Today’s Topics

 E-Commerce Fraud
 Cash Flow Shenanigans
 Metrics Shenanigans

FORENSIC ACCOUNTING - BA124 - 2015

 E-Commerce Fraud

FORENSIC ACCOUNTING - BA124 - 2015

 E-Commerce
The Good, The Bad & The Ugly
 The Good
 Faster, cheaper and less prone to error
 Customer centric
 The Bad
 Hardware issues…spotted owl disease
 False sense of organization
 Initial cost and implementation issues
 Emerging economy issues…haves and have-nots
 The Ugly
 The bad guys and hackers…our focus today

FORENSIC ACCOUNTING - BA124 - 2015

 Consider This…
 The race to 60 million users
 Radio—30 years
 TV—15 years

 The Internet—3 years to 90 million

users

FORENSIC ACCOUNTING - BA124 - 2015

 E-Commerce Fraud
Risks
 P – O – R…see text

FORENSIC ACCOUNTING - BA124 - 2015

 E-Commerce Fraud
Prevention
 Difficult to impact pressure and
rationalization at this time
 Lack of personal contact with
fraudsters
 Avoid “iffy” situations and “sketchy”
firms
 Focus on reducing opportunities
FORENSIC ACCOUNTING - BA124 - 2015
 Prevention in the
Opportunity Sector
 The control environment
 Integrity and ethics
 Board and Audit Committee involvement
 Tone at the Top
 Human resource policies and practices (training)
 Risk assessment efforts

 Implementation of control activities

FORENSIC ACCOUNTING - BA124 - 2015
 Risk Assessment
 Data theft is the big issue…not cash
 Sniffing for passwords
 Unauthorized password access
 False identification of users
 Spoofing for headers and “IP” (protocol
models)
 Impersonation of customers
 False or misleading websites
 Hijacking to copy-cat websites

FORENSIC ACCOUNTING - BA124 - 2015

 Prevention Through
Control Activities
 Separation of duties
 Authorization techniques
 Firewalls
 Passwords
 Digital signatures
 Biometrics
 Documentation and encryption
 Physical control
 Independent assessment (operational auditing)
 On-going not spot-checking
FORENSIC ACCOUNTING - BA124 - 2015
 E-Commerce Fraud
Detection
 Proactive posture
 On-going analysis and effort
 Defending the Digital Frontier, Mark
Doll, Sajay Rai and Jose Granado.
Ernst & Young, LLP.

FORENSIC ACCOUNTING - BA124 - 2015

 Final Shenanigans
 Cash Flow Shenanigans
 Metrics Shenanigans

FORENSIC ACCOUNTING - BA124 - 2015

 Cash Flow
Shenanigans
CFS #1: Shifting Financing inflows to
Operating inflows
CFS #2: Shifting Operating outflows to
Investing outflows
CFS #3: “Inflating” Operating inflows
through normal but infrequent ops
CFS #4: “Inflating” Operating inflows
through normal operations

FORENSIC ACCOUNTING - BA124 - 2015

 CFS #1
Bank borrowings as CFO
Sale of receivables as CFO
Sham sale of receivables as CFO

FORENSIC ACCOUNTING - BA124 - 2015

 CFS #2
Boomerang transactions
Capitalization of operating expenses
Treating inventory purchases as investing
activities

FORENSIC ACCOUNTING - BA124 - 2015

 CFS #3
Inheriting cash flows via acquisition
Acquisition of customers or products
Structuring a divestiture to benefit
operating cash flows

FORENSIC ACCOUNTING - BA124 - 2015

 CFS #4
Paying vendors more slowly
Collecting from customers more quickly
Purchasing less inventory
Limited disclosure of one-time benefits

FORENSIC ACCOUNTING - BA124 - 2015

 Metrics Shenanigans
MS #1: Misleading metrics that overstate
performance
MS #2: Distorting metrics that avoid bad
news

FORENSIC ACCOUNTING - BA124 - 2015

 MS #1
Proforma revenue metrics
Proforma earnings metrics
Proforma cash flow metrics

FORENSIC ACCOUNTING - BA124 - 2015

 MS #2
Distorting A/R metrics
Distorting inventory metrics
Distorting financial asset metrics
Distorting debt metrics

FORENSIC ACCOUNTING - BA124 - 2015