Financial Investigation & Fraud Detection Flashcards

A Ponzi scheme is best described as:

Answer: A fraudulent investment operation paying returns to existing investors using funds from new investors

A Ponzi scheme generates returns for earlier investors using capital from newer investors rather than legitimate business profits, eventually collapsing when new investor recruitment slows.

What is 'check kiting' in the context of banking fraud?

Answer: Exploiting float time between banks by depositing and withdrawing funds before checks clear

Check kiting exploits the time delay (float) between when a check is deposited and when it clears, allowing a fraudster to temporarily inflate account balances across multiple banks.

Which financial statement shows a company's assets, liabilities, and equity at a specific point in time?

Answer: Balance sheet

The balance sheet provides a snapshot of a company's financial position at a specific date, showing assets, liabilities, and shareholders' equity.

What is the primary indicator of a 'phantom employee' payroll fraud scheme?

Answer: Payroll records showing employees who do not actually work for the organization

Phantom employee fraud occurs when someone adds fictitious employees to the payroll and diverts the resulting paychecks, identifiable by employees on record who cannot be verified as actual workers.

The Bank Secrecy Act (BSA) requires financial institutions to file a Suspicious Activity Report (SAR) for transactions that may involve:

Answer: Money laundering, fraud, or other criminal activity

The Bank Secrecy Act requires financial institutions to file SARs when transactions are suspected to involve money laundering, fraud, tax evasion, or other criminal activity.

Which method of financial investigation involves comparing a subject's known income against their actual expenditures and lifestyle to detect unreported income?

Answer: Net worth method

The net worth method compares increases in a subject's net worth plus living expenses against known legitimate income to identify unexplained funds that may represent unreported income or fraud proceeds.

In accounts payable fraud, which internal control is most effective at preventing duplicate invoice payments?

Answer: Implementing a three-way match process comparing purchase orders, receipts, and invoices

A three-way match verifies that the purchase order, receiving report, and vendor invoice all agree before payment is authorized, preventing payment for goods not ordered or received.