How to Find Financial Statement Fraud | Uncover Fraud

Summary

In this video, forensic accountant David Malumad shares his expert insights on detecting financial statement fraud. He demonstrates how to identify red flags in vendor master lists, accounts payable registers, and employee master lists by spotting inconsistencies such as duplicate vendors, unusual invoice patterns, and round numbers. Through practical examples in Excel, David explains how to investigate anomalies and gather evidence of fraudulent activities, emphasizing the importance of attention to detail and thorough analysis. This video serves as a foundational guide for those looking to detect financial fraud effectively.

Takeaways

• 😀 Finding financial statement fraud requires deep analysis of journal entries and registers to spot anomalies.
• 😀 Identifying outliers is crucial for uncovering fraud. Once you spot an anomaly, it’s essential to investigate further.
• 😀 Vendor name anomalies, like 'amazon' versus 'amzn', can be a red flag, indicating potential ghost companies or fraudulent setups.
• 😀 PO boxes in vendor addresses are suspicious. They may indicate fraudulent or non-legitimate operations.
• 😀 Discrepancies in vendor information, such as missing addresses or zip codes, suggest the need for a closer examination.
• 😀 Consecutive invoice numbers that appear out of order, like '1', '2', '3' for the same vendor, could indicate fraudulent practices or manipulation.
• 😀 If a vendor's total payments exceed its credit limit without any valid reason, it could suggest fraudulent override or manipulation.
• 😀 Multiple invoices from the same vendor on the same day, especially if split into smaller amounts, could point to fraud aimed at bypassing limit thresholds.
• 😀 Identical addresses for different vendors, particularly if they share similar business details, might indicate a ghost company or fraudulent activity.
• 😀 Round invoice numbers (e.g., $25,000) without taxes or other details could be a sign of fraudulent self-payment or an attempt to hide illicit transactions.

Q & A

What is the primary focus when investigating financial statement fraud?

The primary focus is on analyzing journal entries, reviewing registers, and identifying anomalies or irregularities that fall outside the norm, which may indicate fraud.

Why is finding outliers in financial data crucial for detecting fraud?

Outliers in financial data, once identified, provide critical clues and evidence. They often represent anomalies that need deeper investigation to uncover any fraudulent activities.

How can discrepancies in vendor names indicate potential fraud?

Discrepancies such as similar names with slight alterations (e.g., 'amazon' vs. 'amzn') could suggest the creation of ghost vendors, where a fraudulent actor uses a variation of a real vendor's name to divert funds.

What does a PO Box address in a vendor record typically indicate?

A PO Box address can be a red flag, as legitimate businesses usually don’t operate out of PO Boxes. It could imply a ghost vendor or a fraudulent operation.

Why are missing or incomplete details in a vendor's information concerning?

Missing information such as incomplete addresses, phone numbers, or zip codes could suggest that the vendor might be fictitious or not legitimate, requiring further investigation.

What is the significance of consecutive invoice numbers in fraud detection?

Consecutive invoice numbers, especially when issued irregularly (e.g., spanning a long period), may indicate manipulation, where invoices are being artificially created or manipulated to hide fraudulent transactions.

What is the role of credit limits in fraud detection?

Monitoring credit limits helps detect any discrepancies. For example, payments exceeding a vendor's credit limit without explanation may indicate fraudulent behavior or manipulation within accounts payable.

What does the splitting of invoices into smaller amounts suggest?

Splitting invoices into smaller amounts can be a tactic to circumvent thresholds or limits for certain supplier transactions, potentially indicating fraudulent activities or kickbacks.

What should be investigated when a vendor has the same address as an employee?

A vendor sharing an address with an employee is a red flag, as it may indicate conflicts of interest, fraud, or a contractor who is also billing the company, potentially funneling money improperly.

How can unusual or round numbers in payments signal fraud?

Round numbers in payments, such as $25,000 with no tax applied, are considered 'nice numbers.' These may be indicative of fraud, as they are often used for self-payment or as deposits, and they lack the expected complexity of business transactions.