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Fraud and the CPA

Author/Moderator: Joseph Wells, CFE, CPA
Publisher: AICPA
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Description

All CPAs have a responsibility to be diligent in preventing and detecting financial statement fraud. Whether you are a preparer of financial statements, an auditor or just want to help your company or your clients, this course from the AICPA and the Association of Certified Fraud Examiners will help you be more effective in preventing and detecting such devastating frauds. In today's environment, this is knowledge you can’t afford not to have.

Objectives: 

  • Gain insights from fraud specialists that will deepen your fraud knowledge, enhance your professional skepticism and improve your decision processes
  • Understand the different ways people "cook the books" and learn what to watch out for
  • Go beyond the checklists and learn to think like a fraudster so you can catch them

Prerequisite:  None

Minimum System Requirements for CD-ROMs
Windows 2000 or above, a minimum video display resolution of 800 by 600 pixels with a minimum color depth of 16-bit (thousands of colors); audio-enabled speakers or headset; 16x CD-ROM drive or faster; Microsoft Internet Explorer version 6 or higher with security settings that allow Java script, shared objects and pop-ups; Macromedia® Flash Player™ version 8 or higher; Adobe® Acrobat® Reader.

Table of Contents

  • Introduction - The Problem of Fraud
    • I. Why should CPAs be concerned about fraud either in their own companies or in their clients' companies?
      • A. Restoring public confidence in the accounting profession and in financial statements
      • B. Reducing fraud losses is an important service CPAs can provide for clients or employers
      • C. Fraud can ruin not only large companies, such as Enron and WorldCom, but small companies as well
      • D. The cost of fraud and statistics from the Report to the Nation
    • II. What we will cover in this course
      • A. What is the CPA's responsibility relating to fraud?
      • B. Why people commit fraud
      • C. How do they do it?
      • D. What can be done to detect it?
      • E. What can be done to prevent it?
  • Understanding the CPA's Fraud-Related Responsibilities
    • I. What are the fraud-related responsibilities of CPAs and management within the company?
      • A. Management responsible for financial information
      • B. CPAs responsible for making sure the information is fairly presented
      • C. Brief overview of general duties of directors and officers, e.g., duties to shareholders, fiduciary duties, etc.
    • II. What are the new responsibilities imposed by Sarbanes-Oxley?
      • A. Role of the Public Company Accounting Oversight Board
      • B. New requirements for public companies, officers, directors, and audit committees
      • C. New standards for auditor independence
      • D. Enhanced financial disclosure requirements
      • E. Protections for whistleblowers
      • F. Civil and criminal penalties for noncompliance
    • III. What is required of CPAs under SAS No. 99? [Quick overview only]
      • A. Understanding the characteristics of fraud
      • B. "Brainstorming" how the entity could commit material fraud
      • C. Obtaining information to assess the risk of material fraud
      • D. Identifying risks that may result in misstatements due to fraud
      • E. Assessing fraud risks in light of the entity's programs and controls
      • F. Responding to the fraud risk assessment
      • G. Evaluating audit test results
      • H. Communicating information about fraud to management, the audit committee, and others
      • I. Documenting the auditor's consideration of fraud
    • IV. The CPA's Duties under the Private Securities Litigation Reform Act
      • A. Detection of illegal acts material to financial statements
      • B. Identifying related party transactions
      • C. "Going concern" evaluation
      • D. Reporting illegal acts
      • E. Evaluation of company action in response to report
  • Understanding Why Employees Commit Fraud
    • I. Why CPAs should understand the sociological factors that lead to fraud
      • A. The key to dealing with fraud
      • B. Sociological models explain what motivates fraud (it's not what you think!)
      • C. Building a deterrence plan that targets fraud motivators
    • II. Understanding the fraud triangle theory
      • A. What is the fraud triangle?
      • B. What are the three factors that make up the fraud triangle?
        • 1. Pressure (non-sharable financial need)
        • 2. Perceived opportunity
        • 3. Rationalization
    • III. What does the fraud triangle tell us about occupational fraudsters?
      • A. If all three factors are not present, fraud will usually not occur
        • 1. Exception for predatory employees
      • B. Status, not greed, is the primary motivator
      • C. Punishing fraud is not an effective deterrent to future fraud
      • D. An effective fraud deterrence program will focus on three factors:
        • 1. Reducing employee pressures
        • 2. Reducing perceived opportunities to commit fraud
        • 3. Dispelling rationalizations for committing fraud
  • Fraudulent Financial Statements
    • I. Why CPAs must understand financial statement fraud
      • A. What is financial statement fraud?
      • B. The primary mission of CPAs - investor protection
      • C. Huge costs to affected companies, their audit firms and to investors
      • D. Devastating personal consequences for CPAs involved as preparers or auditors
    • II. Why do good people commit financial statement fraud?
      • A. Who commits financial statement fraud?
        • 1. Organized criminals
        • 2. Mid- and lower-level employees
        • 3. But mostly senior management
      • B. Different motives for committing financial statement fraud
        • 1. Different measures and goals
        • 2. Understating or overstating results
    • III. Challenges and strategies for CPAs dealing with financial statement fraud
      • A. Common False Beliefs About Financial Statement Fraud
        • 1. My client is too honest to ever commit fraud
        • 2. My client is aggressive, but I can manage the risks
        • 3. My client has good internal controls to prevent fraud
        • 4. Fraud is so rare I really don't have to worry about it
        • 5. Fraud is like a lightning strike - you can't do anything about it
        • 6. Finding financial statement fraud is too hard
        • 7. It's not fraud unless I have proof it's fraud
        • 8. I have all the relevant facts
      • B. Decision Methods That Stop CPAs Detecting Financial Statement Fraud
        • 1. The sky-high burden of proof
        • 2. The even-handed approach
        • 3. The budget-keeping approach
        • 4. The paper-based approach
        • 5. Reluctance to involve fraud specialists
      • C. Strategies for CPAs to overcome these challenges
        • 1. Focus on serving investors
        • 2. Be open to the possibility of fraud
        • 3. Apply SAS No.99 thoughtfully to find material fraud if it is there
        • 4. Address exceptions with extreme care
        • 5. Involve fraud specialists more
    • IV. How do people commit financial statement fraud?
      • A. The five financial statement fraud schemes
        • 1. Fictitious revenues
          • a. What constitutes fictitious revenues?
          • b. Statistics
          • c. How do employees commit this type of fraud?
          • d. What red flags are associated with this type of fraud?
          • e. How can such schemes be prevented and detected?
        • 2. Timing differences
          • a. What constitutes timing differences?
          • b. Statistics
          • c. How do employees commit this type of fraud?
          • d. What red flags are associated with this type of fraud?
          • e. How can such schemes be prevented and detected?
        • 3. Concealed Liabilities and expenses
          • a. What constitutes concealed liabilities and expenses?
          • b. Statistics
          • c. How do employees commit this type of fraud?
          • d. What red flags are associated with this type of fraud?
          • e. How can such schemes be prevented and detected?
        • 4. Improper disclosure
          • a. What constitutes improper disclosure?
          • b. Statistics
          • c. How do employees commit this type of fraud?
          • d. What red flags are associated with this type of fraud?
          • e. How can such schemes be prevented and detected?
        • 5. Improper asset valuations
          • a. What constitutes improper asset valuations?
          • b. Statistics
          • c. How do employees commit this type of fraud?
          • d. What red flags are associated with this type of fraud?
          • e. How can such schemes be prevented and detected?
      • B. Methods used to falsify financial statements
        • 1. Playing the system
        • 2. Beating the system
        • 3. Outside the system
    • V. Preventing and detecting financial statement fraud
      • A. The vulnerability of process level controls to management override
      • B. Effective processes for preventing financial statement fraud
      • C. Emerging consensus for evaluating fraud prevention controls
  • Asset Misappropriations
    • I. Why CPAs need to understand asset misappropriations
      • A. Among the most common types of fraud
      • B. Large losses associated with asset misappropriations
      • C. Small businesses particularly vulnerable to asset misappropriation
    • II. What are the most common asset misappropriation frauds?
      • A. Cash schemes vs. Non-cash schemes
        • 1. Statistics
      • B. The three categories of cash frauds
        • 1. Fraudulent disbursements
        • 2. Skimming
        • 3. Cash larceny
    • III. The most dangerous form of cash fraud: fraudulent disbursements
      • A. The high frequency of fraudulent disbursements
      • B. The high losses associated with fraudulent disbursement schemes
      • C. The five major methods of fraudulent disbursements
        • 1. Billing schemes
        • 2. Payroll schemes
        • 3. Expense reimbursement schemes
        • 4. Check tampering
        • 5. Register disbursements
    • IV. Recognizing billing schemes
      • A. What constitutes a billing scheme?
      • B. Statistics
      • C. How do employees commit billing fraud?
        • 1. Shell company schemes
        • 2. Overbilling via non-accomplice vendors
        • 3. Personal purchases with company funds
      • D. What red flags are associated with billing schemes?
      • E. How can billing schemes be prevented and detected?
    • V. Recognizing payroll schemes
      • A. What constitutes payroll fraud?
      • B. Statistics
      • C. How do employees commit payroll fraud?
        • 1. Ghost employee schemes
        • 2. Falsified hours and salary
        • 3. Commission schemes
      • D. What red flags are associated with payroll schemes?
      • E. How can payroll schemes be prevented and detected?
    • VI. Recognizing expense reimbursement schemes
      • A. What constitutes expense reimbursement fraud?
      • B. Statistics
      • C. How do employees commit expense reimbursement fraud?
        • 1. Mischaracterized expenses
        • 2. Overstated expenses
        • 3. Fictitious expenses
        • 4. Multiple reimbursements
      • D. What red flags are associated with payroll schemes?
      • E. How can payroll schemes be prevented and detected?
    • VII. Recognizing check tampering schemes
      • A. What constitutes check tampering?
      • B. Statistics
      • C. How do employees commit check tampering schemes?
        • 1. Forged maker scheme
        • 2. Forged endorsement schemes
        • 3. Altered payee schemes
        • 4. Authorized maker schemes
      • D. What red flags are associated with check tampering schemes?
      • E. How can check tampering schemes be prevented and detected?
    • VIII. Recognizing register disbursement schemes
      • A. What constitutes a register disbursement scheme?
      • B. Statistics
      • C. How do employees commit fraudulent register disbursements?
        • 1. Fraudulent refunds
        • 2. Fraudulent voids
      • D. What red flags are associated with register disbursement schemes?
      • E. How can register disbursement schemes be prevented and detected?
    • IX. Recognizing skimming schemes
      • A. What constitutes a skimming scheme?
      • B. Statistics
      • C. How do employees commit skimming schemes?
        • 1. Skimming sales
        • 2. Skimming receivables
        • 2. Skimming other receipts
      • D. What red flags are associated with skimming schemes?
      • E. How can skimming be prevented and detected?
    • X. Recognizing cash larceny schemes
      • A. What constitutes a cash larceny scheme?
      • B. Statistics
      • C. How does cash larceny differ from skimming?
      • D. How do employees commit cash larceny?
        • 1. Thefts of incoming receipts
        • 2. Thefts of daily deposits
      • E. What red flags are associated with cash larceny schemes?
      • F. How can cash larceny be prevented and detected?
    • XI. Recognizing inventory theft schemes
      • A. What constitutes inventory fraud?
      • B. Statistics
      • C. How do employees steal inventory and other non-cash assets?
        • 1. Unconcealed larceny
        • 2. Falsified receiving reports
        • 3. Fraudulent shipments of merchandise
        • 4. Fraudulent materials requisitions
      • D. What red flags are associated with inventory theft schemes?
      • E. How can inventory theft schemes be prevented and detected?
  • Corruption
    • I. Why CPAs need to understand how corruption affects businesses
      • A. Impact of corruption on financial statements
      • B. Requirements to detect or report corruption under SAS 99, SAS 54, and the PSLRA
      • C. Corruption is very difficult to detect
      • D. The typical corruption scheme is extremely costly
    • II. What are the four types of corruption schemes?
      • A. Bribery
      • B. Illegal gratuities
      • C. Economic extortion
      • D. Conflicts of interest
    • III. Recognizing bribery schemes
      • A. What constitutes bribery?
        • 1. "Something of value"
      • B. Statistics
      • C. How do employees commit bribery schemes?
        • Invoice kickbacks
        • Bid rigging
        • Illegal gratuities
        • Economic extortion
      • D. What red flags are associated with bribery schemes?
      • E. How can bribery be prevented and detected?
    • IV. Recognizing Conflicts of Interest
      • A. What constitutes a conflict of interest?
      • B. How do employees commit conflict of interest schemes?
        • 1. Overpurchasing
        • 2. Underselling
        • 3. Business diversions
      • C. What red flags are associated with conflicts of interest?
      • D. How can conflicts of interest be prevented and detected?
  • Fraud Prevention
    • I. Who can prevent fraud and what can they do?
      • A. Management
      • B. Boards of Directors
      • C. Audit Committees
      • D. Internal Auditors
      • E. Anti-Fraud Specialists
      • F. Employees
    • II. Developing a Corporate Strategy for Preventing Fraud
      • A. Fraud risk oversight
      • B. Fraud risk ownership
      • C. Fraud risk assessment
      • D. Fraud risk tolerance and risk management policy
      • E. Process level anti-fraud controls/re-engineering
      • F. Environment level anti-fraud controls
      • G. Proactive fraud detection

Excerpts

Videocourse Details

NASBA Field of Study: Auditing
Level: Basic
Recommended CPE Credit: 8
Important Information on Your CPE Credit
FRAUD AND THE CPA CD05
CD-ROM
Product# 738600HS
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