Ebook Fraud examination (3rd edition): Part 2

(BQ) Part 2 book Fraud examination hass contents: Financial statement fraud; revenue and inventory related financial statement frauds; liability, asset, and inadequate disclosure frauds; fraud against organizations; consumer fraud; bankruptcy, divorce, and tax fraud; fraud in e commerce; legal follow up,...and other contents.

PART MANAGEMENT FRAUD CHAPTER 11 Financial Statement Fraud CHAPTER 12 Revenue- and Inventory-Related Financial Statement Frauds CHAPTER 13 Liability, Asset, and Inadequate Disclosure Frauds This page intentionally left blank CHAPTER FINANCIAL STATEMENT FRAUD LEARNING OBJECTIVES | After studying this chapter, you should be able to: Discuss the role that financial statements play in capital markets Understand the nature of financial statement fraud Become familiar with financial statement fraud statistics See how financial statement frauds occur and are concealed Outline the framework for detecting financial statement fraud Identify financial statement fraud exposures Explain how information regarding a company’s management and directors, nature of organization, operating characteristics, relationship with others, and financial results can help assess the likelihood of financial statement fraud TO THE STUDENT Chapter 11 is the first of three chapters on financial statement fraud, also known as management fraud This chapter discusses the numerous financial statement frauds discovered in corporate America between 2000 and 2002 We discuss the common elements of these frauds and the conditions that led to this rash of financial statement fraud Financial statement frauds almost always involve company management and are the result of pressures to meet internal or external expectations This chapter provides a framework for detecting financial statement fraud, which emphasizes the need to consider the context in which management is operating and being motivated R ite Aid Corporation opened its first store in September 1962 as Thrift D Discount Center in Scranton, Pennsylvania From the start, the company grew rapidly through acquisitions and the opening of new stores, expanding to five northeastern states by 1965 It was officially named Rite Aid Corporation in 1968, the same year it made its first public offering and started trading on the American Stock Exchange In 1970, Rite Aid moved to the New York Stock Exchange Today it is one of the nation’s leading drugstore chains, employing approximately 70,000 people in 27 states and the District of Columbia Rite Aid currently operates approximately 3,330 stores with total sales of $17.5 billion at the end of its 2007 fiscal year On June 21, 2002, the Securities and Exchange Commission (SEC) filed accounting fraud charges against several former senior executives of Rite Aid The U.S attorney for the middle district of Pennsylvania simultaneously announced related criminal charges The SEC’s complaint charged former CEO Martin Grass, former CFO Frank Bergonzi, and former Vice Chairman Franklin Brown with conducting a wide-ranging accounting fraud scheme The complaint alleged that Rite Aid overstated its income by massive amounts in every quarter from May 1997 to May 1999 When the wrongdoing was ultimately discovered, Rite Aid was forced to restate its pretax income by $2.3 billion and net income by $1.6 billion, the largest restatement ever recorded The complaint also charged that Grass caused Rite Aid to fail to disclose several related-party transactions, in which Grass sought to enrich himself at the expense of Rite Aid’s shareholders Finally, the SEC alleged that Grass fabricated finance 11 356 Part | Management Fraud committee minutes for a meeting that never occurred, in connection with a corporate loan transaction Wayne M Carlin, regional director of the SEC’s Northeast Regional Office, stated: “The charges against Rite Aid’s executives reveal a disturbing picture of dishonesty and misconduct at the highest level of a major corporation Rite Aid’s former senior management employed an extensive bag of tricks to manipulate the company’s reported earnings and defraud its investors At the same time, former CEO Martin Grass concealed his use of company assets to line his own pockets When the house of cards teetered on the edge of collapse, Grass fabricated corporate records in a vain effort to forestall the inevitable.” The SEC’s complaint alleged the following: Accounting Fraud Charges  As a result of the fraudulent accounting practices described below, Rite Aid inflated its reported pretax income by the following amounts: 1Q98 38% 2Q98 66% 3Q98 16% FY98 9% 1Q99 71% 2Q99 5,533% 3Q99 94% FY99 Percentage not mathematically calculable—reported pretax income of $199.6 million, when actual results were loss of $14.7 million 1Q00 54% The schemes that Rite Aid used to inflate its profits included the following:  Upcharges—Rite Aid systematically inflated the deductions it took against amounts owed to vendors for damaged and outdated products These practices, which Rite Aid did not disclose to the vendors, resulted in overstatements of Rite Aid’s reported pretax income of $8 million in FY 1998 and $28 million in FY 1999  Stock Appreciation Rights—Rite Aid failed to record an accrued expense for stock appreciation rights it had granted to employees Rite Aid should have accrued an expense of $22 million in FY 1998 and $33 million in FY 1999 for these obligations  Reversals of Actual Expenses—In certain quarters, Bergonzi directed that Rite Aid’s accounting staff reverse amounts that had been recorded for various expenses incurred and already paid The effect was to overstate Rite Aid’s income during the period in which the expenses were actually incurred For example, Rite Aid’s pretax income for the second quarter of FY 1998 was overstated by $9 million  “Gross Profit” Entries—Bergonzi directed Rite Aid’s accounting staff to make improper adjusting entries to reduce cost of goods sold and accounts payable in every quarter from the first quarter of FY 1997 through the first quarter of FY 2000 (but not at year-end, when the financial statements would be audited) These entries were intended purely to manipulate Rite Aid’s reported earnings For example, these entries were used to overstate pretax income by $100 million in the second quarter of FY 1999 Financial Statement Fraud |  Undisclosed Markdowns—Rite Aid overstated its FY 1999 net income by overcharging vendors for undisclosed markdowns on vendors’ products The vendors did not agree to share in the cost of markdowns at the retail level, and Rite Aid misled the vendors into believing that these deductions—taken in February 1999—were for damaged and outdated products As a result, Rite Aid overstated its FY 1999 pretax income by $30 million  Vendor Rebates—On the last day of FY 1999, Bergonzi directed that Rite Aid record entries to reduce accounts payable and cost of goods sold by $42 million, to reflect rebates purportedly due from two vendors On March 11, 1999—nearly two weeks after the close of the fiscal year—Bergonzi directed that the books be reopened to record an additional $33 million in credits Rite Aid had no legal right to receive these amounts and, as a result, inflated income by $75 million, or 37 percent of reported pretax income, for FY 1999  Litigation Settlement—In the fourth quarter of FY 1999, Grass, Bergonzi, and Brown caused Rite Aid to recognize $17 million from a litigation settlement Recognition was improper, as the settlement was not legally binding at that time  “Dead Deal” Expense—Rite Aid routinely incurred expenses for legal services, title searches, architectural drawings, and other items relating to new store sites These expenses were capitalized as they were incurred Rite Aid subsequently determined not to construct new stores at many of these sites and should have written off these “dead deal” expenses at that time and taken the charge to income Instead, Rite Aid carried these items on its balance sheet as assets By the end of FY 1999, the accumulated dead deal expenses totaled $10.6 million  “Will-Call” Payables—Rite Aid often received payment from insurance carriers for prescription orders that were phoned in by customers but never picked up Rite Aid recorded a “will-call” payable for the amounts that it was obligated to return to the carriers In the fourth quarter of FY 1999, Rite Aid improperly reversed this $6.6 million payable When Rite Aid’s general counsel learned of this reversal, he directed that the payable be reinstated Bergonzi acquiesced but then secretly directed that other improper offsetting entries be made, which had the same effect as reversing the payable  Inventory Shrink—When the physical inventory count was less than the inventory carried on Rite Aid’s books, Rite Aid wrote down its book inventory to reflect this “shrink” (i.e., reduction presumed due to physical loss or theft) In FY 1999, Rite Aid failed to record $8.8 million in shrink and improperly reduced its accrued shrink expense, producing an improper increase to income of $5 million Related-Party Transactions with Grass  Grass caused Rite Aid to fail to disclose his personal interest in three properties that Rite Aid leased as store locations Rite Aid was obligated to disclose these interests as related-party transactions Even after press reports in early 1999 prompted Rite Aid to issue corrective disclosures regarding these matters, Grass continued to conceal and misrepresent the facts, which caused Rite Aid’s corrective disclosures to be false  Grass never disclosed an additional series of transactions, in which he funneled $2.6 million from Rite Aid to a partnership controlled by Grass and a relative The partnership used $1.8 million of these funds to purchase an 83-acre site intended for a new headquarters for Rite Aid Rite Aid subsequently paid over $1 million in costs related to this site even though it was owned by the partnership, not by Rite Aid After press reports raised questions Chapter 11 357 358 Part | Management Fraud about this site, Grass transferred $2.9 million back to Rite Aid from a personal bank account, but continued to conceal the series of transactions from Rite Aid’s board Fabrication of Minutes by Grass  In September 1999, when Rite Aid was in perilous financial condition, in order to obtain a bank line of credit to keep the company afloat, Grass caused minutes to be prepared for a meeting of Rite Aid’s Finance Committee, stating that the committee had authorized the pledge of Rite Aid’s stock in PCS Health Systems Inc as collateral Grass signed these minutes even though he knew that no such meeting occurred and the pledge was not authorized.1 On May 27, 2004, CEO Grass was sentenced to eight years in prison for his role in this fraud Rite Aid is an example of a company whose financial statements were misstated in a variety of ways In the following chapters, we discuss these and other ways to manipulate the financial statements in detail The Problem of Financial Statement Fraud The stock and bond markets are critical components of a capitalist economy The efficiency, liquidity, and resiliency of these markets depend on the ability of investors, lenders, and regulators to assess the performance of business organizations Financial statements prepared by such organizations play a very important role in keeping capital markets efficient They provide meaningful disclosures of where a company has been, where it is currently, and where it is going Most financial statements are prepared with integrity and present a fair representation of the financial position of the organization issuing them These financial statements are based on generally accepted accounting principles (GAAP) that guide the accounting for transactions While accounting principles allow flexibility, standards of objectivity, integrity, and judgment must always prevail Unfortunately, financial statements are sometimes prepared in ways that misrepresent the financial position and financial results of an organization The misstatement of financial statements can result from manipulating, falsifying, or altering accounting records Misleading financial statements cause serious problems in the market and the economy They often result in large losses by investors, lack of trust in the market and accounting systems, and litigation and embarrassment for individuals and organizations associated with financial statement fraud FINANCIAL STATEMENT FRAUD IN RECENT YEARS During the years 2000–2002, numerous revelations of corporate wrongdoing, including financial statement fraud, in the United States created a crisis of confidence in the capital markets Before we focus exclusively on financial statement fraud, we include an overview of several abuses that occurred so you will understand why there was such a crisis of confidence in corporate America Some of the most notable of these abuses, which led to a $15 trillion decline in the aggregate market value of all public company stock, included the following:  Misstated financial statements and “cooking the books”: Examples included Qwest, Enron, Global Crossing, WorldCom, and Xerox, among others Some of these frauds involved 20 or more people helping to create fictitious financial results and mislead the public  Inappropriate executive loans and corporate looting: Examples included John Rigas (Adelphia), Dennis Kozlowski (Tyco), and Bernie Ebbers (WorldCom)  Insider trading scandals: The most notable example was Martha Stewart and Sam Waksal, both of whom were convicted for using insider information to profit from trading ImClone stock  Initial public offering (IPO) favoritism, including spinning and laddering (spinning involves giving IPO opportunities to those who arrange Financial Statement Fraud quid pro quo opportunities, and laddering involves giving IPO opportunities to those who promise to buy additional shares as prices increase): Examples included Bernie Ebbers of WorldCom and Jeff Skilling of Enron  Excessive CEO retirement perks: Companies including Delta, PepsiCo, AOL Time Warner, Ford, GE, and IBM were highly criticized for endowing huge, costly perks and benefits, such as expensive consulting contracts, use of corporate planes, executive apartments, and maids to retiring executives  Exorbitant compensation (both cash and stock) for executives: Many executives, including Bernie Ebbers of WorldCom and Richard Grasso of the NYSE, received huge cash and equity-based compensation that has since been determined to have been excessive  Loans for trading fees and other quid pro quo transactions: Financial institutions such as Citibank and JPMorgan Chase provided favorable loans to companies such as Enron in return for the opportunity to make hundreds of millions of dollars in derivative transactions and other fees  Bankruptcies and excessive debt: Because of the abuses described above and other similar problems, seven of the ten largest corporate bankruptcies in U.S history occurred in 2001 and 2002 These seven bankruptcies were WorldCom (largest at $101.9 billion), Enron (second at $63.4 billion), Global Crossing (fifth at $25.5 billion), Adelphia (six at $24.4 billion), United Airlines (seventh at $22.7 billion), PG&E (eight at $21.5 billion), and Kmart (tenth at $17 billion) Four of these seven involved financial statement fraud  Massive fraud by employees: While not in the news nearly as much as financial statement frauds, there has been a large increase in fraud against organizations with some of these frauds being as high as $2 to $3 billion More recently, in 2006, many companies were investigated by the SEC for backdating stock options Stock options are a common method of providing executive compensation by allowing top management to purchase stock at a fixed share price If the stock rises above that price, then holders of the options can use them to profit from the increased stock price Backdating is a practice where the effective dates on stock options are deliberately changed for the purpose of securing extra pay for management By backdating | Chapter 11 359 option agreements, management of several companies received stock grants at the lowest prices of the year Then, management was able to sell the stock at a higher price and profit by the difference in price Academic researchers became aware of backdating as they observed that the statistical probability of granting an option at the lowest price of the year was much lower than the frequency of such occurrences This apparently extraordinary timing by numerous companies granting options, dated at times when share prices hit yearly lows (for some companies, this occurred year after year), led the SEC to investigate the issue As of June 2007, approximately 270 companies have admitted to backdating their options agreements Backdating options led to millions of dollars in increased compensation for company executives at the expense of shareholders, and also resulted in misstated financial statements, which were subsequently restated Companies that provided executives with backdated stock options also violated income tax rules because the difference in the grant price on the backdated dates and the market prices on the date the options were actually granted should have been taxable income to the executives WHY THESE PROBLEMS OCCURRED Each of the problems discussed above represents an ethical compromise The explanations covered previously of why people commit other frauds apply to financial statement fraud as well Recall that three elements come together to motivate all frauds: (1) a perceived pressure, (2) a perceived opportunity, and (3) the ability to rationalize the fraud as acceptable and consistent with one’s personal code of ethics Whether the dishonest act involves fraud against a company, such as employee embezzlement, as we have already discussed, or fraud on behalf of a company, such as financial statement fraud that we will now discuss, these three elements are always present Figure 11.1 is a review of the fraud triangle, which we discussed earlier in the book Every fraud perpetrator faces some kind of perceived pressure Examples of perceived pressures that can motivate financial statement fraud are financial losses, failure to meet Wall Street’s earnings expectations, or the inability to compete with other companies Also, executive compensation in the form of stock options is often much higher than any other form of compensation and can be in the tens of millions of dollars As such, executives had enormous pressure to boost their stock value since a small 360 Part FIGURE Management Fraud Element 1: A Booming Economy Fraud Triangle Pr e ss Pe rce ive d on ati liz na tio Ra ure 11.1 | Perceived Opportunity increase in the stock price could mean millions of dollars of compensation for management Fraud perpetrators must also have a perceived opportunity or they will not commit fraud Even with intense perceived pressures, executives who believe they will be caught and punished rarely commit fraud On the other hand, executives who believe they have an opportunity (to commit and/or conceal fraud) often give in to perceived pressures Perceived opportunities to commit management fraud include such factors as a weak board of directors or inadequate internal controls and the ability to obfuscate the fraud behind complex transactions or related-party structures Some of the main controls that could eliminate the perceived opportunity for financial statement fraud include the independent audit and the board of directors Because management can override most internal controls, the audit committee of the board of directors and the independent auditor often provide final checks on financial statement fraud Finally, fraud perpetrators must have some way to rationalize their actions as acceptable For corporate executives, rationalizations to commit fraud might include thoughts such as “we need to protect our shareholders and keep the stock price high,” “all companies use aggressive accounting practices,” “it is for the good of the company,” or “the problem is temporary and will be offset by future positive results.” The fraud triangle provides insights into why recent ethical compromises occurred We believe there were nine factors that came together to create what we call the perfect fraud storm In explaining this perfect storm, we will use examples from recent frauds The first element of the perfect storm was the masking of many existing problems and unethical actions by the booming economy of the 1990s and early 2000s During this time, most businesses appeared to be highly profitable, including many new “dot-com” companies that were testing new (and many times unprofitable) business models These booming economic conditions allowed fraud perpetrators to conceal their actions for longer time periods Additionally, the advent of “investing over the Internet” for a few dollars per trade brought many new inexperienced people to the stock market, and many investors made nonsensical investment decisions History has now shown that several of the frauds that have been revealed since 2002 actually were being committed during the boom years while the economy hid the fraudulent behavior The booming economy also caused executives to believe their companies were more successful than they actually were and that their companies’ success was primarily a result of good management Academic researchers have found that extended periods of prosperity can reduce a firm’s motivation to comprehend the causes of success, raising the likelihood of faulty attributions In other words, during boom periods, many firms not correctly ascribe the reasons behind their successes Management usually takes credit for good company performance When company performance degrades, boards often expect results similar to those in the past without new management styles or actions Since management did not correctly understand past reasons for success, it incorrectly thinks past methods will continue to be successful Once methods that may have worked in the past because of external factors fail, some CEOs may feel increased pressure In some cases, this pressure contributed to fraudulent financial reporting and other dishonest acts Element 2: Decay of Moral Values The second element of the perfect fraud storm was the moral decay that has been occurring in the United States and the world in recent years Whatever measure of integrity one uses, dishonesty appears to be increasing For example, numerous researchers have found that cheating in school, one measure of dishonesty, has increased substantially in recent years Whether it is letting someone copy work, using a cheat sheet on an exam, or lying to obtain a job, studies show that these numbers have drastically increased over the years While Financial Statement Fraud cheating in school is not necessarily directly tied to management fraud, it does reflect the general decay of moral values in society at large Element 3: Misplaced Incentives The third element of the perfect fraud storm was misplaced executive incentives Executives of most fraudulent companies were endowed with hundreds of millions of dollars in stock options and/or restricted stock that put tremendous pressure on management to keep the stock price rising even at the expense of reporting accurate financial results In many cases, this stock-based compensation far exceeded executives’ salary-based compensation For example, in 1997, Bernie Ebbers, the CEO of WorldCom, had a cashbased salary of $935,000 Yet during that same period, he was able to exercise hundreds of thousands of stock options, making millions in profits, and received corporate loans totaling $409 million.2 These incentive packages caused the attention of many CEOs to shift from managing the firm to managing the stock price, which, all too often, resulted in fraudulent financial statements As mentioned earlier, in addition to managing stock prices, executives also defrauded shareholders by backdating options so as to maximize their compensation Element 4: High Analysts’ Expectations The fourth element of the perfect storm, and one closely related to the last, was the often unachievable expectations of Wall Street analysts that targeted only short-term behavior Company boards and management, generally lacking alternative performance metrics, used comparisons with the stock price of “similar” firms and attainment of analysts’ expectations as important de facto performance measures These stock-based incentives compounded the pressure induced by the analysts’ expectations Each quarter, the analysts, often coached by companies themselves, forecasted what each company’s earnings per share (EPS) would be Executives knew that the penalty for missing Wall Street’s forecast was severe—even falling short of expectations by a small amount would drop the company’s stock price by a considerable amount Consider the following example of a fraud that occurred recently For this company, the “street” made the following EPS estimates for three consecutive quarters: Firm Morgan Stanley Smith Barney Robertson Stephens Cowen & Co Alex Brown Paine Webber Goldman Sachs Furman Selz Hambrecht & Quist 1st Quarter $0.17 0.17 0.17 0.18 0.18 0.21 0.17 0.17 0.17 | 361 Chapter 11 2nd Quarter $0.23 0.21 0.25 0.21 0.25 0.28 3rd Quarter 0.21 0.21 0.23 0.23 0.23 0.24 Based on these estimates, the consensus estimate was that the company would have EPS of $0.17 in the first quarter, $0.22 in the second quarter, and $0.23 in the third quarter The company’s actual earnings during the three quarters were $0.08, $0.13, and $0.16, respectively In order to not miss Wall Street’s estimates, management committed a fraud of $62 million or $0.09 per share in the first quarter, a fraud of $0.09 per share in the second quarter, and a fraud of $0.07 per share in the third quarter The complaint in this case read (in part) as follows: “ The goal of this scheme was to ensure that [the company] always met Wall Street’s growing earnings expectations for the company [The company’s] management knew that meeting or exceeding these estimates was a key factor for the stock price of all publicly traded companies and therefore set out to ensure that the company met Wall Street’s targets every quarter regardless of the company’s actual earnings During the period 1998 to 1999 alone, management improperly inflated the company’s operating income by more than $500 million before taxes, which represents more than one-third of the total operating income reported by [the company].” Element 5: High Debt Levels The fifth element in the perfect storm was the large amounts of debt each of these fraudulent companies had This debt placed tremendous pressure on executives to have high earnings to offset high interest costs and to meet debt covenants and other lender requirements For example, during 2000, Enron’s derivates-related liabilities increased from $1.8 billion to $10.5 billion Similarly, WorldCom had over $100 billion in debt when it filed history’s largest bankruptcy During 2002 alone, 186 public companies, including WorldCom, Enron, Adelphia, and Global Crossing, with $368 billion in debt filed for bankruptcy in the United States.3 362 Part | Management Fraud Element 6: Focus on Accounting Rules Rather Than Principles Some believe that another element of the perfect storm was the nature of U.S accounting rules In contrast to accounting practices in many countries such as the United Kingdom and Australia, U.S generally accepted accounting principles (GAAP) are more rule-based than principles-based.4 One potential result of having rule-based standards is that if a client can find a loophole in the rules and account for a transaction in a way that is not specifically prohibited by GAAP, then auditors may find it hard to prohibit the client from using that method of accounting Unfortunately, in some cases, the auditors helped their clients find the loopholes or gave them permission to account for transactions in ways that violated the principle of an accounting method but was within the rules The result was that specific rules (or the lack of specific rules) were exploited for new, often complex financial arrangements, as justification to decide what was or was not an acceptable accounting practice As an example, consider the case of Enron Even if Arthur Andersen had argued that Enron’s special purpose entities weren’t appropriate, it would have been impossible for the accounting firm to make the case that they were against any specific rules Some have suggested that one of the reasons it took so long to get plea bargains or indictments in the Enron case was because it was not immediately clear whether GAAP or any laws had actually been broken Element 7: Lack of Auditor Independence A seventh element of the perfect fraud storm was the opportunistic behavior of some CPA firms In some cases, accounting firms used audits as loss leaders to establish relationships with companies so they could sell more lucrative consulting services In many cases, audit fees were much smaller than consulting fees for the same clients, and accounting firms felt little conflict between independence and opportunities for increased profits In particular, these alternative services allowed some auditors to lose their focus and become business advisors rather than auditors This is especially true of Arthur Andersen, which had spent considerable energy building its consulting practice, only to see that practice split off into a separate firm Privately, several Andersen partners have admitted that the surviving Andersen firm and some of its partners had vowed to “out consult” the firm that separated from it and they became preoccupied with that goal Element 8: Greed The eighth element of the perfect storm was greed by executives, investment banks, commercial banks, and investors Each of these groups benefited from the strong economy, the many lucrative transactions, and the apparently high profits of companies None of them wanted to accept bad news As a result, they sometimes ignored negative news and entered into bad transactions.5 For example, in the Enron case, various commercial and investment banks made hundreds of millions of dollars from Enron’s lucrative investment banking transactions, on top of the tens of millions of dollars in loan interest and fees None of these firms alerted investors about derivative or other underwriting problems at Enron Similarly, in October 2001, after several executives had abandoned Enron and negative news about Enron was reaching the public, 16 of 17 security analysts covering Enron still rated the company a “strong buy” or “buy.”6 Enron’s outside law firms were also making high profits from Enron’s transactions These firms also failed to correct or disclose any problems related to the derivatives and special purpose entities, but in fact helped draft the requisite associated legal documentation Finally, the three major credit rating agencies, Moody’s, Standard & Poor’s, and Fitch/IBC—who all received substantial fees from Enron—also failed to alert investors of pending problems Amazingly, just weeks prior to Enron’s bankruptcy filing—after most of the negative news was out and Enron’s stock was trading for $3 per share—all three agencies still gave investment grade ratings to Enron’s debt.7 Element 9: Educator Failures Finally, the ninth element of the perfect storm involved several educator failures First, educators had not provided sufficient ethics training to students By not forcing students to face realistic ethical dilemmas in the classroom, graduates were ill equipped to deal with the real ethical dilemmas they faced in the business world In one allegedly fraudulent scheme, for example, participants included virtually the entire senior management of the company, including but not limited to its former chairman and chief executive officer, its former president, two former chief financial officers, and various other senior accounting and business personnel In total, it is likely that more than 20 individuals were involved in the schemes Such a large number of participants points to a generally failed ethical compass for this group Consider another case of a chief accountant A CFO instructed the chief Glossary Interrogatory A series of written questions that specifically identify information needed from the opposing party Interstate Identification Index (III) A measure database that contains criminal history records for almost 30 million offenders and can be queried using a name, birth date, and other data Interview The process of asking questions with the ultimate goal of obtaining predetermined information Inventory turnover ratio A ratio that measures the efficiency with which inventory is managed and the rate at which it is sold; the ratio is calculated as cost of goods sold divided by average inventory for the period Investigation The efforts made to identify the who, what, how, when, and how much of a fraud; an investigation is performed once there is predication that fraud is occurring; the process of inquiring into or examining questionable activities Investment scam Any fraud that is related to stocks, bonds, commodities, limited partnerships, real estate, or other types of investments such as the selling of fraudulent and worthless investments to unsuspecting investors Invigilation Imposing strict temporary controls on an activity so that, during the observation period, fraud is virtually impossible Involves keeping detailed records before, during, and after the invigilation period and comparing suspicious activity during the three periods to obtain evidence about whether fraud is occurring 657 Link analysis The process of linking people, documents, and events in a case Link analysis is often performed by automated software that helps coordinate large cases Lower-level trial court State courts that try misdemeanors (small crimes) and pretrial issues M Mail stuffing A scam that promises income simply for stuffing envelopes Victims are required to pay considerable up-front costs for information about the opportunity Management fraud Deception perpetrated by an organization’s top management through the manipulation of financial statement amounts or disclosures Marketable securities Short-term stocks, bonds, and other noncash assets; sometimes called short-term investments Matasos matrix A two-dimensional display of red flag hits used in data-driven fraud detection Columns usually represent red flags being searched for, and rows represent cases like individuals, bids, or other measures Mergers The combining of two organizations into one business entity Miscellaneous fraud Deception that doesn’t fall into any of the other five categories of fraud Modeling Setting an example J Jurisdiction The limit or territory over which an organization has authority K Kickbacks Funds or gifts received secretly for performing some task or obtaining favorable treatment; for example, money received for purchasing from an uncompetitive bidder Kinetic communication Communication using body language, facial movements, and so forth; such communication represents a large part of the communication that takes place L Labeling Teaching employees behaviors that are and are not appropriate within the organization Lapping Fraud that involves stealing one customer’s payment and then crediting that customer’s account when a subsequent customer pays Larceny Intentionally taking an employer’s cash or other assets without the consent and against the will of the employer, after it has been recorded in the company’s accounting system Leases Obligations to make payments over a specified period for use or “rent” of an asset; not involve ownership of the asset Legitimate power The ability of one person to influence another person as the result of legitimate authority Lifestyle symptoms Spending patterns that suggest a potential fraud perpetrator may be using assets obtained through fraud to maintain a lifestyle that is not sustainable on the perpetrator’s income; fraud perpetrators will often use their ill-gotten gains to purchase real estate, jewelry, fancy clothing or cars, and other things they could not afford without the fraudulent income; one of the six categories of red flags Money laundering The practice of engaging in economic transactions that are designed to conceal the identity, source, or destination of currency; such practice involves converting large amounts of money that were obtained illegally (e.g., drug sales or terrorist financing) into money that can be used to purchase goods and services without triggering currency transaction reports; often involves setting up a legitimate-looking business and depositing receipts on behalf of that business into the banking system Mortgage Long-term loan secured by property, such as a home mortgage Motion The response to a complaint or pleading by the defendant Sometimes “motion” refers to any request made to the judge for a ruling in a case by either party Motion for summary judgment A request made to a judge to dismiss all or part of a claim prior to completion of a full trial because no genuine issue of a material fact is present Multilevel marketing organization A well-established, legitimate form of business In most multilevel marketing programs, company representatives act as sellers of real products These individuals are independent distributors of a legitimate business N National Crime Information Center (NCIC) The major criminal database maintained by the FBI This database contains information on stolen vehicles, securities, boats, missing persons, and other information helpful in fraud investigations Net asset value (NAV) The value of one unit of a mutual fund; changes as the assets that comprise the fund increase or decrease in value Net income An overall measure of the performance of a company; equal to revenues minus expenses for a period Net worth method Analytical method that estimates a suspect’s unexplained income Liabilities are subtracted from assets to give 658 Glossary net worth, and then the previous year’s net worth is subtracted to find the increase in net worth Living expenses are then added to the change in net worth to determine a person’s total income, and finally known income is subtracted from total income to determine the unknown income N-gram An advanced method of fuzzy matching that counts the number of matching runs of characters in two names, addresses, or other textual fields Nigerian money offers A form of foreign advance-fee scams where individuals from Nigeria or another underdeveloped country contact victims and offer millions of dollars Nolo contendere A plea by a defendant that does not contest the charges but does not admit guilt; means no contest Pencil-and-paper honesty tests Questionnaires or other written assessment tests that are intended to assess someone’s honesty or propensity to be dishonest Pension Postretirement cash benefits paid to former employees Perceived opportunity A situation where someone believes he or she has a favorable or promising combination of circumstances to commit fraud and not be detected Perceived pressure A situation where someone perceives he or she has a need to commit fraud; a constraining influence on the will or mind, as a moral force Percentages The fraction of a number; used in vertical analysis where financial statement numbers are converted to percentages to assess comparability Nonfinancial performance measures Statistics and data that are not financial in nature but can be used to assess an organization’s performance such as the nonfinancial measures used in a balanced scorecard Perpetrator A person who has committed a fraud Nonsampling risk The risk that a sample will be examined and the true characteristics of the sample, including fraudulent or other elements of interest, will be misinterpreted or overlooked Phishers Fraudsters who engage in phishing Norming or calibrating That part of an interview that is intended to determine how an interviewee responds when answering questions about subjects he or she is comfortable with so as to be able to contrast the verbal and nonverbal cues from those questions with those exhibited when the interviewee is asked about a fraudulent or dishonest act Number of days’ sales in inventory Calculated by dividing the cost of goods sold by the average amount of inventory for the year, and divide that into 365 A measure of how long it takes a company to turn over its inventory Number of days’ sales in receivables 365 (number of days in a year) divided by accounts receivable turnover; a measure of how long it takes to collect receivables O Open Database Connectivity (ODBC) The standard method of connecting analysis applications to relational database management systems Operating performance ratio Net income divided by total sales; a measure of the percentage of revenues that become profits Opportunity meeting A high-pressure meeting where fraudsters pressure individuals to invest money in fraudulent organizations Opting out Right of customers to give written notice to financial institutions that prohibits the institution from sharing or selling customer’s personal information Overstatement of asset fraud Financial statement fraud involving recording assets at amounts higher than they should be P Pacing Controlling the length of pauses and the rate of speech during an interview Paralinguistic communication Communicating not only by what you say, but how you say it Passwords Secret codes or names that allow users to access networks and other computer systems Personal observation Evidence that is sensed (seen, heard, felt, etc.) by investigators Phishing A high-tech scam that uses spam or pop-up messages to deceive consumers into disclosing credit card numbers, bank account information, Social Security number, passwords, or other sensitive information Physical evidence Evidence of a tangible nature—includes fingerprints, tire marks, weapons, stolen property, identification numbers or marks on stolen objects, and so on—that can be used in an investigations to provide information about a fraud or another crime Physical safeguards Vaults, fences, locks, etc., that physically protect assets from theft Pivot tables A data summarization tool found in data visualization programs such as spreadsheets The primary use of pivot tables is to convert traditional “database-formatted” data to twodimensional spreadsheet-structured data Polygraphs An electronic assessment of honesty that includes hooking a person up to a machine to assess the normalcy of breathing, pulse, and other physical abnormalities; used to assess stress to determine if people are telling the truth Ponzi schemes Fraudulent pyramid schemes where old investors are paid their gains out of new investors’ funds so as to make the appearance that the scheme is generating an unusually large return; named after Charles Ponzi Postal inspectors Inspectors or investigators hired by the U.S Postal Service to handle major fraud cases that are perpetrated through the U.S mail system Power The probability that a person can carry out his or her own will despite resistance Predication Circumstances that, taken as a whole, would lead a reasonable, prudent professional to believe that a fraud has occurred, is occurring, or will occur Preliminary hearing A pretrial hearing to determine if there is “probable cause” to charge the defendant with a crime Product testing Perpetrators falsely promise consumers the opportunity to review products and send their commentaries to suppliers for substantial income Victims are required to pay enrollment fees ranging from $10 to $25 Profit margin Net income divided by total revenues; also known as return on sales, profit margin percentage, profit margin ratio, and operating performance ratio Glossary 659 Proxemic communication Communicating with others by virtue of the relative position of the bodies Sales discount percentage The percentage of the sales price waived for payment made within a predetermined discount period Psychopath A person having a personality disorder, especially one manifested in aggressively antisocial behavior Sales Returns (Sales Returns and Allowances) Sold merchandise that is returned by customers and/or damaged, or other sold merchandise for which credit is given Purchase of real estate scam In this advance-fee scam, perpetrators will offer to purchase property on behalf of a foreign concern for an “up-front” payment Pyramid schemes Illegal fraud schemes where fraudsters— instead of selling real, legitimate products—sell only illusionary products and profits; the investments of subsequent investors are used to pay the promised returns of earlier investors Q Quick (acid-test) ratio Measure of a firm’s ability to meet current liabilities; computed by dividing net quick assets (all current assets, except inventories and prepaid expenses) by current liabilities R Rapport The feeling of trust and confidence an interviewer seeks to establish and maintain with interviewees Rationalization To devise self-satisfying but incorrect reasons for one’s behavior Referent power The ability of one person to influence another person based upon a personal relationship with that person Register disbursement schemes Schemes that involve false refunds or false voids Remedy Judgments asked for in civil cases (what it would take to right a private wrong) Repurchase agreements Agreements to buy back something previously sold Sales returns percentage ratio Sales returns divided by total sales; a measure of the percentage of sales being returned by customers Sampling risk Risk that a sample is not representative of the population Sarbanes-Oxley Act of 2002 U.S legislation passed in 2002 whose goal is to minimize the occurrence of fraud and increase the penalties for perpetrators when it occurs Scheme An elaborate and systematic plan of action usually involving illegal activity Schemes usually have many indicators for which investigators search SEC enforcement release A public document released by the SEC when a company commits financial statement fraud or other perceived inappropriate activities Securities and Exchange Commission (SEC) Governmental organization with responsibility for regulating stock trading and the financial statements and reports of public companies Security through obscurity Reliance on secrecy of design, implementation, or holes to provide security rather than the use of time-tested methods that have withstood public scrutiny Segregation of duties Dividing a task into two parts, so one person does not have complete control of the task Settlement A negotiated pretrial agreement between the parties to resolve a legal dispute Shoulder surfing A process where criminals watch consumers from a nearby location as they enter credit card pin numbers, garage codes, computer passwords, or other valuable information Request for admission A request that the opposing party admit designated facts relevant to litigation Silent probe An interviewing technique wherein an interviewer pauses and says nothing; usually used to elicit a more thorough response Restructuring The reevaluation of a company’s assets because of impairment of value or for other reasons Restructured companies usually have lower amounts of assets and look quite different than before the restructuring Sixth Amendment An amendment to the U.S Constitution that provides trial-related protections to defendants, such as the right to a speedy trial and the right to be heard by an impartial jury Return on assets Net income divided by average total assets; an overall measure of profitability Skimming A process where fraudsters use information storage devices to capture valuable information from victims’ credit cards or other bar-encoded documents Return on equity Measure of the profit earned per dollar of investment; computed by dividing net income by equity Snake oil plans Plans that promise enormous earnings or claim to sell miracle products Revenue Increases in a company’s resources from the sale of goods or services Sniffing Illegal or unauthorized viewing of information as it passes along a network communication channel Revenue recognition Determining that revenues have been earned and are collectible and thus should be reported on the income statement Social engineering Deceiving in order to breach security controls; often involves impersonating someone else, and can be done by e-mail, telephone, or face-to-face Reward power The ability of someone to influence another person as the result of a promised reward or benefit Soundex A phonetic algorithm for indexing names by their sound when pronounced Risk assessment The identification, analysis, and management of risk, such as the risk associated with the possibility of fraud Spoofing Changing the information in an e-mail header or an IP address to hide identities S Statement of cash flows Financial statement that reports an entity’s cash inflows (receipts) and outflows (payments) during an accounting period Sale of crude oil at below market price Involves a victim receiving a letter that falsely offers the opportunity to purchase crude oil at prices well below market price Statistical analysis The use of statistics and number patterns to discover relationships in certain data, such as Benford’s law 660 Glossary Statute A law or regulation; a law enacted by the legislative branch of a government Strategic reasoning The reasoning process involved in the fraud setting where an investigator or auditor attempts to predict how a fraud perpetrator may be responding to likely behavior of the investigator (e.g., concealing the fraud from typical procedures) Stratification Division of data into groups by employee, invoice, or other measure Structured query language (SQL) The standard programming language used to discover indicators in database management systems Subpoena (subpoena duces tecum) A written order in the name of the court, requiring a witness to submit to a deposition, give testimony at trial, or report to an administrative body Summarization A technique used in data-driven fraud detection that summarizes data using different functions or according to time period Surveillance Investigation technique that relies on the senses, especially hearing and seeing Symptoms Red flags or indicators of fraud; anything that provides some predications that fraud may be occuring System of authorizations A system of limits on who can and cannot perform certain functions T Tab separated values (TSV) A delimited text file format in which data are stored in a file where the items of data are separated by tab characters Tax court Federal courts that hear only tax cases Tax fraud Willfully and intentionally violating the known legal duty of voluntarily filing income tax returns and/or paying the correct amount of income, employment, or excise taxes Topside journal entries Manual journal entries that can be used by management to commit fraud; these entries may involve overriding of internal controls Trashing Searching through a person’s trash for possible evidence in an investigation Treadway Commission The National Commission on Fraudulent Financial Reporting that made recommendations related to financial statement fraud and other matters in 1987 Trustee Individual or firm that collects a debtor’s assets and distributes them to creditors U Understatement of liability frauds Financial statement fraud that involves understating liabilities or amounts owed to others Unearned revenues Amounts that have been received from customers but for which performance of a service or sale of a product has not yet been made V Vendor fraud An overcharge for purchased goods, the shipment of inferior goods, or the nonshipment of goods even though payment is made Vertical analysis Tool that converts financial statement numbers to percentages so that they are easy to understand and analyze Victim The person or organization deceived by the perpetrator Voice stress analysis An analysis that determines how much stress a person is experiencing through analyzing his or her voice; related to polygraph and lie detector tests Voir dire The legal process of qualifying an expert witness Telemarketing fraud Any fraud where the perpetrator communicates with the victim via telephone Volatile interviews Interviews in which there is a great deal of tension and possible contention; such interviews must be handled with great care 10-K Annual report filed by publicly traded U.S companies to the SEC Vulnerability chart Tool that coordinates the various elements of a fraud investigation to help identify possible suspects 10-Q Quarterly report filed by publicly traded U.S companies to the SEC Testimonial evidence Evidence based on querying techniques, such as interviewing, interrogation, and honesty testing Theft act The commission of a fraud Theft act investigation Fraud investigation methods that focus on the fraudulent transfer of assets; includes surveillance, invigilation, seizing computers, and examining physical evidence Time trend analysis Examining and attempting to find patterns in financial information over time Times-interest-earned ratio The ratio calculated by dividing the net income of a company by the amount of interest expense; a measure of whether a company’s profits are sufficient to pay the interest on its outstanding debt W Warrant An order issued by a judge to arrest someone Warranty liabilities Obligations to perform service and repair items sold within a specific period of time or use after sale Wartrapping Rogue access points accrued at shifting user information on wireless networks Whistle-blowing systems Response mechanisms that make it easy for employees and others to report questionable activities (also called hotlines) Wire tapping Electronic or mechanical eavesdropping done by investigators to listen to private conversations; often requires a court order Glossary Working capital turnover ratio Sales divided by average working capital; a measure of the amount of working capital used to generate revenues 661 Z Z-score The number of standard deviations above or below the mean or average value in a standard normal distribution This technique is useful to describe how far a data value is outside the norm for a given data set This page intentionally left blank INDEX A Academic requirements, fighting fraud, 17 Accounting anomalies, 136–140 defined, 135, 164 faulty journal entries, 137–139 ledger inaccuracies, 139 source document irregularities, 136 Accounting cycle, defined, 179 Accounting or documentary symptoms, searching for, 412, 423 Accounting system, defined, 41 Accounts payable, understating, 450 Accounts receivable turnover, defined, 410 Accounts receivable turnover ratio, defined, 180 Accrued liabilities, defined, 451 understating, 451 ACFE, see Association of Certified Fraud Examiners Acid-test ratio, defined, 180 Ackroyd Airlines, 118 Acquisitions, defined, 461 Acute emotional crisis, defined, 280 ADA, see Americans with Disabilities Act ADEA, see Age Discrimination in Employment Act Adelphia Communications Corp., 87, 100, 358, 359, 361, 389, 465, 474, 479, 484, 513, 514, 640 Admission-seeking questions, defined, 295 AFCO fraud case, 47–48, 462–463, 554 Affidavit, defined, 628 Affinity fraud, 12 Age Discrimination in Employment Act (ADEA), 102 AICPA, see also American Institute of Certified Public Accountants AICPA Board of Director’s 1993 Report, 645 AICPA SEC Practice Section Initiatives, 645 Alibis, refuting in interview, 300 Allowance for uncollectible accounts as a percentage of receivables, defined, 410 Altruistic appeals, 280 American Institute of Certified Public Accountants (AICPA), 17, 402 American Stock Exchange, 355 Americans with Disabilities Act (ADA), 102 AmTelSat, 145 Analyst conflicts of interest, 392 Analytical anomalies, defined, 135 Analytical fraud symptoms, 142–145 Analytical procedures, defined, 145 Annuities, variable, 13 Anomalies, accounting, 135 analytical, 135 vs fraud, 164–165 Answer, defined, 627 AOL Time Warner, 359 Apathy, 47–48 Appeal, 631 Appellate courts, defined, 624 Apple Computer, 144 Applebee’s, 448 Appropriate hiring, 40 Arby’s, 448 Arraignment, defined, 631 Arthur Andersen, 3, 145, 488 Assessment questions, defined, 290 interview, 293–294 Asset misappropriation, 506–515 defined, 505 Asset overstatement, types of, 460 Asset overstatement fraud, identifying, 459–460 searching for symptoms, 465–471 Asset turnover ratio, defined, 410 Asset-related fraud schemes, 492 Associated Communications, 504 Association of Certified Fraud Examiners (ACFE), 4, 10, 403 AT&T, 145 Audit, 234 Audit Committee requirements of major U.S Stock Exchanges, 648 Audit effectiveness, panel on, 646 Audit sampling and fraud, 164 Audit setting, strategic reasoning in, 400 Audit trail, defined, 41 lack of, 48–49 Auditing, proactive fraud, 116–117 Auditor independence, 390 Avis Car Rental, 401 B Backdating, defined, 359 Bad debt expense, defined, 415 Bakker, Jim, 49–50 Balance sheets, defined, 179 Balances, changes in recorded, 421 Bank schemes, prime, 12 Bankruptcy, and divorce fraud schemes, 579–580 civil and criminal fraud statutes, 574–575 defined, 566 fraud examiner’s role in, 566 fraud investigator’s relationship, 578–579 Bankruptcy code, defined, 574 Bankruptcy court, 576 defined, 573, 625 Bankruptcy fraud, 572–579 Bankruptcy or divorce, fraudulent concealment of assets, 580–581 Bankruptcy process, participants in, 576–578 Bankruptcy statutes, civil, 575–576 Baskin-Robbins, 43 Bates numbers, defined, 233 Behavioral or verbal and lifestyle symptoms, searching for, 413, 424 Behavioral symptoms, defined, 136 Bell Atlantic Corp., 464 BellSouth, 464, 478 Benchmark admission, defined, 301 Benford’s law, 171–173 defined, 168 Better Business Bureau, 553 Bid-rigging schemes, defined, 516 Billing schemes, defined, 510 Biometrics, defined, 611 Blockbuster Video, 448 Bogus mystery shopping scam, defined, 549 Bre-X Minerals, 385–386, 473, 475 Bribery, defined, 515 Bristol-Myers, 50–51 Brown-Forman Distillers, 127 Burden of proof, 631 Bureau of Prisons, 252, 253 Business Regulation, Department of, 254 Bust-out, defined, 579 C Cable & Wireless, 404 Calibrating, defined, 290 Capitalization, defined, 454 Cash and short-term investment fraud, 464 Cash theft through fraudulent disbursements, 508 Castle Crown, 145 Catharsis, 280 defined, 278 663 664 Index Cendant Corporation, 401, 468 Centennial Savings and Loan, 474 Central Intelligence Agency (CIA), 252 Century 21, 401 Chain letter scams, defined, 548 Chain of custody, defined, 230 Chapter bankruptcy, defined, 580 Chapter 11 bankruptcy, defined, 580 Chapter 13 bankruptcy, defined, 580 Charter Communications Inc., 632 Chase Manhattan Bank, 127 Check tampering, defined, 508 Christian & Timbers, 101 Chronemic communication, defined, 286 Chronological confusion, 279 Circular reaction, defined, 280 Cisco Systems Inc., 632 Citibank, 127, 359 Citigroup, 15 Civil action, fraud, 86 Civil, and criminal fraud trials, 625–626 bankruptcy statutes, 575–576 law, defined, 15, 625 liability for false accusations, 582 litigation process, overview of, 626–629 prosecution of fraud, 15 Civil Rights Act of 1954, 102 Clearinghouse scam, defined, 545 Closing questions, interview, 294–295 Codes of conduct, defined, 74 Coercive power, defined, 53 Commercial bribery, defined, 515 Commission resources and authority, 392 Committee of Sponsoring Organizations (COSO), 38, 110, 375, 402 defined, 364 Communication, inhibitors of, 278 Company policy awareness, 112–113 Comparator Systems, 472–473, 475, 476 Complaint, defined, 627 Computer forensics, defined, 214 Computer Science Corporation (CSC), 460 Concealment, defined, 84 investigating, 229–243 documentary evidence, 230 methods, 230–243 Concealment of assets, 580–581 Conflict of interest, 517–519 analyst, 392 defined, 517 Confusion, in interviews, 279 Consumer fraud, 529–555 defined, 530 seriousness of, 530–531 Consumer investment scams, 543–555 Contingent liability, defined, 453 omission of, 453 Control activities, defined, 41 Control environment, accounting system, 41 appropriate hiring, 40 authorizations, 43 control activities, 41 defined, 39 documents and records, 44 dual custody, 42 independent checks, 43 internal audit department, 41 management communication, 39 management role, 39 organizational structure, 41 segregation of duties, 42 summary of, 44 Control procedures, defined, 41 Control symptoms, searching for, 413 Controlled-answer techniques, defined, 285 Controls to prevent or detect fraud, 44 Conversion, defined, 84 investigation methods, 249–261 Conversion searches, 250–251 Corporate, and criminal fraud accountability, 393 fraud accountability, 393 responsibility, 391 tax returns, 393 Corruption, 515–519 defined, 505 types of, 516 COSO, see also Committee of Sponsoring Organizations COSO’s 1992 Report, 648 Cost of goods sold (COGS), calculation, 416 defined, 410 frauds, 415–425 County, and local records, 254 clerk, 254 land office, 254 sheriff, 254 tax assessor’s office, 254 Court system, fraud and, 624–626 Court-appointed or panel trustee, 577 Courts, local, 255 Craft assembly, defined, 549 Crazy Eddie, Inc., 146, 422 Creditor, defined, 578 Crest Industries, 503 Criminal, action, fraud, 87 charges, filing, 629 investigative careers, 571 law, defined, 14, 625 litigation process, 629–632 prosecution of fraud, 13–15 Critical Path, Inc., 477 Current ratio, defined, 180 Custom, defined, 280 Customer fraud, defined, 11 Cutter and Buck, Inc., 486 Cyclic redundancy check (CRC) number, defined, 216 D Data access, 168–170 data warehouse, 170 open database connectivity, 169 text import, 169–170 Data analysis process, 165–168 Data analysis software, defined, 168 Data analysis techniques, 170–178 data preparation, 171 digital analysis, 171 fuzzy matching, 176 outlier investigation, 173 stratification and summarization, 175 time trend analysis, 175 Data preparation, 171 Data theft, defined, 604 Data warehouse, defined, 170 Databases, online, 256–258 Data-driven approach, banking industry, 198–199 examples of, 198–201 oil industry, 199–201 Data-driven fraud detection, defined, 163 Days Inn, 401 Debt, not recording or underrecording types of, 452 Debtor, defined, 578 Debt-to-equity ratio, defined, 180 Deduction, defined, 280 Deception in interviews, physiology of, 290–293 Defendant, arresting and charging, 629 Deferred charges, defined, 459 Dell Computer, 422 Deloitte, 114 Delta, 359 Denny’s, 229 Department of Defense, 11, 251 Deposition, defined, 628 Descriptives, defined, 171 Digital analysis, defined, 171 Digital Equipment Corporation, 144 Digital signatures and certificates, defined, 611 Disbursement of money from wills, defined, 545 Disclosure fraud, kinds of, 472–475 Index related to financial reports and footnotes, 476–477 Discovery, 631 defined, 627 Discovery sampling, defined, 235 Dishonesty, fraud and, 100 Divorce, defined, 571 Divorce cases, fraud examiner’s role in, 566 participants in, 572 Divorce fraud, 571–572 Document examination, defined, 240 Document experts, 240 defined, 240 Documentary evidence, aspects of, 230 audits, 234 chain of custody, 230 coordination of, 233 defined, 84 discovery sampling, 235 document experts, 240 hard-to-get, 238 marking of, 232 obtaining, 234 organization of, 232 originals vs copies, 233 Documents and records, defined, 44 Domain Technologies, 144 Domino’s Pizza, 151 Dual custody, 42 Dummy company, defined, 510 Dumpster diving, defined, 535 Dynegy Inc., 479 E E.F Hutton Group, Inc., 473 EAP, see employee assistance program Earned revenue, recognized as unearned revenue, 451 Earnings management, slippery slope of, 460–465 Earnings per share, defined, 411 Earnings per share ratio, defined, 180 Earthlink, 623 E-business, defined, 604 E-business fraud, detecting, 612–613 E-commerce risks, inside organizations, 604–607 outside organizations, 607–609 E-commerce, control environment, 609 fraud in, 603–613 fraud risks in, 604–609 preventing fraud in, 609–612 preventing fraud through control activities, 610–612 risk assessment, 610 Economic extortion, defined, 519 Edison Schools, Inc., 472 EEOC, see Equal Employment Opportunity Commission Electronic evidence, 214 gathering, 214–217 Elements of fraud, defined, 149 Elgin Aircraft, 133–136, 235 E-mail systems, 217 Embezzlement, employee, defined, 10 Emerald Enterprises, 271 EMM, see ethical maturity model Employee(s), and fraud prevention, 71 assistance programs (EAP), defined, 108 collusion, 112–113 embezzlement, defined, 10 ethics, 72 Enron, 3, 4, 12, 15, 53, 80, 87, 116, 152, 153–155, 246, 358, 361, 362, 370, 371, 373, 374, 382, 389, 404, 433–434, 479, 484, 490, 632 Equal Employment Opportunity Commission (EEOC), 102 Equifax, 225, 256 Ernst & Young, 141 ESM Government Securities, 12 Ethical maturity model (EMM), defined, 72 Ethics, and honesty, 71 employee, 72 Evidence square, 84 Evidential matter, defined, 14, 539 Examiners, 578 Expectations, fulfilling, 280 Expense scheme, defined, 511 Experian, 256 Expert power, defined, 53 Expert witness, defined, 632 Extravagant lifestyles, 145–146 Exxon Corporation, 625 F Facilitators of communication, defined, 280 False accusations, civil liability for, 582 Falsified identity, defined, 608 FATF, see Financial Action Task Force FBI, 4, 11, 232–232 FCPA, see Foreign Corrupt Practices Act FDIC, Federal Communications Commission (FCC), 464 Federal courts, 625 defined, 624 Federal Trade Commission (FTC), 530, 540 Fidelity bonding, defined, 626 Fifth Amendment, defined, 630 Financial Action Task Force (FATF), 583 665 Financial disclosures, enhanced, 392 Financial News Network, 15 Financial pressures, 35 Financial reports, misrepresentation of nonfinancial information, 473 Financial results and operating characteristics, financial statement fraud, 376–378 Financial statement, and fraud, defined, 7, 358 Financial statement amounts, compared to assets, 412 comparing to assets they represent, 423 Financial statement analysis, 179–186 types of, 409 Financial statement fraud, 355–378 brief history, 643–644 causes of, 359–363 defined, 358 detecting, 367–378 financial results and operating characteristics, 376–378 in recent years, 358–359 management and, 368–370 motivations for, 366 nature of, 363 organization and industry, 374–376 other types of, 477–479 problem of, 358–366 relationships with others, 370–374 revenue- and inventoryrelated, 401–425 standards for, 643–649 statistics, 363–365 Financial statement information, comparing companies, 411–412 comparing with other companies, 422 First National of Chicago, 147 First-order reasoning, defined, 400 Fitch/IBC, 362 Fixed assets, defined, 456 overstatement of, 464, 469–470 Fixed-width format, defined, 169 Flag, 404 Footnote disclosures, misleading, 474–475 Footnotes, defined, 453 Ford Motor Company, 225, 359 Foreign advance-fee scams, defined, 543 Foreign Corrupt Practices Act (FCPA), 478 improper accounting for foreign payments, 478 Foreign-advance fee scams, 545 Fourth Amendment, defined, 629 Fraud, and criminal investigation division, 567–571 666 Index assessing and mitigating risk of, 79 asset misappropriation, 506–515 asset overstatement, searching for symptoms, 465–471 asset-related schemes, 493 audit sampling and, 164 bankruptcy, 572–579 bankruptcy, divorce, and tax, 565–585 behavior signals of perpetrators, 147 cash and short-term investment, 464 civil action, 86 civil litigation process, 626–629 consumer, 530 controls to prevent or detect, 44 court system, 624–626 criminal action, 87 criminal and civil prosecution of, 13–15 criminal litigation process, 629–632 current model, 119–121 customer fraud, 11 defined, 7–9 detecting e-business, 612–613 detecting inadequate disclosure, 475 divorce, 571 documentary symptoms of, 458 elements of, 84 opportunity, 38–49 pressure, 35–38 rationalization, 49–51 eliminating opportunities for, 109–116 employee embezzlement, 10 employee tips, 149 federal courts, 625 fighting, 69–87 financial pressures, 35–36 reports and footnotes, 476–477 statement, follow-up legal action, 86–87 fraud scale, 35 fraud triangle, 33–35 identifying understatement of liability, 450 inadequate disclosure, 472–477, 493 Internet, 13 inventory and cost of goods sold, 415–425 inventory theft, 514 investment scams, 12 judging quality of performance, 45 legal follow-up, 623–634 liability, asset, and inadequate disclosure, 447–479 liability-related schemes, 492 management fraud, 12 miscellaneous, 10 motives for, 302 nature of, 3–19 other types of financial statement, 477–479 overstatement of asset, 459–471 perpetrators of, 32–33 prevention of, 70–80 and detection, 38–44 profiles of perpetrators, 33 ratios used in detecting, 457 reasons for, 31–55 revenue-related, 402–415 senior investment, 12 seriousness of problem, 4–7 state courts, 624 success of, 116–117 symptoms of, 133–155 tax, 567 telemarketing, 550 types of, 10–13 vendor fraud, 11 vice pressures, 36–37 work-related pressures, 37–38 Fraud accountability, corporate, 393 corporate and criminal, 393 Fraud against organizations, 503–519 Fraud auditing, proactive, 116–117 Fraud awareness training, 101 Fraud control, control environment, 39 Fraud detection, 80–83 anomalies vs frauds, 164 data access, 168–170 data analysis process, 165–168 data analysis techniques, 170–178 data-driven, 163–186 defined, 82 financial statement analysis, 179–186 real time analysis, 178 text import, 169–170 whistle-blowerprotection, 151–155 Fraud exposure rectangle, 368 Fraud in e-commerce, 603–613 preventing, 609–612 Fraud investigation, 83–86 approach to, 83 conduction a, 84 Fraud opportunity, failure to discipline, 45–46 ignorance, apathy, and incapacity, 47–48 lack of access to information, 46–47 lack of audit trail, 48–49 quality of performance, 45 Fraud perpetrators, failure to discipline, 45–46 Fraud prevention, 99–121 assessing risk, 79 banking industry, 198–199 comprehensive approach, 118–119 defined, 71 dishonesty and, 100 eliminating opportunities for, 109–116 employee collusion, 112–113 expectations of honesty, 74 good internal controls, 110–112 handling of perpetrators, 79 honesty and, 101–109 ethics, 71 oil industry, 199–201 positive work environment, 78, 103–108 proper modeling, 71 punishment, 115–116 right kind of employees, 71 vendors and company policy, 112–113 whistle-blowing, 113–115 Fraud recruitment, 52–54 power, 52–54 Fraud report, 306–307 example, 318–351 inquiry methods and, 271–307 Fraud risks in e-commerce, 604–609 Fraud scale, 35 Fraud schemes, transaction types used in, 406 Fraud statistics, 504–506 Fraud statutes, civil and criminal bankruptcy, 574–575 Fraud symptoms, 164 accounting anomalies, 136–140 extravagant lifestyles, 145–146 tips and complaints, 149–155 unusual behavior, 146–149 Fraud trials, civil and criminal, 625–626 Fraud triangle, 33–35, 206, 413 summary of, 51–52 Fraud-fighting, academic requirements, 17 professionals, 16–17 skills required, 16–17 Fraud-related careers, 17–19 Fraudulent, disbursements, theft of cash through, 508 statements, defined, 505 transfers, 581–582 Free narrative, defined, 285 Front loading, defined, 546 FTC, see Federal Trade Commission Future obligations, underrecording, 452 Fuzzy matching, defined, 176 G General Electric (GE), 152, 359, 604 General Electrodynamics Corp (GEC), 453 General Motors, 464 General Motors Acceptance Corporation (GMAC), 554 Giant Eagle, 365 Global Crossing, 358, 359, 361, 389, 404, 478 Google, 603 Index Government sources of information, 251–255 Gramm-Leach Bliley Act, defined, 256, 539 Grand jury, defined, 630 Graphology, defined, 306 Gross profit (margin) ratio, defined, 410 Ground floor opportunity, defined, 548 H Habit, defined, 280 Hardee’s, 448 Harding, Warren G., 515 Headhunter fees, defined, 546 HealthSouth, 367, 408 Hewlett-Packard (HP), 456 Higher-level trial courts, defined, 624 Higher-order reasoning, defined, 400 HIH Insurance, 148 Home Shopping Network, 36 Homestore.com, Inc., 477 Honesty, and ethics, 71 creating culture of, 101–109 expectations of, 74 positive work environment, 103–108 Honesty testing, 306 graphology, 306 pencil-and-paper test, 306 voice stress analysis, 306 Horizontal analysis, defined, 180 Hormel Foods, 104–107 Houston Natural Gas, I IBM, 79, 144, 359, 435, 436, 478 Identity theft, 531–543 comments on, 541–543 converting personal information to personal gain, 534–535 defined, 531 minimizing the risk, 536–539 minimizing the damages, 539–541 prosecution of, 539 stages of, 532–534 stealing an identity, 535–536 Ignorance, 47–48 Illegal gratuities, defined, 519 Imclone fraud scandal, 50–51 Improper accounting in violation of Foreign Corrupt Practices Act (FCPA), 478 Improper use of non-GAAP financial measures, 478 off-balance-sheet arrangements, 478–479 Inadequate disclosure fraud, 472–477, 493 defined, 472 detecting, 475 Inappropriate accounting for, nonmonetary transactions, 477 roundtrip transactions, 477 Incapacity, 47–48 Income statements, defined, 179 Independence Standards Board, 649 Independent checks, defined, 43 Independent insurance agents, 12 Induction, defined, 279 Inferential confusion, 279 Information, lack of access to, 46–47 private sources of, 255–256 Informational questions, defined, 283 in interviews, 283–284 techniques in interviews, 285 Inhibitor, defined, 278 Initial pleading, defined, 627 Inquiry methods, for fraud reports, 271–307 interviewing, 272–273 Institutional Commodity Services, Inc., 511 Insurance agents, independent, 12 Intangible assets, defined, 459 Intent, defined, 539 Internal audit department, 41 Internal control(s), good system of, 110–112 structure, 44 weaknesses, 140–141 defined, 135 Internal Revenue Service (IRS), 4, 252, 567 International Monetary Fund (IMF), 583 International multilevel marketing schemes, 548 Internet, fraud, 13 search, 258 InterNorth, Interrogatory, defined, 627 Interstate Identification Index (III), defined, 252 Interview, 272–273 altruistic appeals, 280 catharsis, 280 chronological confusion, 279 defined, 272 demands for time, 279 demeanor of interviewer, 276 elements of conversation, 278 etiquette, 279 extrinsic rewards of, 281 facilitators of communication, 280 forgetting, 279 fulfilling expectations, 280 inferential confusion, 279 information exchange, 278 667 inhibitors of communication, 278 language of, 277 mechanics of the, 281–305 need for meaning, 281 new experience, 280 planning an, 276–284 question typology, 277–278 recognition, 280 ritual of, 278 sympathetic understanding, 280 threatened egos, 279 trauma, 279 unconscious behavior, 280 volatile, 289 Interview mechanics, admission-seeking questions, 295– 305 assessment questions, 290 assessment questions, 293–294 closing questions, 294–295 dealing with resistance, 288 difficult people, 288–289 fraud motives, 302 informational question techniques, 285 informational questions, 283–284 introductory questions, 281–282 methodology, 282–283 note-taking, 285–286 observing reactions, 286–287 physical evidence, 303 physiology of deception, 290–293 question sequence, 284–285 refute alibis, 300 signed statements, 304–305 theme development, 287 transition methodology, 287–288 volatile interviews, 289–290 Inventory, and cost of goods sold analytical symptoms, searching for, 420–421 and cost of goods sold frauds, 415–425 Inventory fraud, analyzing financial statements for, 421 transactions subject to, 418 Inventory overstatement, effect on income statement, 416 Inventory theft, 514 Inventory turnover, defined, 421 Inventory turnover ratios, defined, 180 Inventory-related, control symptoms, searching for, 423 financial statement fraud, 401–425 Inventory-related fraud, identifying, 416–418 symptoms of, 418–420 schemes, 446 strategic reasoning relating to, 446 Investigation, defined, 84 668 Index Investigation methods, conversion, 249–261 Investigator, application for retention of, 599–601 Investment fraud, defined, 554 Investment scams, consumer, 543–555 defined, 12 Invigilation, defined, 212 ITT, 73 J Johnson Marine, 147 Journal entries, faulty, 137–139 JP Morgan Chase, 359 Jurisdiction, defined, K Keating, Charles, 46–47 Kentucky Fried Chicken, 229 Kickback, defined, 516 warning signs, 167 Kimberly-Clark, 468 Kinetic communication, defined, 287 Kiting, 82 Kmart, 359 KPMG, 505 L Labeling, defined, 39 Lapping, defined, 508 Larceny, defined, 506 theft of cash through, 506–508 Laribee Wire Manufacturing Co., 423 Law, civil, 15 criminal, 14 Leases, defined, 448 Ledger inaccuracies, 139 Legal action, follow-up, 86–87 Legitimate power, defined, 53 Liabilities, manipulating, 449–450 understanding, 448–459 Liability, transactions, 450 understatement of, 450 Liability-related fraud schemes, 492 Lifestyle symptoms, defined, 136 Lincoln Savings and Loan, 46–47, 138– 139, 368, 371, 374–375, 452, 464 Link analysis, defined, 233 Lower-level trial courts, defined, 624 M Mail Boxes Etc., 230 Mail stuffing, defined, 549 Malibu Capital Corporation, 461 Management, boards of directors, and audit committees, role of, 648 communication, 39 fraud, defined, 12 role and example, 39 Mandatory vacation, 43 Marketable securities, defined, 464 Matasos matrix, 178–179 defined, 178 Mayberry Corporation, 142 McDonald’s, 205, 207, 226 MCI, 87 Mergers, defined, 461 Merrill Lynch & Co., 127, 632 Methodology for interviews, 282–283 Midisoft Corporation, 386–387 MiniScribe Corporation, 12, 144, 420 Miranda warnings, 296 Miscellaneous fraud, defined, 10 Misleading footnote disclosures, 474–475 Misrepresentation of company, and assets, symptoms related to, 475 and products, 472 Modeling, defined, 39 proper, 71 Money laundering, 582–585 defined, 582 detecting schemes, 584 efforts to combat, 583 process of, 585 Moody’s, 362 Mortgages, defined, 448 Motion, defined, 627 for summary judgment, defined, 628 Motor Vehicles, Department of, 254 Motorola Inc., 632 Muffler’s Incorporated, 508 Multilevel marketing (MLM) company, defined, 546 Mutual fund business practices, 13 N NASDAQ corporate governance changes, 394–396 National Crime Information Center (NCIC), defined, 252 Net asset value (NAV), defined, 518 Net income, defined, manipulation of, 403–404 Net worth method, 259–261 defined, 259 New Jersey Resources Corporation, 459 New York Stock Exchange, 355 Nextel, 145 N-grams, defined, 177 Nigerian money offers, defined, 543 Nolo contendere, defined, 631 Nonfinancial information, misrepresentations in, 473 Nonfinancial performance measures, defined, 367 Non-GAAP financial measures, improper use of, 478 Nonmoney transactions, inappropriate accounting for, 477 Nonsampling risk, defined, 238 Norming, defined, 290 Note-taking in interviews, 285–286 Number of days in receivables, defined, 410 Number of days’ sales in inventory, defined, 421 Nynex Telephone Company, 464 NYSE corporate governance changes, 396 O OCC, see Office of the Controller of the Currency ODBC, see Open Database Connectivity Off-balance-sheet arrangements, improper use of, 478–479 Office of the Controller of the Currency (OCC), 43 Online databases, 256–258 Open Database Connectivity (ODBC), defined, 169 Operating performance margin ratio, defined, 411 Operation Cyber Sweep, 13 Opportunity meetings, defined, 547 Opting out, defined, 256 Organizational structure, 41 Outlier investigation, 173 Overstatement of asset fraud, 459–471 defined, 459 Overstatement of fixed assets, 464, 469–470 P Pacific Telephone Co fraud, 51–52 Pacing, defined, 286 Paralinguistic communication, defined, 287 Parmalat, 12 Passwords, defined, 604 Payroll, disbursement schemes, 512 scheme, defined, 511 Index PCAOB, see Public Company Accounting Oversight Board Pencil-and-paper honesty test, defined, 306 Penn Central, 469 Pension, defined, 454 PepsiCo, 359 Perceived opportunity, defined, 34 Perceived pressure, defined, 33 Percentages, defined, 411 Performance, inability to judge the quality of, 45 Permit departments, 255 Perpetrators, defined, of fraud, proper handling of, 79 Personal observation, defined, 84 Peso’s Country Kitchen, 448 Pfizer, Inc., 453 Phar-Mor, 12, 249–250, 415, 465, 471 financial statement fraud, 365–366 Phishers, defined, 536 Phishing, 608 defined, 533 Physical evidence, 213 defined, 84 of fraud, 303 Physical safeguards, defined, 44 Pigeon drops, 47 Pilgrim, Baxter & Associates, 519 Pitney Bowes, 570 Pivot tables, defined, 175 Planned bankruptcy (bust-out), 579–580 PNC Financial Services Group, 465 Polygraph, defined, 306 Ponzi scheme, 12, 475, 554, 623 defined, 546 Ponzi, Carlo Charles, Popeye’s, 448 Positive work environment, 78, 103–108 Postal inspectors, defined, 252 Power, coercive, 53 defined, 52 expert, 53 legitimate, 53 referent, 53 reward, 53 types of, 53 Predication, defined, 83 Preliminary hearing, defined, 630 Pressure, and fraud, 35–38 financial, 35–36 other, 38 vice, 36–37 work-related, 37–38 Pretrial motions, 631 Prime bank schemes, 12 Proactive fraud auditing, 116–117 Procedures, control, 41 Product testing, defined, 549 Profit margin, defined, Profit margin ratio, defined, 180 Promissory notes, 12 Proposed investigator, affidavit of, 595–598 Proxemic communication, defined, 286 Psychopaths, defined, 149 PTL fraud, 49–50 Public Company Accounting Oversight Board (PCAOB), 389, 394 Public Oversight Board’s 1993 Special Report, 645 Public Oversight Board’s 1995 Report, 649 Public Oversight Board’s Advisory Panel Report, 649 Purchase of real estate scam, defined, 545 Putnam Investments, 519 Pygmalion effect, 104 Pyramid scheme, defined, 546 Q Question sequence in interviews, 284–285 Quick ratio, defined, 180 Qwest, 358, 403, 404, 484 R Racketeer Influenced and Corrupt Organizations (RICO) Act, 625 Radio Shack, 102 Ramada Inn, 401 Rapport, defined, 281 Rationalization, element of, 49–51 Rationalize, defined, 34 Ratios, common, 180–181 Reaction to crises, 273–276 acceptance, 276 anger, 275 denial, 274 depression, 275 rationalization, 275 Real time analysis, 178 Recognition, 280 Red Hat, Inc., 74–78 Referent power, defined, 53 Regal Industries, 142 Regina Vacuum Company, 12, 36, 147 Register disbursement schemes, defined, 509 Relationships, changes in, 421 Remedy, defined, 627 Report of the National Commission on Fraudulent Financial Reporting, 644 Repurchase agreements, defined, 454 Request for admission, defined, 627 Resistance, in interviews, 288 Respondent reactions, observing in interviews, 286–287 669 Restructuring, defined, 449 Return on assets ratio, defined, 180 Return on equity ratio, defined, 180 Revenue, defined, Revenue recognition, defined, 402 Revenue transactions, basic, 405 Revenue-related analytical symptoms, searching for, 408–409 Revenue-related financial statement fraud, 401–425 Revenue-related fraud, 402–415 identifying, 404–405 schemes, 437 strategic reasoning relating to, 437 Revenue-related fraud symptoms, following up on, 415 identifying, 405–408 searching for, 408 Revenue-related relationships, changes in, 410–411 Revenues and receivables, manipulating net income using, 403–404 Revere Armored Car Company , 152 Reward power, defined, 53 RICO, see Racketeer Influenced and Corrupt Organizations Act Risk assessment, defined, 166 Risks, inside organizations, e-commerce, 604–607 outside organizations, e-commerce, 607–609 Rite Aid Corporation, 12, 355–358, 415, 474 Robinson Pipe Cleaning, 503 Roundtrip transactions, inappropriate accounting for, 477 Rustcraft Broadcasting Company, 504 S Sale of crude oil at below market price, defined, 545 Sales, calls, avoiding, 553 discount percentage ratio, defined, 410 return percentage ratio, defined, 410 returns, defined, 410 Sampling risk, defined, 238 Sarbanes-Oxley Act of 2002, 74, 104, 114, 364, 373, 389–394, 401, 413, 649 analyst conflicts of interest, 392 auditor independence, 390 commission resources and authority, 392 corporate and criminal fraud accountability, 393 corporate fraud accountability, 393 corporate responsibility, 391 corporate tax returns, 393 defined, 80 670 Index enhanced financial disclosures, 392 PCAOB, 389–390 recent laws and changes following, 389–399 studies and reports, 393 white-collar crime penalty enhancements, 393 Sarbanes-Oxley Corporate Governance Act, SAS No., 53, role of auditors, 645 SAS No., 82, 646 SBC Communications, Inc., 464 Scams that prey on the elderly, 552 Scheme, defined, 163 Ponzi, 12, 475, 554, 623 defined, 546 prime bank, 12 Schneider, Jerry, 51–52 Scientific Atlanta, 632 Sears Roebuck & Co., 45, 365, 470 Securities and Exchange Commission (SEC), 104, 141, 364, 373, 368, 401, 623, 392, 393 defined, 355 enforcement releases, defined, 364 form 10-K, 472 defined, 368 form 10-Q, 472 defined, 374 Secret Service, 252 Secretary of State, 253 Security and Exchange Act of 1933, 391 Security sales, 12 Security through obscurity, defined, 609 Segregation of duties, defined, 42 Senior investment fraud, 12 Settlement, defined, 628 Shell company, defined, 510 Shoulder surfing, defined, 536 Signed statement sample, 317 Signed statements of confession, 304–305 Silent probe, defined, 286 Simon Marketing, 205 Sirena Apparel Group, Inc., 451 Sixth Amendment, defined, 630 Sizzler Steak House, 229 Skimming, defined, 508, 535 theft of cash through, 508 Snake oil plans, defined, 547 Sniffing, defined, 606 Social engineering, defined, 604 Social Security Administration (SSA), 253 Soundex, defined, 177 Source documents, irregularities in, 136 Southern Bell Telephone, 464 Spoofing, defined, 608 Sprint, 145 Spyware, 608 Standard & Poor’s, 362 State attorney general, 253 State sources of information, 253–255 Statement on Auditing Standards No., 99, 647 Statements of cash flows, defined, 179 Statistical analysis, defined, 168 Statute, defined, 14 Stewart, Martha, 50–51 Stock exchanges, changes made by, 394–398 Stockbrokers, unscrupulous, 12 Strategic reasoning, defined, 367 in the audit setting, 400 Stratification, defined, 175 Structured query language (SQL), defined, 167 Subpoena, defined, 238, 628 Summarization, defined, 175 Sunbeam Corporation, 12, 402, 449–450 Surveillance, and covert operations, 209 defined, 207 Sympathetic understanding, 280 Systems of authorizations, defined, 43 Systems Research & Development Corporation (SRD), 177 Tab separated values (TSV), defined, 169 Tax courts, defined, 625 Tax fraud, 567–571 defined, 567 T Tax, divorce, and bankruptcy fraud, overview of, 566–567 Teapot Dome scandal, 515 TechnoWorld, 429 Teledata Communications, Inc., 225 Telemarketing fraud, defined, 550 safeguards against, 552–553 Testimonial evidence, defined, 84 Text import, 169–170 Theft, investigating, 205–219 investigative methods, 207–217 Theft act, defined, 84 Theft investigation, defined, 207 electronic evidence, 214 e-mail systems, 217 example, 217–219 invigilation, 212 physical evidence, 213 surveillance and covert operations, 209 vulnerability chart, 208 Theft of cash, through larceny, 506–508 through skimming, 508 Theft of inventory or other assets, 514 Theme development in interviews, 287 Time trend analysis, 175 defined, 176 Times-interest-earned ratio, defined, 180 Tips and complaints, searching for, 414, 424 Topside journal, defined, 403 Toshiba, 115 Transaction types used in fraud schemes, 406 Transition methodology in interviews, 287–288 TransUnion, 256 Trashing, defined, 255 Treadway Commission, defined, 363 Trial and appeal, 629, 631 Trump Hotels, 478 Trustee, defined, 577 TSV, see tab separated values Tyco International Ltd., 358, 513, 514 U U.S Cellular, 145 U.S Constitution, 624, 629 U.S Postal Service, 252 U.S Social Security Administration (SSA), 164 U.S Trustee, 576 UCC, see Uniform Commercial Code Underrecording, debts (notes, mortgages, etc.), 452 future obligations, 452 Underreporting of liabilities, searching for symptoms of, 455–459 Understatement of liability fraud, defined, 449 detecting symptoms, 453–455 exposure, identifying, 450 Understating accounts payable, 450 Understating accrued liabilities, 451 Unearned revenues, defined, 451 recognizing as earned revenue, 451 Uniform Commercial Code (UCC), 253 United Airlines, 127, 359 Unlicensed individuals, 12 Unscrupulous stockbrokers, 12 V Variable annuities, 13 Vendor fraud, defined, 11 Vertical analysis, defined, 180 Vice pressures, 36–37 Victim, defined, Village Inns, 448 Vital Statistics, Department of, 254 Voice stress analysis, defined, 306 Voir dire, defined, 632 Index Volatile interview, defined, 289 Vulnerability chart, defined, 208 W W.R Grace & Co., 449–450 Wal-Mart, 249, 365, 470 Warrant, defined, 629 Warranty liability, defined, 456 Wartrapping, defined, 607 Washington Mutual Bank, 225 Waste Management, Inc., 12, 139, 447, 487–489 Wendy’s, 448 Western Wireless, 145 Westinghouse Credit Corp., 365 Wheeling Bronze, Inc., 503 Whistle-blower, protection of, 151–155 Whistle-blowing, 513 accessibility, 115 anonymity, 114, 115 culture, 115 follow-up, 115 independence, 115 lack of awareness, 115 policies, 115 Whistle-blowing system, 113–115 defined, 82 White-collar crime penalty enhancements, 393 Wireshark software, 606 Work environment, positive, 78, 103–108 Work-at-home schemes, 546 Working capital turnover ratio, defined, 411 Work-related pressures, 37–38 671 World Bank, 583 WorldCom, 3, 12, 15, 71, 87, 116, 145, 155, 358, 361, 382, 389, 412, 413, 461, 478, 490 X Xerox Corp., 358, 449–450 Y Yahoo!, 603 Z Zero-order reasoning, defined, 400 Z-score, defined, 173 ZZZZ Best, 12, 403 ... 1st Quarter $0.17 0.17 0.17 0.18 0.18 0 .21 0.17 0.17 0.17 | 361 Chapter 11 2nd Quarter $0 .23 0 .21 0 .25 0 .21 0 .25 0 .28 3rd Quarter 0 .21 0 .21 0 .23 0 .23 0 .23 0 .24 Based on these estimates, the consensus... depreciation TOTAL ASSETS 20 08 20 07 $ 1, 320 ,096 $ 1,089,978 1,646,046 15, 524 ,349 1 ,28 5,593 12, 356,400 17, 720 15, 826 7,916 $16,516, 127 5,484 $14,753 ,28 1 596,517 6 12, 480 $17,1 12, 644 $15,365,761 (Continued)... detecting fraud We label this framework the fraud exposure rectangle.” The fraud exposure rectangle shown in Figure 11 .2 is a useful tool for identifying management fraud 368 Part FIGURE 11 .2 | Management