Program alteration Program alteration requires programming skills and knowledge of the program. Program coding is revised for fraudulent purposes. For example: Ignore certain transactions such as overdrafts against the programmers' account Grant excessive discounts to specified customers Programmers should not be allowed to make changes to actual production source programs and data files. Segregation of Duties Programmers should not have access to production programs or data files. Periodic Comparisons Internal Audit or an independent group should periodically process actual data, and compare the output with output from normal operations. Differences indicate unauthorized program changes. Periodic comparisons of on-line programs to off-line backup copies to detect changes. Independent file librarian function who controls custody/access to programs File alteration Defrauder revises specific data or manipulates data files. For example: Using program instructions to fraudulently change an employee’s pay rate in the payroll master file Transferring balances among dormant accounts to conceal improper withdrawals of funds. Restrict Access to Equipment/Files access to computer center. and analysts should not have direct access to production data files. a librarian maintain production data in a library. computer operator access to applications documentation, except needed to perform their duties, to minimize their ability to modify programs and data files. Data theft Smuggling out data on: Hard copies of reports/files. Magnetic devices in briefcases, employees' pockets, etc. Tap or intercept data transmitted by data communication lines Electronic sensitization of all library materials to detect unauthorized removals. Encrypt sensitive data transmissions.
6. Management can bleed the company or engage in transactions with owners. Both owners are paying their spouses exorbitant salaries and have extravagant expense accounts and perks. Buildings, equipment, and furnishings could be purchased from/by the owners at inflated or deflated prices. This is not fraud, as long as what occurs is reported properly for tax purposes and financial statement given to the bank properly disclose any needed items. It is fraud if one owner authorizes payments, perks, or non-arms length transactions to himself or his family that the other partner is not aware of. Company perpetually short of cash Expense accounts and perks unusually high Inflated salary expenses Abnormally high prices for the assets purchased. No apparent controls to prevent one owner from defrauding the other owner. Require all payments, perks, or transactions to an owner to be approved by the other owner. An external, independent Full disclosure of all payments, perks, or transactions to a qualified tax preparer to ensure full compliance with applicable tax laws. 7. Customers can use photo coupons without completing their payments. There are no controls to prevent customers who have stopped paying on their note from taking their coupon to their photographer for a sitting and getting their picture taken. Increase in the number of sittings per current customer. Coupons submitted for customers that have been written off. Photographer complaints. Photographers are not required to verify if customers are current before a sitting. Customer given all their coupons at initial purchase. Set up automatic withdrawals from checking accounts or automatic charges to credit Require photographers to verify that customers are current before each sitting. Keep a list of customer payments; do not pay for customers that are no longer current.
Do credit checks on all potential customers. 8. Photographers could send in unused coupons or fake coupons. Photographers have exclusive rights to customers in their specified areas. They could encourage customers to leave the coupons at the photo studio so they are not lost or misplaced. If a customer did not come in during the 6-month period, the photographer could submit his unused coupon. If the coupon book is not left for safekeeping, the photographer could scan a coupon, change the name to a customer who did not use their coupon, print it, and send it in. Abnormally high rate of customers using their coupons Coupons that do not look authentic. Customer complaints. Photographers an exclusive area. Customers not signing coupons or otherwise verifying they had a sitting. Photographers send in coupons for non-current customers as they are not required to verify if customers are current before a sitting. Nor does the company verify that submitted coupons are for a current customer. Pre-number coupons. Have a code on the coupon that the photographer has to call in to the company (or enter on a website) before authorization is granted to take the photo. For each photographer, analyze what percent of customers use their coupons looking for abnormally high usage rates. Require photographers to verify that customers are current before each sitting. Do not pay for customers that are no longer current. 9. Heirloom can defraud the bank by misstating the maximum amount Heirloom can borrow. Notes payable are in the borrowing base until they are 60 days overdue. To maximize that base, Heirloom could lap customer payments. They could take a monthly payment on a current account and apply it to an account that is just about to go 60 days overdue. The inflated list could be used to support a higher than justified loan. Abnormally high number of customers 30-60 days overdue. Bank does not verify data from Heirloom. Analysis of the list, such as An increase in the number or percentage of accounts on the list submitted to the bank with no comparable increase in sales. Comparison of monthly lists to see if the same names appear month after month.
10. Heirloom can defraud the bank by misstating its financial statements in many ways. For example: - Understating its allowance and bad debt expense (not writing off uncollectible receivables and the bad debt expense). - Creating fictitious sales and notes receivables. - Intentionally under or over stating the sales commission estimates. Unusual decrease in the allowance or bad debt amounts. Sales increase without a comparable increase in receivables; inventory; cost of goods sold; and applicable expenses such as photographer and album expenses, embossing and shipping, and commissions. Sales commissions out of line with those of the industry or past years. There is no mention of an external audit by independent CPAs. An external, independent Financial statement analysis, such as Analysis of bad debt to sales and allowance to sales ratios to see if they are below those of past years and those of comparable customers in the same industry. Analysis of sales ratios, comparing sales to receivables; inventory; gross margin, cost of goods sold; and applicable expenses such as album and photographer expenses, embossing and shipping, and commissions.