Data Analytics and Financial Statement Fraud 2013 Copyright Tommy Sea

Information about Data Analytics and Financial Statement Fraud 2013 Copyright Tommy Sea

Published on July 11, 2014

Author: tommyseah

Source: authorstream.com

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Financial Analytical Skills Financial Statement Fraud by Tommy Seah ACFE Regent Emeritus: Financial Analytical Skills Financial Statement Fraud by Tommy Seah ACFE Regent Emeritus Programme Overview – Day 1 : Programme Overview – Day 1 9.00am - 10.30am Understanding Financial Statement Fraud Financial Statement Fraud Define Key Elements of Financial Statement Lessons Learned, a case study : Analysis of Famous Cases 10.30am – 10.45am Morning tea break Programme Overview - Day 1: Programme Overview - Day 1 10.45am – 12.30pm The Fraud Triangle - The Three Factors present in Organization that allow fraud to occur Incentive /pressure Opportunities Attitudes/Rationalization Profiles of a Financial Statement Fraudster 12.30 – 2.00pm Lunch Programme Overview - Day 1: Programme Overview - Day 1 2.00pm – 3.30pm The Anatomy of Financial Statement Fraud (Case Discussion) Utilize Aggressive Reserves Delay/alter Expense Recognition Accelerate Revenue Recognition Make Unsupportable Entries Fabricate Additional Revenues 3.30 – 3.45pm Afternoon tea break Programme Overview - Day 1: Programme Overview - Day 1 3.45am – 5.00pm Analysis of common Fraud Examples and how to Detect Potential Warning Signs Refreshed” Receivables Misstatement Of Expenses Sales of Development Stage Products Channel Stuffing Misstatement Of Asset Value & Liabilities Moving Inventory Between Locations Fraudulent Audit Confirmations Off Balance Sheet Liabilities Improper Revenue Recognition PowerPoint Presentation: Are “Certified” accounts reliable for Decision Making? • A Case Study • Problems of Current Reporting Practices • Financial Reporting WORST Practices Financial Statement Fraud Defined: Financial Statement Fraud Defined Deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors. Financial Statement Fraud Defined: Financial Statement Fraud Defined Falsification, alteration, or manipulation of material financial records, supporting documents, or business transactions Financial Statement Fraud Defined: Financial Statement Fraud Defined Material intentional omissions or misrepresentations of events, transactions, accounts, or other significant information from which financial statements are prepared Financial Statement Fraud Defined: Financial Statement Fraud Defined Deliberate misapplication of accounting principles, policies, and procedures used to measure, recognize, report, and disclose economic events and business transactions The Fraud Triangle: The Fraud Triangle Costs of Financial Statement Fraud: Costs of Financial Statement Fraud PowerPoint Presentation:               What type of individual commits FRAUD?  It is not limited to any one type of person. Profile of a Financial Statement Fraudster PowerPoint Presentation: 14 Optimistic High self-esteem Achieving Family harmony Socially conforming Self control Kind Sympathetic Conclusion: Fraud Perpetrators Look Exactly Like Us! PowerPoint Presentation: 15               Profile of A Person Who Commits Fraud Given the right circumstances, almost everyone can rationalize that it is OK to commit fraud..   15 PowerPoint Presentation: INTERNATIONAL MILITARY BRIBERY SCHEME UNCOVERED Singapore executive arrested in San Diego September 17, 2013 PowerPoint Presentation: Three individuals were charged with participating in a criminal military bribery scheme unsealed in federal court today (Sept. 17). Leonard Glenn Francis, head of a Singapore defense contractor, was charged with providing luxury travel and prostitutes to U.S. Navy Commander Michael Vannak Khem Misiewicz, and special agent for the Naval Criminal Investigative Service, John Bertrand Beliveau II in exchange for confidential information in relation to hundreds of millions of dollars in Navy contracts. “Red Flags” : 18 “ Red Flags ” Text Alcohol Gambling Drugs Sex Profile of A Person Who Commits Fraud Given the “right circumstances” , almost everyone can rationalize that it is OK to commit fraud.. PowerPoint Presentation: Financial analytical Skills Financial Statement Analysis: Financial Statement Analysis Financial Statement Analysis: Financial Statement Analysis Percentage Analysis - Balance Sheet : Percentage Analysis - Balance Sheet Percentage Analysis - Income Statement: Percentage Analysis - Income Statement Methods of Financial Statement Fraud: Methods of Financial Statement Fraud Fictitious revenues Timing differences Improper asset valuations Concealed liabilities and expenses Improper disclosures Fictitious Revenues: Fictitious Revenues Recording of goods or services that did not occur Fake or phantom customers Legitimate customers Sales with conditions Motivation - pressures to boost revenues Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues Rapid growth or unusual profitability, especially compared to that of other companies in the same industry Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues Significant transactions with related parties or special purpose entities not in the ordinary course of business or where those entities are not audited or are audited by another firm Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues Unusual growth in the number of days’ sales in receivables Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues A significant volume of sales to entities whose substance and ownership is not known Red Flags – Fictitious Revenues: Red Flags – Fictitious Revenues An unusual surge in sales by a minority of units within a company, or of sales recorded by corporate headquarters Timing Differences: Timing Differences Recording revenue and/or expenses in improper periods Shifts revenues or expenses between one period and the next, increasing or decreasing earnings as desired Timing Differences: Timing Differences Red Flags – Timing Differences: Red Flags – Timing Differences Rapid growth or unusual profitability, especially compared to that of other companies in the same industry Red Flags – Timing Differences: Red Flags – Timing Differences Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth Red Flags – Timing Differences: Red Flags – Timing Differences Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions Red Flags – Timing Differences: Red Flags – Timing Differences Unusual increase in gross margin or margin in excess of industry peers Red Flags – Timing Differences: Red Flags – Timing Differences Unusual growth in the number of days’ sales in receivables Red Flags – Timing Differences: Red Flags – Timing Differences Unusual decline in the number of days’ purchases in accounts payable Concealed Liabilities: Concealed Liabilities Liability/expense omissions Capitalized expenses Failure to disclose warranty costs and liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Red Flags – Concealed Liabilities: Red Flags – Concealed Liabilities Improper Disclosures: Improper Disclosures Liability omissions Subsequent events Management fraud Related-party transactions Accounting changes Red Flags – Improper Disclosures: Red Flags – Improper Disclosures Domination of management by a single person or small group (in a non-owner managed business) without compensating controls Ineffective board of directors or audit committee oversight over the financial reporting process and internal control Red Flags – Improper Disclosures: Red Flags – Improper Disclosures Ineffective communication, implementation, support, or enforcement of the entity’s values or ethical standards by management or the communication of inappropriate values or ethical standards Rapid growth or unusual profitability, especially compared to that of other companies in the same industry Red Flags – Improper Disclosures: Red Flags – Improper Disclosures Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another firm Red Flags – Improper Disclosures: Red Flags – Improper Disclosures Significant bank accounts or subsidiary or branch operations in tax haven jurisdictions for which there appears to be no clear business justification Overly complex organizational structure involving unusual legal entities or managerial lines of authority Red Flags – Improper Disclosures: Red Flags – Improper Disclosures Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management, or board members alleging fraud or violations of laws and regulations Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality Red Flags – Improper Disclosures: Red Flags – Improper Disclosures Formal or informal restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with the board of directors or audit committee Programme Overview – Day 2 : Programme Overview – Day 2 9.00am - 10.30am DETECTING CREATIVE ACCOUNTING PRACTICE • Detecting Fictitious Revenues • Detecting Misreported Asset & Liabilities • Identifying the ‘Red Flags’ and Anomalies in Financial Statement • Using Operating Cash Flow to Detect Creative Accounting Practices 10.30am – 10.45am Morning tea break Programme Overview - Day 2: Programme Overview - Day 2 10.45am – 12.30pm PREVENT AND DETECT FINANCIAL STATEMENT FRAUD • Tools and Techniques to Combat Financial Statement Fraud • What to Do When You’ve Discovered a Serious Financial Fraud • Proactive Forensic Data Analysis • How to Protect Your Organisation from Financial Statement Fraud 12.30 – 2.00pm Lunch Programme Overview - Day 2: Programme Overview - Day 2 2.00pm – 3.30pm (Experience Sharing) FRAUD INVESTIGATION IN ACTION : WHAT EXPERTS DO • Fraud Audit vs Fraud Investigation • Fundamentals of Financial Statement Audit • Internal Investigation Protocols • Mistakes Investigators Make in Conducting Fraud Investigations 3.30 – 3.45pm Afternoon tea break Programme Overview - Day 2: Programme Overview - Day 2 3.45am – 5.00pm DIGITAL FORENSICS TO AID FINANCIAL STATEMENT RECONSTRUCTION • What you must NOT DO when you are tasked to investigate a Computer Related Crime • The need to understand the REAL difference between Data Analytics and Digital Forensics • Where to get help if System Records are Deleted and files gone missing overnight? Improper Asset Valuation: Improper Asset Valuation Inventory valuation Improper Asset Valuation: Improper Asset Valuation Accounts receivable Improper Asset Valuation: Improper Asset Valuation Business combinations Improper Asset Valuation: Improper Asset Valuation Fixed assets Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Red Flags – Improper Asset Valuation: Red Flags – Improper Asset Valuation Deterrence of Financial Statement Fraud: Deterrence of Financial Statement Fraud Reduce Pressures to Commit Financial Statement Fraud: Reduce Pressures to Commit Financial Statement Fraud Establish effective board oversight of the “tone at the top” created by management. Reduce Pressures to Commit Financial Statement Fraud: Reduce Pressures to Commit Financial Statement Fraud Avoid setting unachievable financial goals. Avoid applying excessive pressure on employees to achieve goals. Reduce Pressures to Commit Financial Statement Fraud: Reduce Pressures to Commit Financial Statement Fraud Change goals if changed market conditions require it Reduce Pressures to Commit Financial Statement Fraud: Reduce Pressures to Commit Financial Statement Fraud Ensure compensation systems are fair and do not create too much incentive to commit fraud. Reduce Pressures to Commit Financial Statement Fraud: Reduce Pressures to Commit Financial Statement Fraud Discourage excessive external expectations of future corporate performance. Remove operational obstacles blocking effective performance. Reduce the Opportunity to Commit Financial Statement Fraud: Reduce the Opportunity to Commit Financial Statement Fraud Maintain accurate and complete internal accounting records. Carefully monitor the business transactions and interpersonal relationships of suppliers, buyers, purchasing agents, sales representatives, and others who interface in the transactions between financial units. Reduce the Opportunity to Commit Financial Statement Fraud: Reduce the Opportunity to Commit Financial Statement Fraud Establish a physical security system to secure company assets, including finished goods, cash, capital equipment, tools, and other valuable items. Reduce the Opportunity to Commit Financial Statement Fraud: Reduce the Opportunity to Commit Financial Statement Fraud Maintain accurate personnel records including background checks on new employees. Reduce the Opportunity to Commit Financial Statement Fraud: Reduce the Opportunity to Commit Financial Statement Fraud Encourage strong supervisory and leadership relationships within groups to ensure enforcement of accounting procedures. Establish clear and uniform accounting procedures with no exception clauses. Reduce Rationalization of Financial Statement Fraud: Reduce Rationalization of Financial Statement Fraud Reduce Rationalization of Financial Statement Fraud: Reduce Rationalization of Financial Statement Fraud Reduce Rationalization of Financial Statement Fraud: Reduce Rationalization of Financial Statement Fraud Reduce Rationalization of Financial Statement Fraud: Reduce Rationalization of Financial Statement Fraud How can Computer Forensics help?: Financial Statement Fraud Employee Misdemeanor Sexual harassment cases - memos, letters, e-mails, chat Embezzlement cases - spreadsheets, memos, letters, e-mails, on line banking information Corporate Espionage - memos, letters, e-mails, chat Fraud - memos, letters, spreadsheets, e-mails How can Computer Forensics help? Tools of the Trade: Tools of the Trade Best to use commercial software, available to anyone EnCase by Guidance Software Forensic Tool Kit by Access Data IDENTIFY: IDENTIFY What is the evidence? Where is it stored? How is it stored? How long will it be there? Stand alone Server Laptop Handheld Remote Storage Relevant Policies & Procedures: Relevant Policies & Procedures Ensure the Client’s policy states that the user has no expectation of privacy on any computer that is owned by the company or access the company’s network or email systems. Game Plan: Game Plan Develop keyword searches to run against the data List the file types you are interested in Determine which computers need to be imaged and then a priority for each computer for analysis work Set benchmarks where you will give the client reports on work in process A Few Common Mistakes: A Few Common Mistakes Not making a bit-stream image Gates Rubber Co. v. Bando Chemical Industries, Ltd., 167 F.R.D. 90 (D. Colo. 1996). Plaintiff had a technician install Norton’s Unerase on the defendants computer & destroyed about 7% of the recoverable items in the process. In 1996 they got away with this, now a judge familiar with computer forensics could have anything found thrown out. Booting the computer Poking around before making an image Not using a person that is not properly train in computer forensics Not making forensically sound images as soon as possible Not notifying the right people in IT In today’s environment of outsourcing, a third party may need to be notified for preservation – is this in your plan? Keir v. Unumprovident Corp., No. 02 Civ. 8781, 2003 WL 21997747 (S.D.N.Y. Aug. 22, 2003). Preservation: Preservation Securing the potential evidence Preservation Imaging the items Documentation Securing the potential evidence: Securing the potential evidence Preservation is the first step Know your rights and responsibilities Review ISPs to see if they have any policies and procedures concerning request for information. Preserve: Preserve The key to a forensically sound examination hinges on the pristine condition of the evidence/information. This examination insures there are no changes to the original evidence. Destination drive preparation Write Blocking Software Read Only Attribute Digital Intelligence DOS EnCase Image Validation: Image Validation Encase MD5, CRC (every 32K) FTK MD5, SHA-1 Chain of Custody: Chain of Custody Very important documentation Inadequate documentation may result in all the forensic work being thrown out Guard the original evidence Examination & Analysis: Examination & Analysis What can be recovered & Why Differences in the Forensic Tools Tool validation Why can data be recovered?: Why can data be recovered? Windows operating systems can not securely remove data from a hard drive. The way data is stored allows data to be recovered long after an individual thought it was gone. Data is stored on a hard drive in “clusters.” Windows uses fixed-size clusters. Even if data being stored doesn’t completely fill the cluster, the entire cluster is used for the file. Unused space is called slack space . Computer Forensics vs Electronic Discovery: Computer Forensics vs Electronic Discovery Computer Forensics Investigate & detailed analysis Typically targets selected hard drives or PCs Searching for “deleted” information Determine who, what, & when Re-creation of time critical events Reporting & expert testimony Breaking of passwords/encryption May include backup tapes Includes Meta-data Electronic Discovery Gathering, searching, filtering, and producing large amounts information for review Data is accessed, but not analyzed Active and archived data Normally does not include deleted, discarded, or hidden data Backup tapes, email servers, network servers May or may not include Meta-data Difference in Forensic Tools: Difference in Forensic Tools No one tool does everything Know the tools strengths & Weaknesses Example FTK preprocesses and builds and index & EnCase post processes – no index ProDiscover has remote acquisition, others do not. (not counting EnCase Enterprise) Tool Validation: Tool Validation Use one tool to validate another If you can get the same results with 2 or more different tools, then the tool can be validated How to Find this Stuff: How to Find this Stuff Keyword searches File carving utilities File viewers for ‘picture’ files Time Line Analysis File hashing & hash set comparison File signature analysis Running of scripts Presentation: Presentation Informal to client Phone call Email Meeting Report Courtroom Powerpoint Live demonstrations Reports: Reports EnCase Can be created with Bookmarks and outputted in RTF or HTML formats FTK Report Wizard, HTML Report ProDiscover Automatically generated Winhex/X-Ways Forensic Automated log and report generation Courtroom Presentation: Courtroom Presentation Documented Chain of Custody Repeatable Verifiable Resist the temptation to tell more than you know. Where do I start? PowerPoint Presentation: For those new to evidence in general, inculpatory evidence is that which supports a charge or accusation of wrongdoing. Inculpatory evidence PowerPoint Presentation: exculpatory evidence is that which would cast doubt or prove innocence. In the computer forensic world, perhaps the best known example of exculpatory evidence is a virus which downloads content, or rootkit allowing surreptitious access by a third party to a computer. Exculpatory evidence PowerPoint Presentation: 110               Thank you Contact Information: Tommy Seah CFE, CSI, FCPA Regent Emeritus ACFE Board of Regents, Texas, USA www.cfe-in-practice.com [email protected] Singapore Phone : + (65) 91069872 ICFE CONSULTANCY GROUP PTE LTD International Cybercrime & Forensics Examiners www-icfe-cg.com

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