Learning Objectives

• Identify common fraud schemes
• Recognize red flags and warning signs
• Understand fraud prevention strategies
• Week 1: Financial forensics fundamentals

1. Asset Misappropriation Schemes

• Skimming: Theft before recording (hardest to detect)
• Cash Larceny: Theft after recording
• Fraudulent Disbursements: False invoices, payroll schemes, expense reimbursement fraud Inventory/Asset Theft:
• Misuse, theft, or fraudulent write-offs

2. Financial Statement Fraud

• Fictitious Revenue: Recording fake sales
• Timing Differences: Premature revenue recognition
• Improper Asset Valuation: Overstating inventory, understating liabilities
• Improper Disclosure: Hiding related-party transactions, liabilities

3. Corruption Schemes

• Bribery: Payments for influence
• Kickbacks: Vendors pay employees for contracts
• Conflict of Interest: Employee's personal interests conflict with employer's
• Extortion: Forcing payment for decisions

4. Red Flags

• Employees living beyond means
• Unusual accounting entries (especially near period-end)
• Missing documents or altered records
• Weak internal controls
• Unusual relationships with vendors
• Reluctance to take vacation (fear of detection during absence)

Q1: What is the difference between skimming and cash larceny?

Skimming: cash stolen before it's recorded on the books (pre-recording). Harder to detect because no entry exists. Cash larceny: cash stolen after recording. Can detect by comparing recorded amounts to deposits. Q2: What are common revenue recognition frauds?

Recording sales before delivery, recording fake sales to related parties, recognizing revenue from consignment goods, side agreements allowing returns, channel stuffing (shipping excess to distributors). Q3: Why is reluctance to take vacation a red flag?

Fraudsters fear their scheme will be detected during absence (someone else handles their work and might discover discrepancies). Mandatory vacation policies are a common fraud detection tool. Q4: What is the fraud scale?

Extension of fraud triangle. Adds personal integrity as factor. Fraud occurs when: High pressure + High opportunity + Low personal integrity. Integrity acts as a moderating variable. Q5: What is a shell company scheme?

Employee sets up fake vendor company, submits false invoices, approves payment. Detection: verify vendors (phone, address, bank account checks), compare to employee records (same address, bank account). Join Discord PreviousIntroduction to Financial ForensicsNextBenford's Law & Data Analysis