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Forensic accounting and fraud examination

DISCUSS how your view of the impact of fraud on an organizationand who commits fraud have changed during this course. INCLUDE howyou can/will use this new knowledge to grow as a leader and managerin your organization.

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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In this activity, your instructor will assign you to a groupwith four or five of your peers. Each group member will select adifferent computer fraud event from the following list. Researchthe topic and discuss how the fraud occurred. Assess theeffectiveness of the company’s internal controls and recommendaccounting information system (AIS) controls that will mitigate therisk of future attacks. Ensure your recommendation is in compliancewith industry standards. Russian hackers broke into Citibank’ssystem and stole $10 million from customer accounts. Acxiom managescustomer information for credit card issuers, banks, automotivemanufacturers, and retailers. A systems administrator for a companydoing business with Acxiom exceeded his authorized access,downloaded an encrypted password file, and used a password-crackingprogram to access confidential IDs. The intrusion cost Acxiom over$5.8 million. During the Iraq war, Dutch hackers stole confidentialinformation, including troop movements and weapons information, at34 military sites. Their offer to sell the information to Iraq wasdeclined, probably because Iraq feared it was a setup. A17-year-old hacker broke into the Bell Laboratories network,destroyed files, copied 52 proprietary software programs, andpublished confidential information on underground bulletin boards.Many hackers are young, some as young as 12. In the worst securitybreach in gaming history, 101 million Sony PlayStation accountswere hacked, crashing the network for over a month. More than 12million credit card numbers, email addresses, passwords, homeaddresses, and other data were stolen.

Once each group member has submitted their assessment andrecommendation, discuss the similarities and differences betweenthe internal controls that allowed this fraud to occur and betweenthe AIS controls recommended to prevent future occurrences. Do youagree with your peers’ recommendations? Explain why or why not andsupport your claim with relevant research.

Directions: Read the following case information andanswer the question(s). Prepare your answer forthis discussion topic which will be due for class on Monday, April10, 2017. Your answer should be at least 1/2 page double-spaced andin your own words. Be prepared to discuss the topic with yourclassmates also. No one student will be expected to carry thediscussion. All students will be expected to participate in orderto receive full credit.

When auditing payables and other liabilities, the auditor is notas concerned with existence as they are with completeness. This isbecause an understatement of liabilities can be used to exaggeratethe financial strength of a company just as easily as anoverstatement of assets can. It can be much more difficult thoughto find amounts that are not recorded than to verify the existenceof an amount that is recorded. The omission of an entry is muchmore difficult to detect. Consider the following case that involvedthe drug store chain, Rite Aid.

The SEC found that Rite Aid overstated its income in everyquarter from May 1997 to May 1999, by massive amounts. When thewrongdoing was ultimately discovered, Rite Aid was forced torestate its pre-tax income by $2.3 billion and net income by $1.6billion, the largest restatement ever recorded. Rite Aidperpetrated the fraud through a number of fraudulent transactionsincluding the following:

Reversals of Actual Expense - In certainquarters, Frank Bergonzi, CFO for Rite Aid, directed that RiteAid's accounting staff reverse amounts that had been recorded forvarious expenses incurred and already paid. These reversals werecompletely unjustified and, in each instance, were put back on thebooks in the subsequent quarter, thus moving the expenses to aperiod other than that in which they had actually been paid. Theeffect was to overstate Rite Aid's income during the period inwhich the expenses were actually incurred. For example, Bergonzidirected entries of this nature which caused Rite Aid's pre-taxincome for the second quarter of FY 1998 to be overstated by $9million.

"Gross Profit" Entries -- Bergonzi directedRite Aid's accounting staff to make improper adjusting entries toreduce cost of goods sold and accounts payable in every quarterfrom the first quarter of FY 1997 through the first quarter of FY2000 (but not at year end, when the financial statements would beaudited). These entries had no substantiation, and were intendedpurely to manipulate Rite Aid's reported earnings. For example, asa result of these entries alone, Rite Aid overstated pre-tax incomeby $100 million in the second quarter of FY 1999.

Vendor Rebates -- On the last day of FY 1999,Bergonzi directed that Rite Aid record entries to reduce accountspayable and cost of goods sold by $42 million, to reflect rebatespurportedly due from two vendors. On March 11, 1999 -- nearly twoweeks after the close of the fiscal year -- Bergonzi directed thatthe books be reopened to record an additional $33 million incredits. All of these entries were improper, as Rite Aid had notearned the credits at the time they were recorded and had no legalright to receive them. Moreover, due to Rite Aid's pass-throughobligations in agreements with its own customers, Rite Aid wouldhave been obligated to pass $42 million out of the $75 millionthrough to third parties. The $75 million in inflated incomeresulting from these false entries represented 37% of Rite Aid'sreported pre-tax income for FY 1999.

Using the accounts payable audit procedures described onpages 581-583, describe how the fraud perpetrated by Rite-Aid mighthave been uncovered. It was discovered during the investigationthat Rite-Aid employees who complained about the fraud were givenmoney to keep quiet. Do you think that paying off employees wouldhave caused the fraud to be less likely to be detected by theauditors? Were internal controls likely to have prevented theRite-Aid fraud?

Sources – http://www.sec.gov/news/press/2002-92.htm

FRAUD EXAMINATION

Case 1

Stats Plus Company develops and sells a measuring and globalpositioning software package used by surveyors throughout theworld. The software allows the users to connect to databases insuch a way that the surveyors in the field can quickly andaccurately calculate land dimensions and boundaries. Stats Plususes a subscription model to market and sell its product.Subscribers pay a fee, which permits them to download and use thesoftware for a year. After a year, they must pay a fee tore-subscribe. Otherwise, they no longer have access to thesoftware.

Stats Plus was formed several years ago by three partners. StatsPlus has grown rapidly to have a current subscriber base of morethan 15,000. Customers input their payment information into asecure web form on the Stats Plus site. One of the partners, Sean,wants an automated system to handle all customer transactions. Hehas found an open-source system that he likes. He wants to use anopen-source system to allow for simplified modification in thefuture.

Sean is currently using the Thunder accounting system, which isalso open-source. It handles all payroll and expense transactions.Sean uses the system to process revenues, but he must enter themmanually in weekly batches. Open-source databases are used for allThunder system data files. This facilitates integrating the Thundersystem with online shopping carts and billing systems that alsosupport open-source databases. Sean is evaluating four packages foropen-source accounting and billing systems. In his evaluation,security is a major consideration. He wants to make sure that thesystems are well protected against hackers.

You are hired as a forensic accountant to consult with StatsPlus. In relation to this scenario, write responses to thefollowing questions:

How would you suggest evaluating the open-source shopping cartsystems that are being considered?

How does the open-source nature of the systems affect theirsecurity?

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