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Today’s Topics

Today’s Topics. Inductive Fraud Detection Financial Statement Analysis and Detection High Technology Trends Shenanigan #1. Inductive Methods Broad Analysis. Commercial Data-mining Tools (ACL) Query and sorting tools Covers a vast amount of data Easy to use Requires a lot of memory

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Today’s Topics

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  1. Today’s Topics • Inductive Fraud Detection • Financial Statement Analysis and Detection • High Technology Trends • Shenanigan #1 FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-1

  2. Inductive MethodsBroad Analysis • Commercial Data-mining Tools (ACL) • Query and sorting tools • Covers a vast amount of data • Easy to use • Requires a lot of memory • Static in nature • Data  information; false positives • Database Analysis • Analysis of internal data using, for example, Benford’s Law FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-2

  3. Benford’s Law • Occurrence of digits in a random number sequence • Series starting with 1’s greater than 2’s; 2’s greater than 3’s etc. • Effective for locating falsified trends FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-3

  4. Deductive MethodsNarrow Analysis • Five-step process • Know the territory • Know fraud possibilities • Determine the symptoms • Use tools to search for the symptoms • Follow up on the symptoms • Two examples • Bank example • Oil company example FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-4

  5. Financial Statement Analysis • Methodology • Trends • Ratios • Horizontal analysis • Vertical analysis • What looks out of the ordinary FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-5

  6. High Tech Trends • Artificial intelligence or “fuzzy logic” • Unique associations • Invasion of privacy issues FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-6

  7. Shenanigan #1 • Technique #1: • Recording revenue when services remain • Technique #2: • Recording revenue before shipment or acceptance • Technique #3: • Recording revenue when payment is not required • Technique #4: • Selling to an affiliate • Technique #5 • Using quid pro quo (I.e. bartering) • Technique #6: • Grossing up revenue FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-7

  8. Revenue Red Flags • Aggressive Rev. Rec. Policies • Rise in unbilled receivables • Rising receivables • Rising allowance for doubtful accounts • Increased returns FORENSIC ACCOUNTING - BA124 - Fall 2007 Slide 6-8

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