Chapter 9 - When searching public records

Chapter 9

10. When searching public records, what are the four different types of information sources available to investigators?

The four types of information sources are government, private, online databases, and internet searches.

11. What is the Gramm-Leach-Bliley Act? How does it apply to investigators?

The act requires financial institutions to explain their information-sharing practices to their customers and to safeguard sensitive data. This allows financial institutions to share information with investigators legally.

Short Case 8

1. Without calculating the amount of unknown income, indicate possible red flags or trends you notice in the numbers above.

Financial statement red flags provide a general overview of the warning signs a company should look out for. It does not a imply an absolute occurrence of financial statement fraud, but simply signals that a detailed investigation must be done of the accounts in the financial statement. Some of the red flags shown in this example are increase in assets while there is a decrease in liabilities.

Beginning with assets, you can see that there is a sharp increase in automobiles, starting in year 2 and year 3 for $45,000 as compared to year 1, which was $18,000. In addition, we can also see an increase in CD’s for $15,000 in years 2 and 3, while year 1 showed $5,000. The stock portfolio also showed a large increase in years 2 and 3 for $15,000 as compared to year 1 for $3,500. The individual also added another asset by purchasing a boat costing $15,000 in year 2 and 3.

Similarly, there is a decrease in mortgage liability from $200k in year 1 to $180k in year 2 and $100k in year 3. Furthermore, the auto loan showed an increase from $12,000 in year 1 to $30,000 in year

2, but then the liability did not exist in year 3. Finally, there was another loan, shown as “other loan”

which was taken out in year 2 for $18,000, then paid off by year 3.

2. Now calculate the amount of total income and unknown income using the numbers given. Does it appear that a possible fraud exists? Could there be other explanations for the unknown income?

Using the comparative net worth asset method indicates the following results:

Comparative Net – Worth Asset Method

Year End 1 Year End 2 Year End 3

Assets:

Residence $280,000 $280,000 $280,000

Automobile 18,000 45,000 45,000

CD 5,000 15,000 15,000

Cash 8,000 8,000 2,000

Stock Portfolio 3,500 15,000 15,000

Boat 15,000 15,000

Total Assets $314,500 $378,000 $372,000

Liabilities:

Mortgage 200,000 180,000 100,000

Auto Loan 12,000 30,000

Other Loan 18,000

Total Liabilities $212,000 $228,000 $100,000

Net Worth $102,500 $150,000 $272,000

Change in Net Worth $47,500 $122,000

Add: Living expenses 47,000 47,000

Total Income $94,500 $169,000

Less: Known Income 90,800 130,800

Income from Unknown Sources $3,700 $38,200

There can be an explanation for income from unknown sources because this money may have been inherited, received as a gift, or through gambling rather than fraud.