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MIS 520 – Data Analytics for IT Auditors Ed Ferrara, MSIA, CISSP eferrara@temple.edu Week 1: Introduction to Fraud
MIS 520 – Data Analy t ics fo r IT Aud itors
EdFerrara,MSIA,[email protected]
Week1:IntroductiontoFraud
TheManyFacesofFraud
Fraud
Theft(Misappropriation)
CorruptionDeceptiveStatements
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
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.
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
Fraud Costs
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
Fraud Costs
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
Fraud Costs
© 2014 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,”
MoneyLaundering
HowDo Cr iminals Th ink AboutMoney?
§ Alargepercentageofyourmoney(wealth)isillegal§ Thegovernmentwillseizethismoney(wealth)ifdetectedand
caught§ Thereforecriminalsneedto:
§ Hidetheirwealth§ Transport/Transferinordertohide§ Transformthewealthfromillegallysourcedfundstolegally
sourcedfunds§ Enjoy
Fraud vs . Money Launder ing
Fraud•Securecashorpropertyunderfalsepretenses
•Companies orindividuals thatarevictimsoffraudincurfinanciallosses.
MoneyLaundering•Companies orindividuals thelaundermoneydonotincurfinanciallosses
•Moneylaunderingseparatesthesourceofthecash
• Lossisonly experiencedifthegovernmentseizesfunds duetoillegalactivity
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)
TheFraud T r iangle
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
HowOccupational F raud is Committed
Occupational F raud – Percentage o f Cases
22
Occupational F raud – Med ian Loss
23
Occupational F raud – In it ia l Detect ion
24
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
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
Cyber F raud – F inanc ial Serv ice CompanyRationalization Opportunity Motive (Pressure) Means
IfI don’tdothistheyaregoingtobreakmylegsorworse.
Custodianhadphysicalaccesstothebankfunds transferroom.
Gamblingindebtednesstoorganizedcrime
Poor physical, processandsystemcontrols
Fraud ’s Impact
NextWeek
FraudDetection&Prevention
