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BGBC: Don’t get duped. Test your fraud skills

February 11, 2015

Do you think you are too smart to be duped by a fraudster? Have you been paying attention to our fraud articles? The Association of Certified Fraud Examiners estimates that the typical organization loses 5 percent of its annual revenue to fraud. Test your knowledge on fraud by taking this 10-question quiz.

1. What type of fraud costs organizations the most?

A. Financial statement fraud

B. Corruption

C. Asset misappropriation

D. Both b and c

2. What type of fraud occurs the most often?

A. Financial statement fraud

B. Corruption

C. Asset misappropriation

D. Both a and b

3. The median loss caused by fraud is:

A. $50,000

B. $100,000

C. $150,000

D. $1 million

4. What is the most common fraud detection method?

A. External audit

B. Tips

C. Information technology controls

D. By accident

5. What is the order of a typical fraud investigation?

A. Document review, data analytics, interviewing

B. Data analytics, interviewing, document review

C. Interviewing, data analytics, document review

D. Interviewing, document review, data analytics

6. The following are red flags identified in fraud cases except:

A. Numerous transactions with related persons or entities

B. Management compensation based on company results

C. Ineffective board of directors

D. All of the above

7. What percent of victim organizations were able to recover 100 percent of their losses from frauds perpetrated against them?

A. 0 percent

B. 14 percent

C. 58 percent

D. 100 percent

8. What should you not do when handling disbursements from a trust account?

A. Fully document the transaction

B. Cash should not be received back when making a trust deposit

C. Make trust account check payable to cash or bearer

D. All of the above

9. Which of the following trust fund violations have occurred within Indiana law firms?

A. Trust account checks were signed by an office manager, not alicensed attorney

B. Accounting of trust funds by client was not maintained and/or monitored

C. Operating expenses of the firm were paid using trust account monies

D. All of the above

10. What should you do if you suspect fraud?

A. Conduct your own internal investigation

B. Communicate your suspicions to management and/or the board of directors

C. Contact a forensic accountant

D. Seek the advice of a co-worker

Answers

1. A. Financial statement fraud costs the most with a median loss of $1 million per company. Fraud losses reduce net income dollar for dollar and often result in decreases of stock market values.

2. C. Although financial statement fraud costs more, asset misappropriation occurs the most often. Asset misappropriation is less complex than financial statement fraud and more easily understood.

3. C. The median loss caused by fraud is $150,000.

4. B. Tips are the most common fraud detection method. This is mainly because more companies have whistleblower policies and anonymous reporting mechanisms in place to report suspicions of fraud than ever before.

5. A. The typical order of a fraud investigation is document review, data analytics and interviewing. Document review and data analytics can generally be performed interchangeably, but it is important that interviewing comes last. Once all the facts are gathered and analyzed, the information can then be corroborated by interviewing.

6. D. All of the above is correct. Numerous related party transactions may be of concern because of favorable terms that are not arms-length. If management’s compensation is based on company results, management has an incentive to inflate earnings. An ineffective board of directors results in poor tone at the top and may trickle down the organization.

7. B. Only 14 percent of victim organizations recover 100 percent of their fraud losses. Some funds may have successfully been diverted and are therefore unrecoverable. Often, the money taken by the fraudster is already spent.

8. C. Funds maintained in a trust account are essentially someone else’s money and should be treated as such. Generating checks payable to cash or bearer can result in funds being easily misappropriated.

9. D. All of the above is correct. The most common deficiency in each firm was lack of an adequate internal control structure, including periodic attorney oversight and supervision.

10. C. Contact a forensic accountant if you suspect fraud. A forensic accountant can help determine the who, what, why, when, where and how the fraud occurred as well as the financial impact to the company. A forensic accountant can also assist with fraud prevention measures.

If you answered all 10 correct, congratulations! Perhaps you should consider a career change to forensic accounting. If you answered seven to nine questions correct, your understanding of fraud may help you better assist your client’s needs. If you answered four to six questions correct, you are on the right track. If you answered fewer than four questions correct, you might be the next victim.•

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Erika M. Gowan, CPA/CFF, CFE and Casey L. Higgs; CPA/CFF, CFE, CVA are with BGBC Partners LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the authors.

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