mis 520 – data analytics for it auditors€¦ · physical introduction of bulk cash into the...
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MIS 520 – Data Analy t ics fo r IT Aud itors
EdFerrara,MSIA,[email protected]
Week1:IntroductiontoFraud
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TheManyFacesofFraud
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Fraud
Theft(Misappropriation)
CorruptionDeceptiveStatements
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FraudTheintenttodeceivetoobtainanunearnedbenefit.
Fraud:• Isanillegalactoracts(intentionalwrongdoing thatviolatesalaworlaws)• Includestheconcealmentoftheactoracts• Resultsinthe perpetratorsgaining financialbenefit fromtheact(monetizing the
gains- cashoranothervaluablecommodity)
Examples:• Borrowingmoneyusingsomeoneelse’sidentity• Misrepresenttheprofitabilityofapublicly tradedcompanytoartificiallyinflatethe
company’sstockprice• Misrepresenttheprofitabilityofaprivatelyheldcompany,whensellingthe
company,tomakethebuyerbelievethecompanyisworthmorethanitactuallyis• Plantsmallquantitiesofvaluableoreon landforsaletodeceivepotentialbuyers
aboutthevalueoftheland• Usingastolencreditcardtopurchasegoodsandorservices• Oftenseeninconjunction withmoney laundering tohidetheproceedsofthefraud
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Fraud Other ExamplesFraudthatbenefits AnOrganization Fraudthatharms anorganizationImpropertransferpricingbetweenrelatedentities
Stealingmoney,property orfalsifyingfinancialrecordstocoverupatheft
Intentional improperrelated-partytransactionswhereonepartyreceivessomebenefitnotobtainableinanormalarm’slengthtransaction.
Intentionally misrepresentingorconcealingeventsordata
Legallytransferring(assignment)fictitiousormisrepresentedassetsor sales
Submitting claimsforservicesorgoodsnotactuallyprovidedbytheorganization.
Deliberatemisrepresentingorvaluingassets,liabilitiesorsalesinafinancialtransaction
Conductingbusiness activities thatviolategovernmentstatutes,rules,regulations,orcontracts
Misrepresentingthefinancial statusofanorganizationtooutsidepartiesbyintentionallyfailingtodisclosesignificantinformation.
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© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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Fraud Costs
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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Fraud Costs
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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Fraud Costs
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
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MoneyLaundering
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HowDo Cr iminals Th ink AboutMoney?
§ Alargepercentageofyourmoney(wealth)isillegal§ Thegovernmentwillseizethismoney(wealth)ifdetectedand
caught§ Thereforecriminalsneedto:
§ Hidetheirwealth§ Transport/Transferinordertohide§ Transformthewealthfromillegallysourcedfundstolegally
sourcedfunds§ Enjoy
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Fraud vs . Money Launder ing
Fraud•Securecashorpropertyunderfalsepretenses
•Companies orindividuals thatarevictimsoffraudincurfinanciallosses.
MoneyLaundering•Companies orindividuals thelaundermoneydonotincurfinanciallosses
•Moneylaunderingseparatesthesourceofthecash
• Lossisonly experiencedifthegovernmentseizesfunds duetoillegalactivity
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Money Launder ing
An estimated 900 billion to 1 trillion US dollars of
illicit funds circulating worldwide Approximately
500 to 600 billion US dollars associated with
the drug trade About 300 billion US dollars
associated with United States drug sales.
Odeh, Ismail A. (2010-08-24). Anti-Money Laundering and Combating Terrorist Financing for Financial Institutions (p. 4). Dorrance Publishing Co. Inc.. Kindle Edition.
Placement
Layering
Integration
Physicalintroductionofbulkcashintothefinancialsystem– cashdeposits, andcashequivalentpurchases – currencysmuggling
Separatingtheproceedsofcriminalactivityfortheirsourcethroughcomplexlayersoftransactions– usingmorethanonefinancialinstitution –obscuring theaudittrail
Placingthelaunderedfunds backintotheeconomy– enteringasapparentlylegitimatefunds.Accomplished throughreal-estatepurchases, shell companies, andsecurities investments.
Aggregate money laundering is estimated to be 2% to 5% of the world’s
gross domestic product (GDP)
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TheFraud T r iangle
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WhyIs There Fraud?
Opportunity
Motive(Pressure)
Means
ClassicCriminal&FraudulentActivity
WeakInternalProcess&SystemControlsWeakExternalProcess&SystemControls
PersonalGain
Access:• Physical• System• Process
Rationalization:• Iamsimplyborrowingthemoney…
• Everyoneelseisdoingit…
• Wearejustmeetingournumbers…
• It’snotreallyillegal…
• Ihavetodothisformyfamily…
• IfIdon’ttheywillbreakmylegs…
Integrity
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HowOccupational F raud is Committed
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Occupational F raud – Percentage o f Cases
22
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Occupational F raud – Med ian Loss
23
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Occupational F raud – In it ia l Detect ion
24
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Respons ib i l i ty fo r F raud Detect ion (RACI )
Responsible Accountable Consulted InformedInternalAuditExternalAudit
ExecutiveManagement
LegalCounselEnterprise RiskLineManagement
Interestedparties(e.g.shareholders,governmentalregulators,etc.)
Concept Definition
Responsible Thepersonorgroup thatdoestheworkAccountable Thepersonorgroup thatgetsfired ifsomething goeswrongConsulted Thepersonorgroup thatisaskedfortheiropinion andguidanceInformed Thepersonorgroup thatisinformed oftheissue
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Secur it ies F raud§ Pennystockfraud§ Stockpricerisesdueto
brokerbuyingthestockartificiallyinflatingtheprice
§ Usingfalsereportingandmanipulativebusinessactivities
§ http://www.fbi.gov/cleveland/press-releases/2014/penny-stock-fraud-nets-millions
§ http://www.wsj.com/articles/sec-charges-two-with-penny-stock-fraud-1405716923
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Cyber F raud – F inanc ial Serv ice CompanyRationalization Opportunity Motive (Pressure) Means
IfI don’tdothistheyaregoingtobreakmylegsorworse.
Custodianhadphysicalaccesstothebankfunds transferroom.
Gamblingindebtednesstoorganizedcrime
Poor physical, processandsystemcontrols
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Fraud ’s Impact
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NextWeek
FraudDetection&Prevention