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E-Commerce Fraud
Cash Flow Shenanigans
Metrics Shenanigans
FORENSIC ACCOUNTING - BA124 - 2015

FORENSIC ACCOUNTING - BA124 - 2015

E-Commerce
The Good, The Bad & The Ugly
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The Good
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Faster, cheaper and less prone to error
Customer centric
The Bad
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Hardware issues…spotted owl disease
False sense of organization
Initial cost and implementation issues
Emerging economy issues…haves and have-nots
The Ugly
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The bad guys and hackers…our focus today
FORENSIC ACCOUNTING - BA124 - 2015

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The race to 60 million users
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Radio—30 years
TV—15 years
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The Internet—3 years to 90 million users
FORENSIC ACCOUNTING - BA124 - 2015

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P – O – R…see text
FORENSIC ACCOUNTING - BA124 - 2015

E-Commerce Fraud
Prevention
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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
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The control environment
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Integrity and ethics
Board and Audit Committee involvement
Tone at the Top
Human resource policies and practices (training)
Risk assessment efforts
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Implementation of control activities
FORENSIC ACCOUNTING - BA124 - 2015

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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
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Separation of duties
Authorization techniques
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Firewalls
Passwords
Digital signatures
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Biometrics
Documentation and encryption
Physical control
Independent assessment (operational auditing)
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On-going not spot-checking
FORENSIC ACCOUNTING - BA124 - 2015

E-Commerce Fraud
Detection
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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

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Cash Flow Shenanigans
Metrics Shenanigans
FORENSIC ACCOUNTING - BA124 - 2015

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

Bank borrowings as CFO
Sale of receivables as CFO
Sham sale of receivables as CFO
FORENSIC ACCOUNTING - BA124 - 2015

Boomerang transactions
Capitalization of operating expenses
Treating inventory purchases as investing activities
FORENSIC ACCOUNTING - BA124 - 2015

Inheriting cash flows via acquisition
Acquisition of customers or products
Structuring a divestiture to benefit operating cash flows
FORENSIC ACCOUNTING - BA124 - 2015

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

Distorting A/R metrics
Distorting inventory metrics
Distorting financial asset metrics
Distorting debt metrics
FORENSIC ACCOUNTING - BA124 - 2015