, the critical question is, “Who could turn an opportunity for fraud into reality?” Using the four-element fraud diamond, a fraudster’s thought process might proceed as follows (Exhibit 1): Incentive: I want to, or have a need to, commit fraud. Opportunity: There is a weakness in the system that the right person could exploit. Fraud is possible. Rationalization: I have convinced myself that this fraudulent behavior is worth the risks. Capability: I have the necessary traits and abilities to be the right person to pull it off. I have recognized this particular fraud opportunity and can turn it into reality

    16. 16 Fraud Trivia #1.5

    17. 17 KOSS HEADPHONES FRAUD 22 Mar 2010 / Posted in: Fraud Koss Fraud May Have Been Due, in No Small Part, to Michael Koss Holding Five Executive Positions How an embezzler stole millions from a small company By Curtis C. Verschoor, CMA January 26, 2011 - New details have emerged on the methods used and the outcomes following the case of 47-year-old convicted embezzler Sujata "Sue" Sachdeva, who was the trusted 15-year veteran vice president of finance, secretary, and principal accounting officer of Koss Corporation. During a span of more than five years, she stole nearly half the company's pretax earnings. The scheme was uncovered when American Express noticed her credit card balances were being paid through large wire transfers originating from a company bank account. Koss is the Milwaukee-based, mostly privately held small company that's a prominent global designer and marketer of stereophonic headphones. Sachdeva's criminal case concluded after she pleaded guilty to embezzling $34 million from her employer, an increase of $2.5 million over earlier estimates. The six felony fraud counts carried a maximum penalty of 120 years in jail, but 15 to 20 years is appropriate under federal sentencing guidelines. Because she cooperated with authorities from the very beginning of their investigation, the judge limited her sentence on November 17, 2010, to 11 years in federal prison, plus restitution to Koss of $34 million. Her physician husband filed for divorce after the sentencing hearing. Federal officials have seized most of her assets, including a 2007 Mercedes-Benz, timeshares, jewelry, shoes, furs, and other luxury items – some that were never worn because they were put into storage for lack of space. Sachdeva's attorney claims she has a bipolar disease of compulsive shopping disorder and is an alcoholic. Countering the defendant's plea for a lenient sentence because of mental illness, Koss CEO Michael Koss asked the judge to sentence Sachdeva to the maximum 15 to 20 years, writing that she "stole from the hardworking employees of the company and their families, and ultimately the stockholders of the company." In a presentencing letter, he stated, "The full extent of the damage to the reputation of the company and its employees caused by Ms. Sachdeva's criminal acts cannot be expressed in words." He added that the damage will continue to tarnish Koss and subject it to ridicule long after her sentence ends. In addition to Sachdeva, the U.S. Securities and Exchange Commission (SEC) has charged Julie Mulvaney, former Koss senior accountant, with assisting Sachdeva to conceal the theft on Koss's financial statements by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. The SEC accuses both of them in a civil case of maintaining fraudulent records so that Koss filed materially false current, quarterly, and annual reports with the SEC over a period of years. The theft was accomplished through a variety of means, including fraudulent cashier's checks, fraudulent wire transfers, and unauthorized payments from petty cash. A third person, Tracy Malone, a Koss accountant who was fired because she knew about the theft but said nothing, hasn't been charged. Methods of misappropriating cash The SEC's August 30, 2010, complaint provides details of the means used by Mulvaney and Sachdeva to get cash by circumventing the internal controls of the corporation. Sachdeva admitted stealing $15 million by authorizing issuance of more than 500 cashier's checks to pay her personal expenses. Cashier's checks were issued directly to retailers, such as Nieman Marcus and Saks Fifth Avenue, and other vendors. Sometimes acronyms were used, like N-M and S.F.A. In addition to using cashier's checks, Sachdeva fraudulently authorized and directed numerous wire transfers, including wiring company funds to American Express to pay for personal purchases on her credit card. From 2008 through December 2009, Sachdeva fraudulently authorized more than 200 bank wire transfers totaling more than $16 million to American Express. Other methods of fraudulently misappropriating cash for personal use described in the SEC complaint include misuse of petty cash. Sachdeva issued checks payable to "petty cash," had Koss employees then negotiate and return the money to her, which she then used to pay personal expenses. Sachdeva also converted unused traveler's checks that the company had purchased for use by its employees travelling on company-related business and fraudulently used them for herself. It appears that Mulvaney didn't receive any of the benefits of the massive embezzlements, and she hasn't been charged with theft. But she did materially participate in the cover-up of the fraud and was therefore charged with civil fraud. According to the SEC complaint, the pair were able to hide the huge amounts of missing cash by means of top-side general journal entries. Mulvaney maintained a "red book" containing numerous false journal entries to the company's accounting books and records. She wrote the false journal entries in the red book and then entered them in the company's accounting books and records. By means of those entries, Mulvaney purported to adjust or reclassify the amount of company cash without supporting documentation or any legitimate explanation. The complaint notes that Mulvaney also prepared falsified accounting books and records and maintained them in a series of colored folders, called the "rainbow files." The rainbow files consisted of seven folders covering fiscal years 1995-2000 (green folder), 2004 (orange), 2005 (blue), 2005 (orange), 2006 (blue), 2007 (yellow), and 2008 (green). The rainbow files included more than 100 fraudulent transactions on the company's books and records. The rainbow files also reflected a scheme to conceal the receipt of funds by the company through a debit/credit wipe (DC Wipe). A DC Wipe made it appear that a certain transaction (e.g., a sale to a customer and the receipt of funds by the company) never took place. For example, in December 2007, Koss received funds totaling more than $100,000 from an overseas customer. Mulvaney falsified the books and records to make it appear that the company never received the funds. In an attempt to avoid detection, she reduced five separate sales accounts by different amounts that collectively totaled the exact amount – instead of reducing a single sales account by the whole amount. The fraudulent accounting cover-up also involved the company's sales over the Internet and at its retail outlet. From fiscal year 2006 through the time the fraud was discovered during the second quarter of fiscal year 2010 (December 2009), Sachdeva and Mulvaney didn't record in Koss's books any sales made over the Internet or at the company's retail outlet, totaling $1.8 million. Unanswered questions Although Sachedeva's fate seems settled, at least for several years, no punishment for Mulvaney has been revealed yet. In a November 17, 2010, Milwaukee Business Journal article titled "Sachdeva throws Mulvaney under the train," additional details emerged from the sentencing hearing that show Mulvaney's enabling role in the fraud. Apparently, each year Sachdeva would review the company's cash position a few weeks prior to a scheduled visit from Koss's outside auditors, Grant Thornton. She would presume the difference between the cash in the company's bank accounts and the related ledger accounts was because of her theft of company funds. In a panic, Sachdeva would then call Mulvaney into her office and show her the numbers. Mulvaney would respond by saying, "Let me look at everything and get back to you, and don't worry," and then apparently make the journal entries that no one questioned. There are other unanswered questions, such as how it was possible that Grant Thornton didn't discover such a massive defalcation. Answers may be forthcoming in the lawsuit Koss has filed against the firm in Cook County, Illinois. The complaint alleges that "Grant Thornton, the company's auditor, failed to properly perform audits of the company's financial statements and failed to properly assess the company's internal controls, thus allowing the embezzlement to continue and the damage to the company to escalate." Surprisingly, the lawsuit claims specifically that "Grant Thornton repeatedly assured Koss's management and its board that the company's internal controls were effective and that Koss could rely on those same internal controls and Grant Thornton's work." Koss's attorney, Michael J. Avenatti, said, "Grant Thornton was paid hundreds of thousands of dollars to properly audit the company's financial statements, and they failed miserably. This failure included repeatedly assuring the company and its board that the company's internal controls were effective. A company should be able to rely on its auditors." For its part, the firm has stated it was not engaged to provide a separate opinion on internal controls. Sarbanes-Oxley Section 404(b) doesn't apply to Koss because it is too small. 22 Mar 2010 / Posted in:Fraud Koss Fraud May Have Been Due, in No Small Part, to Michael Koss Holding Five Executive Positions How an embezzler stole millions from a small company By Curtis C. Verschoor, CMAJanuary 26, 2011 - New details have emerged on the methods used and the outcomes following the case of 47-year-old convicted embezzler Sujata "Sue" Sachdeva, who was the trusted 15-year veteran vice president of finance, secretary, and principal accounting officer of Koss Corporation.

    18. 18 Fighting Fraud What Have We Done in Accounting? Treadway Commission ’87 COSO ’87 SAS 53 ’88 Certified Fraud Examiner ’88 SAS 82 ’96 Sarbanes Oxley ’02 SAS 99 ’02 Enterprise Risk Management

    19. 19 Fighting Fraud What Have We Done in Legal? Sarbanes Certifications Anonymous Hotlines Whistleblower Investigations DOJ Investigations SEC Investigations

    20. 20 Fraud Trivia #2 ANSWER: C. Texas Hold’m A. Vishing is the criminal practice of using social engineering and Voice over IP (VoIP) to gain access to private personal and financial information from the public for the purpose of financial reward. The term is a combination of "voice" and phishing. Vishing exploits the public's trust in landline telephone services, which have traditionally terminated in physical locations which are known to the telephone company, and associated with a bill-payer. The victim is often unaware that VoIP allows for caller ID spoofing, inexpensive, complex automated systems and anonymity for the bill-payer. Vishing is typically used to steal credit card numbers or other information used in identity theft schemes from individuals. B. A Romance scam occurs when strangers pretend romantic intentions, gain the affection of victims, and then use that goodwill to gain access to their victims' money, bank accounts, e-mail accounts, and/or ID numbers by getting the victims to commit financial fraud on their behalf. Many of these scams originate from Nigeria, Kosovo, Russia, the Ivory Coast and Ghana. D. Work @ home scams often use email or signs posted around town to advertise and promise huge money. They will say that you can do these easy tasks at home (i.e., craft assembly, medical billing, etc), but ask for shipping or processing fee upfront. Others might be set up as multi-level marketing schemes. Remember: if it’s too good to be true, it probably is. ANSWER: C. Texas Hold’m A. Vishing is the criminal practice of using social engineering and Voice over IP (VoIP) to gain access to private personal and financial information from the public for the purpose of financial reward. The term is a combination of "voice" and phishing. Vishing exploits the public's trust in landline telephone services, which have traditionally terminated in physical locations which are known to the telephone company, and associated with a bill-payer. The victim is often unaware that VoIP allows for caller ID spoofing, inexpensive, complex automated systems and anonymity for the bill-payer. Vishing is typically used to steal credit card numbers or other information used in identity theft schemes from individuals. B. A Romance scam occurs when strangers pretend romantic intentions, gain the affection of victims, and then use that goodwill to gain access to their victims' money, bank accounts, e-mail accounts, and/or ID numbers by getting the victims to commit financial fraud on their behalf. Many of these scams originate from Nigeria, Kosovo, Russia, the Ivory Coast and Ghana. D. Work @ home scams often use email or signs posted around town to advertise and promise huge money. They will say that you can do these easy tasks at home (i.e., craft assembly, medical billing, etc), but ask for shipping or processing fee upfront. Others might be set up as multi-level marketing schemes. Remember: if it’s too good to be true, it probably is.

    21. 21 Internal Control Weakness

    22. 22 Organization Type of Victims

    23. 23 Based on Size of Victim Organization Size of Victim Organization — Median Loss

    24. 24 Industry of Victim Organizations Industry This analysis does not necessarily indicate which industries are more or less likely to be victimized by fraud; it is more a representation of the companies that hired Certified Fraud Examiners over the last two years to investigate an internal fraud case. However, the findings in the tables highlight some interesting differences among the types and severity of fraud cases experienced by companies in different industries. For example, of the 905 cases in which information about the victim’s industry was provided, the greatest percentage (15%) occurred in the banking and financial services sector. On the opposite end of the spectrum, the agriculture, forestry, fishing, and hunting industry was cited in only 1.4% of cases, but experienced the second greatest median loss at $450,000. The telecommunications industry endured the largest losses, with a median of $800,000 for the 16 cases reported from that sector. Industry This analysis does not necessarily indicate which industries are more or less likely to be victimized by fraud; it is more a representation of the companies that hired Certified Fraud Examiners over the last two years to investigate an internal fraud case. However, the findings in the tables highlight some interesting differences among the types and severity of fraud cases experienced by companies in different industries. For example, of the 905 cases in which information about the victim’s industry was provided, the greatest percentage (15%) occurred in the banking and financial services sector. On the opposite end of the spectrum, the agriculture, forestry, fishing, and hunting industry was cited in only 1.4% of cases, but experienced the second greatest median loss at $450,000. The telecommunications industry endured the largest losses, with a median of $800,000 for the 16 cases reported from that sector.

    25. 25 Industry of Victim Organizations

    26. 26 Initial Detection of Occupational Fraud 2008 Data for all Cases Tip 46.2% By Accident 20.0% Internal Audit 19.4% Internal Controls 23.3% External Audit 9.1% Notified by Police 3.2%2008 Data for all Cases Tip 46.2% By Accident 20.0% Internal Audit 19.4% Internal Controls 23.3% External Audit 9.1% Notified by Police 3.2%

    27. 27 Tenure of Perpetrator - Frequency

    28. 28 Tenure of Perpetrator - Median Loss 2008 Data Tenure Median Loss <1 yr $ 50,000 1-5 yrs $142,000 5-10 yrs $261,000 10 + yrs $250,000 2008 Data Tenure Median Loss <1 yr $ 50,000 1-5 yrs $142,000 5-10 yrs $261,000 10 + yrs $250,000

    29. 29 Fraud Trivia #3 Answer: B “Catch me if You Can” (Leonardo DeCaprio and Tom Hanks) New Rochelle, the 1960s. High schooler Frank Abagnale Jr. idolizes his father, who's in trouble with the IRS. When his parents separate, Frank runs away to Manhattan with $25 in his checking account, vowing to regain dad's losses and get his parents back together. Just a few years later, the FBI tracks him down in France; he's extradited, tried, and jailed for passing more than $4,000,000 in bad checks. Along the way, he's posed as a Pan Am pilot, a pediatrician, and an attorney. And, from nearly the beginning of this life of crime, he's been pursued by a dour FBI agent, Carl Hanratty. What starts as cat and mouse becomes something akin to father and son. Answer: B “Catch me if You Can” (Leonardo DeCaprio and Tom Hanks) New Rochelle, the 1960s. High schooler Frank Abagnale Jr. idolizes his father, who's in trouble with the IRS. When his parents separate, Frank runs away to Manhattan with $25 in his checking account, vowing to regain dad's losses and get his parents back together. Just a few years later, the FBI tracks him down in France; he's extradited, tried, and jailed for passing more than $4,000,000 in bad checks. Along the way, he's posed as a Pan Am pilot, a pediatrician, and an attorney. And, from nearly the beginning of this life of crime, he's been pursued by a dour FBI agent, Carl Hanratty. What starts as cat and mouse becomes something akin to father and son.

    30. 30 Age of Perpetrator – Median Loss Age of Perpetrator — Median Loss 2008 Data Age Median Loss <26 $ 25,000 26-30 $ 50,000 31-35 $113,000 36-40 $145,000 41-50 $250,000 51-60 $500,000 >60 $435,000 2008 Data Age Median Loss <26 $ 25,000 26-30 $ 50,000 31-35 $113,000 36-40 $145,000 41-50 $250,000 51-60 $500,000 >60 $435,000

    31. 31 Age of Perpetrator - Frequency Age of Perpetrator — Frequency

    32. 32 Education of Perpetrator Education of Perpetrator — Median Loss

    33. 33 On January 11, 2009 Marcus Schrenker, head of Heritage Wealth Management Inc, crashed his plane and parachuted to safety in an elaborate scheme to fake his death and flee financial ruin. He was later charged with 11 felony counts of fraudulent sale of securities. He was sentenced Wednesday, Aug. 19, 2009 to more than four years in federal prison. http://www.nytimes.com/aponline/2009/08/19/us/AP-US-Plane-Crash-Mystery.html?scp=2&sq=Marcus%20Schrenker&st=cse On January 11, 2009 Marcus Schrenker, head of Heritage Wealth Management Inc, crashed his plane and parachuted to safety in an elaborate scheme to fake his death and flee financial ruin. He was later charged with 11 felony counts of fraudulent sale of securities. He was sentenced Wednesday, Aug. 19, 2009 to more than four years in federal prison. http://www.nytimes.com/aponline/2009/08/19/us/AP-US-Plane-Crash-Mystery.html?scp=2&sq=Marcus%20Schrenker&st=cse

    34. 34 Position of Perpetrator – Median Loss Position of Perpetrator — Median Loss

    35. 35 Position of Perpetrator - Frequency Position of Perpetrator — Frequency

    36. 36 Gender of Perpetrator

    37. 37 Gender of Perpetrator

    38. 38 Number of Perpetrators

    39. 39 Perpetrators’ Criminal Histories Perpetrator’s Criminal Background

    40. 40 Perpetrators’ Criminal Histories Perpetrator’s Employment Background

    41. 41 Answer: D: More than $900 billion (median 7% of losses applied to GDP =$994 billion in losses) 2006: More than $600 billion ($630 billion per year in losses, which is equal to about 5% of GDP). Additionally, approximately half of all companies are affected. Answer: D: More than $900 billion (median 7% of losses applied to GDP =$994 billion in losses) 2006: More than $600 billion ($630 billion per year in losses, which is equal to about 5% of GDP). Additionally, approximately half of all companies are affected.

    42. 42 Distribution of Dollar Losses Distribution of Losses

    43. 43 Misappropriation of Assets Cash fraud schemes Skimming Larceny Fraudulent disbursements Accounts receivable schemes Improper posting of credits Discount Return Write-off Inventory and other asset schemes Appropriating inventory and supplies for personal use Stealing inventory Theft of scrap proceeds

    44. 44 Corruption Bribery Illegal gratuities Economic extortion Conflicts of interest

    45. 45 Financial Statement Fraud Fictitious revenues Involves the sale or goods or services which never occurred Timing differences Improper matching of revenues Early revenue recognition Recording expenses in the wrong period Concealed liabilities and expenses Liability/expense omissions Returns and allowances and warranties Improper disclosure Liability omissions Significant events Management fraud Accounting changes Improper asset valuation Inventory Fixed Assets

    46. 46 Healthsouth, Inc. Trick Entry One A/R Revenue Entry Two Fixed Assets Cash Entry Three Cash A/R

    47. 47 Healthsouth, Inc. Trick Entry One A/R Revenue Entry Two Fixed Assets Cash Entry Three Cash A/R

    48. 48 Corruption Cases by Industry Certain industries, such as construction or government and public administration, are often thought to be associated with or susceptible to corruption. Yet surprisingly, of the 21 industry categories in our survey, organizations in the government and public administration sector ranked 11th in terms of the percent of cases involving corruption, and organizations in the construction industry ranked last with only 12%. The oil and gas industry had the greatest percentage of corruption cases at 47%, and one-third of the 132 banking sector cases also involved corruption. Certain industries, such as construction or government and public administration, are often thought to be associated with or susceptible to corruption. Yet surprisingly, of the 21 industry categories in our survey, organizations in the government and public administration sector ranked 11th in terms of the percent of cases involving corruption, and organizations in the construction industry ranked last with only 12%. The oil and gas industry had the greatest percentage of corruption cases at 47%, and one-third of the 132 banking sector cases also involved corruption.

    49. 49 Answer: B "But Spitzer had the money broken down into several smaller amounts of under $10,000 each, apparently to avoid getting around federal regulations requiring the reporting of the transfer of $10,000 or more, the sources said. The regulations are aimed at helping spot possible illegal business activities, such as frauds or drug deals. Apparently, having second thoughts about even sending the total amount in this manner because it still might reveal what he was doing, Spitzer then asked that the bank to take his name off the wires, the sources said. Bank officials declined, however, saying that it was improper to do so and in any event, it was too late to do so, because the money already had been sent, the sources said. The bank then, as is required by law, filed an SAR, or Suspicious Activity Report, with the Internal Revenue Service, reporting the transfer of the money that exceeded $10,000, but had been broken down into smaller amounts, the sources said." Answer: B "But Spitzer had the money broken down into several smaller amounts of under $10,000 each, apparently to avoid getting around federal regulations requiring the reporting of the transfer of $10,000 or more, the sources said. The regulations are aimed at helping spot possible illegal business activities, such as frauds or drug deals. Apparently, having second thoughts about even sending the total amount in this manner because it still might reveal what he was doing, Spitzer then asked that the bank to take his name off the wires, the sources said. Bank officials declined, however, saying that it was improper to do so and in any event, it was too late to do so, because the money already had been sent, the sources said. The bank then, as is required by law, filed an SAR, or Suspicious Activity Report, with the Internal Revenue Service, reporting the transfer of the money that exceeded $10,000, but had been broken down into smaller amounts, the sources said."

    50. Behavioral Red Flags Unusually close association with vendor/customer – 15.2% of cases, but highest in median loss ($410,000) Wheeler-dealer Attitude – 20%, $405,000 Excessive pressure from within organization – 6.5%, $388,000 Living beyond means – 38.6%, $250,000 Control issues, unwillingness to share duties – 18.7%, $250,000 Refusal to take vacation – 6.8%, 250,000 Addiction problems – 13.3%, $225,000 Unusually close association with vendor/customer – 15.2% of cases, but highest in median loss ($410,000) Wheeler-dealer Attitude – 20%, $405,000 Excessive pressure from within organization – 6.5%, $388,000 Living beyond means – 38.6%, $250,000 Control issues, unwillingness to share duties – 18.7%, $250,000 Refusal to take vacation – 6.8%, 250,000 Addiction problems – 13.3%, $225,000

    51. 51 Tone at the Top: Emphasis on “doing the right thing” should be done by management and board of directors. Teach by example. If fraud occurs, punish appropriately and learn from mistakes. Have management participate in regular risk assessments of the company. It’s tough to prevent fraud if you don’t have an idea of where your vulnerabilities lie. Code of Conduct: Consider requiring annual re-certifications by employees. Factors to incorporate: different cultural norms; substance abuse; conflicts of interest; outside employment; professional and trade associations; protecting assets; gifts; outside directorships; use of corporate resources; insider trading; bribery and improper payments; compliance and discipline. Background Checks: Should be done after an offer is accepted, but before the employment begins. Can verify: criminal history, employment history, education, social security, credit history, drug testing. Compensation: Don’t want to place excessive weight on earnings targets, etc. This might entice management to behave aggressively in an effort to reach unrealistic goals. Pay people to DO THE RIGHT THING! Internal Controls: basics include things like segregation of duties; management oversight; IT access controls; vacation policies; formal/written policy and procedure manuals; require support and documentation for journal entries, invoices, etc; Consequences: Punish appropriately. Don’t sweep fraud under the rug, otherwise employees might feel that it’s ok. Learn from mistakes. Tone at the Top: Emphasis on “doing the right thing” should be done by management and board of directors. Teach by example. If fraud occurs, punish appropriately and learn from mistakes. Have management participate in regular risk assessments of the company. It’s tough to prevent fraud if you don’t have an idea of where your vulnerabilities lie. Code of Conduct: Consider requiring annual re-certifications by employees. Factors to incorporate: different cultural norms; substance abuse; conflicts of interest; outside employment; professional and trade associations; protecting assets; gifts; outside directorships; use of corporate resources; insider trading; bribery and improper payments; compliance and discipline. Background Checks: Should be done after an offer is accepted, but before the employment begins. Can verify: criminal history, employment history, education, social security, credit history, drug testing. Compensation: Don’t want to place excessive weight on earnings targets, etc. This might entice management to behave aggressively in an effort to reach unrealistic goals. Pay people to DO THE RIGHT THING! Internal Controls: basics include things like segregation of duties; management oversight; IT access controls; vacation policies; formal/written policy and procedure manuals; require support and documentation for journal entries, invoices, etc; Consequences: Punish appropriately. Don’t sweep fraud under the rug, otherwise employees might feel that it’s ok. Learn from mistakes.

    52. 52

    53. 53 Internal Audit – audits are not typically conducted for the sole purpose of uncovering fraud; however, internal auditors should be aware of the possibilities. Separate department – for example, most banks have a Fraud department. Because IA is such a broad area, many organizations might have a specific group within IA that deals specifically with fraud/compliance. As another example, Microsoft has a “Financial Integrity Unit” that is involved in education, investigation, etc. Software – ie, Yellowhammer, IDEA. Programs can be used for data mining. Can also build “red flags” into systems that will look for unusual patterns, duplicate payments, etc. Monitoring – as part of internal controls, managers should review work. Remember the auditor’s motto: professional skepticism. Whistleblower Policy – there needs to be a formal means by which employees can report suspected violations. Remember that retaliation cannot be tolerated. Many companies outsource this function to a 3rd party. Whatever route is chosen, be sure the policy is well-communicated. External audit – despite the advances in fraud programs, etc., most companies still rely on external auditors to discover fraud. Like IA, external audits are not conducted for the sole purpose of discovering fraud. However, maintaining an appropriate relationship with the external auditors enhances communication. Culture is important. If employees do not feel comfortable going to supervisors, they might not ever speak up. Internal Audit – audits are not typically conducted for the sole purpose of uncovering fraud; however, internal auditors should be aware of the possibilities. Separate department – for example, most banks have a Fraud department. Because IA is such a broad area, many organizations might have a specific group within IA that deals specifically with fraud/compliance. As another example, Microsoft has a “Financial Integrity Unit” that is involved in education, investigation, etc. Software – ie, Yellowhammer, IDEA. Programs can be used for data mining. Can also build “red flags” into systems that will look for unusual patterns, duplicate payments, etc. Monitoring – as part of internal controls, managers should review work. Remember the auditor’s motto: professional skepticism. Whistleblower Policy – there needs to be a formal means by which employees can report suspected violations. Remember that retaliation cannot be tolerated. Many companies outsource this function to a 3rd party. Whatever route is chosen, be sure the policy is well-communicated. External audit – despite the advances in fraud programs, etc., most companies still rely on external auditors to discover fraud. Like IA, external audits are not conducted for the sole purpose of discovering fraud. However, maintaining an appropriate relationship with the external auditors enhances communication. Culture is important. If employees do not feel comfortable going to supervisors, they might not ever speak up.

    54. 54 http://www.sec.gov/investor/pubs/oilgasscams.htm If you think you’ve found the right oil or gas investment to “strike it rich,” consider this:  it may be a scam.  While some oil and gas investment opportunities are legitimate, many oil and gas ventures are frauds.  Many of these schemes start in so-called “boiler rooms,” where skilled telemarketers use high pressure sales tactics to convince you to hand over your hard-earned money.  Once they have your money, scam artists pay themselves first, often using funds to pay personal expenses.  In the end, only some of your money may be invested in an actual oil or natural gas well, or none at all.   Red Flag Warnings If you are considering an oil and gas investment, look for these “red flag” warnings of fraud: Sales Pitches Focused on Highly Publicized News.  Scam artists read the headlines, too.  Often, they’ll use a highly publicized news item, like volatile gas prices, to lure potential investors and make their “opportunity” sound more legitimate.  “Can’t Miss” Wells.  Every investment carries some degree of risk so you should be skeptical of any oil and gas investment opportunity pitched as completely safe.  Fraudsters often spend a lot of time trying to convince you that extremely high returns are "guaranteed" or "can't miss." Don't believe it.  Unsolicited Materials.  Be especially careful if you receive unsolicited materials about an investment.  Simply ignoring investment-related “junk” faxes, emails, voice mail messages, and regular mail may be your best strategy.  And don’t let a package full of colorful marketing materials impress you, even if it’s sent by certified or overnight mail.  If you’re not going to research an opportunity fully, do yourself a favor and put any unsolicited materials in the recycle bin immediately.  If someone calls to follow up regarding the materials, tell him or her “thanks, but no thanks” and hang up.  [Hanging up is critical because scam artists often use scripted sale pitches to keep you on the phone.]  Limited Opportunities.  Scam artists often try to give you the impression that the “ opportunity” they are promoting is scarce, hoping you will hand over your money hastily before doing any due diligence.  Resist the pressure to invest quickly, and take the time you need to investigate before sending money.   High Rates of Return.  Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you'll get substantially more could be highly risky. And that means you might lose money. Tips or Secrets.  A promoter may discourage you from talking about the opportunity with someone you trust, like a loved one, attorney or financial professional.  If that happens, stop listening, and leave or hang up.  Then, be sure to contact us.  http://www.sec.gov/investor/pubs/oilgasscams.htm If you think you’ve found the right oil or gas investment to “strike it rich,” consider this:  it may be a scam.  While some oil and gas investment opportunities are legitimate, many oil and gas ventures are frauds.  Many of these schemes start in so-called “boiler rooms,” where skilled telemarketers use high pressure sales tactics to convince you to hand over your hard-earned money.  Once they have your money, scam artists pay themselves first, often using funds to pay personal expenses.  In the end, only some of your money may be invested in an actual oil or natural gas well, or none at all.   Red Flag Warnings If you are considering an oil and gas investment, look for these “red flag” warnings of fraud: Sales Pitches Focused on Highly Publicized News.  Scam artists read the headlines, too.  Often, they’ll use a highly publicized news item, like volatile gas prices, to lure potential investors and make their “opportunity” sound more legitimate.  “Can’t Miss” Wells.  Every investment carries some degree of risk so you should be skeptical of any oil and gas investment opportunity pitched as completely safe.  Fraudsters often spend a lot of time trying to convince you that extremely high returns are "guaranteed" or "can't miss." Don't believe it.  Unsolicited Materials.  Be especially careful if you receive unsolicited materials about an investment.  Simply ignoring investment-related “junk” faxes, emails, voice mail messages, and regular mail may be your best strategy.  And don’t let a package full of colorful marketing materials impress you, even if it’s sent by certified or overnight mail.  If you’re not going to research an opportunity fully, do yourself a favor and put any unsolicited materials in the recycle bin immediately.  If someone calls to follow up regarding the materials, tell him or her “thanks, but no thanks” and hang up.  [Hanging up is critical because scam artists often use scripted sale pitches to keep you on the phone.]  Limited Opportunities.  Scam artists often try to give you the impression that the “ opportunity” they are promoting is scarce, hoping you will hand over your money hastily before doing any due diligence.  Resist the pressure to invest quickly, and take the time you need to investigate before sending money.   High Rates of Return.  Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you'll get substantially more could be highly risky. And that means you might lose money. Tips or Secrets.  A promoter may discourage you from talking about the opportunity with someone you trust, like a loved one, attorney or financial professional.  If that happens, stop listening, and leave or hang up.  Then, be sure to contact us. 

    55. 55 http://www.sec.gov/investor/pubs/oilgasscams.htm Steps You Can Take to Protect Yourself Here are some steps you can take to avoid being scammed:  Ask questions and check out the answers. Fraudsters rely on the sad truth that many people simply don't bother to investigate before they invest. It's not enough to ask a promoter for more information or for references - fraudsters have no incentive to set you straight. Savvy investors take the time to do their own independent research. Contact state oil and gas regulatory agencies.  You may be able to verify information provided in offering materials by contacting the oil and gas regulatory agency in which the wells are allegedly being drilled.  For example, these agencies generally have information about a company’s drilling history that could confirm claims of prior success.  Research the company before you invest. You can contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing.  You also will want to understand the company's business and its products or services before investing.  Before buying any stock, check out the company's financial statements on the SEC's website, or contact your state securities regulator. All but the smallest public companies have to file financial statements with us. If the company doesn't file with us, you'll have to do a great deal of work on your own to make sure the company is legitimate and the investment appropriate for you. That's because the lack of reliable, readily available information about company finances can open the door to fraud.  Remember that unsolicited materials should never be used as the sole basis for an investment decision. Know the salesperson. Spend some time checking out the person touting the investment before you invest - even if you already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities in your state and whether they or their firms have had run-ins with regulators or other investors. You can check out the disciplinary history of brokers and advisers quickly - and for free - using the SEC's and FINRA's online databases. Your state securities regulator may have additional information. http://www.sec.gov/investor/pubs/oilgasscams.htm Steps You Can Take to Protect Yourself Here are some steps you can take to avoid being scammed:  Ask questions and check out the answers. Fraudsters rely on the sad truth that many people simply don't bother to investigate before they invest. It's not enough to ask a promoter for more information or for references - fraudsters have no incentive to set you straight. Savvy investors take the time to do their own independent research. Contact state oil and gas regulatory agencies.  You may be able to verify information provided in offering materials by contacting the oil and gas regulatory agency in which the wells are allegedly being drilled.  For example, these agencies generally have information about a company’s drilling history that could confirm claims of prior success.  Research the company before you invest. You can contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing.  You also will want to understand the company's business and its products or services before investing.  Before buying any stock, check out the company's financial statements on the SEC's website, or contact your state securities regulator. All but the smallest public companies have to file financial statements with us. If the company doesn't file with us, you'll have to do a great deal of work on your own to make sure the company is legitimate and the investment appropriate for you. That's because the lack of reliable, readily available information about company finances can open the door to fraud.  Remember that unsolicited materials should never be used as the sole basis for an investment decision. Know the salesperson. Spend some time checking out the person touting the investment before you invest - even if you already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities in your state and whether they or their firms have had run-ins with regulators or other investors. You can check out the disciplinary history of brokers and advisers quickly - and for free - using the SEC's and FINRA's online databases. Your state securities regulator may have additional information.

    56. 56 Financial Statement Fraud Compilation Client Inflating Accounts Receivable $123,000 WP Accounting Services Identified

    57. 57 Neurologist’s Office – Identity Theft Business Manager 25 years Refinance of Home Loan Credit Report HIPPA Audit $176,000

    58. 58 Fort Worth ISD Case Construction Fraud Collusion Construction Superintendent (Tommy Ingram - 54) Concrete Vendor (Ray Brooks - 57) $7.6 Million Fraudulent Charges 14 Month Investigation FBI and DA’s Office Project Team Construction Auditor Engineer CPA’s Jail Term – 8 years for both Defendants http://www.justice.gov/tax/usaopress/2004/txdv04fwisd_ingram_brooks_info_pr.html http://www.justice.gov/tax/usaopress/2004/txdv04fwisd_ingram_brooks_info_pr.html

    59. 59 Notes: Schemes Based on Perpetrator’s Department We broke down the distribution of fraud schemes based on the perpetrator’s department to see how methods of fraud varied depending on where the perpetrator worked within an organization. We limited our inquiry to the six highest frequency departments: accounting, operations, sales, executive/upper management, customer service and purchasing. As noted earlier, those six departments accounted for 80% of all cases. Accounting Department The most common schemes committed by fraudsters in the accounting department were check tampering and billing fraud, each of which occurred in over 30% of cases. When compared to the overall distribution, we see that accounting personnel are much more likely than other employees to commit check tampering and payroll fraud, but less likely to engage in corruption or steal non-cash assets. This distribution was similar to what we encountered in 2008. Notes: Schemes Based on Perpetrator’s Department We broke down the distribution of fraud schemes based on the perpetrator’s department to see how methods of fraud varied depending on where the perpetrator worked within an organization. We limited our inquiry to the six highest frequency departments: accounting, operations, sales, executive/upper management, customer service and purchasing. As noted earlier, those six departments accounted for 80% of all cases. Accounting Department The most common schemes committed by fraudsters in the accounting department were check tampering and billing fraud, each of which occurred in over 30% of cases. When compared to the overall distribution, we see that accounting personnel are much more likely than other employees to commit check tampering and payroll fraud, but less likely to engage in corruption or steal non-cash assets. This distribution was similar to what we encountered in 2008.

    60. 60 The most common frauds in the sales department were corruption (34% of cases) and theft of non-cash assets (24%). Fraudsters in the sales department were somewhat more likely than others to steal non-cash assets. Conversely, they were much less likely to engage in billing schemes, check tampering or payroll fraud. The most common frauds in the sales department were corruption (34% of cases) and theft of non-cash assets (24%). Fraudsters in the sales department were somewhat more likely than others to steal non-cash assets. Conversely, they were much less likely to engage in billing schemes, check tampering or payroll fraud.

    61. 61 When fraud occurred in the executive suite, nearly half of the cases involved corruption. Billing fraud (41%) and expense reimbursement schemes (30%) were also very common. All three of these schemes occurred with much more frequency among executives than other employees. Financial statement fraud schemes were also much more common among executives and upper management. When fraud occurred in the executive suite, nearly half of the cases involved corruption. Billing fraud (41%) and expense reimbursement schemes (30%) were also very common. All three of these schemes occurred with much more frequency among executives than other employees. Financial statement fraud schemes were also much more common among executives and upper management.

    62. 62 Corruption was the most common form of fraud among customer service employees (22% of cases), but compared to the distribution for all cases, we see that corruption was actually much less likely to occur in customer service than elsewhere. Conversely, skimming, theft of cash on hand and fraudulent register disbursements were more likely to occur in customer service than in other areas of the organization Corruption was the most common form of fraud among customer service employees (22% of cases), but compared to the distribution for all cases, we see that corruption was actually much less likely to occur in customer service than elsewhere. Conversely, skimming, theft of cash on hand and fraudulent register disbursements were more likely to occur in customer service than in other areas of the organization

    63. 63 The vast majority of frauds in the purchasing department involved corruption (72% of cases), and billing schemes also occurred at a very high rate (43%). Both of these schemes were more likely to occur in the purchasing department than in any other area of the organization, which is not surprising because the purchasing function often lends itself to bribery, overbilling and bid rigging schemes, which are among the most costly forms of occupational fraud. The vast majority of frauds in the purchasing department involved corruption (72% of cases), and billing schemes also occurred at a very high rate (43%). Both of these schemes were more likely to occur in the purchasing department than in any other area of the organization, which is not surprising because the purchasing function often lends itself to bribery, overbilling and bid rigging schemes, which are among the most costly forms of occupational fraud.

    64. 64

    65. 65

    66. 66 Whitley pENN, llp www.wpcpa.com Felix J. Lozano III, CPA, CFE P: 214.393.9340 F: 214.393.9341 C: 214.738.7128 Felix.lozano@wpcpa.com

    67. 67

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