The Cat and Mouse in Click Fraud

A recent NY Times article describes click fraud as follows:

Strategic Fraud

Fraudsters go to great lengths to structure their fraud around regulators, auditors, and other interested parties to avoid detection.  Such is the case with an online scam that was recently disrupted by the FTC.  Scammers set up over 100 fake companies and then submitted fictitious transactions to credit card processors.  The transactions were structured to be inconspicuous to the owners of the credit cards--transactions were usually between $0.25 and $9.00 and many of the fictitious companies had names similar to legitimate companies.  Per the FTC, the fraudsters charged 1.35 million credit cards a total of $9.5 million, but only 78,724 of these fake charges were ever noticed.  (via Macworld) 

More on how cyclists may be cheating

Last Saturday, I posted a short discussion that referenced an article by Edmund Burke on how cyclists can avoid detection while cheating the doping rules. Yesterday's NY Times reports that doctors have figured out how to administer microdoses of EPO to cyclists such as Floyd Landis or Lance Armstrong in a way that avoids detection by the current doping tests. Apparently, this method of administering microdoses works as long as the tests are not administered at night.

More on doping in cycling

Edmund R. Burke, has written many books on cycling and has been involved in the science of the sport for decades. In a recent article, Burke restates what I've said on this blog before as he says that as long as there's money (in cycling) there will be fraud (in the form of doping).

Detecting Fraud: Lessons from Satyam

BusinessWeek has an interesting article on the Satyam fraud. One of the most amazing thing about this fraud is that the fraud appears to have been primarily a cash fraud (i.e. the company claimed to have cash that didn't really exist). The authors of the article discuss two possible scenarios that could have resulted in the fictitious cash balance: (1) fake sales and (2) theft of real cash. Because of the inherent difficulty in creating fictitious sales and sustaining such a fraud over an extended period of time (the problems at Satyam allegedly took place over seven years), the latter possibility appears to be the most likely. In the words of the article:

Consider, again, the $825 million Satyam reported as investments in bank deposits in its consolidated balance sheet as of Mar. 31, 2008. If one were to substitute the line item "investments in bank deposits" with "Chairman Raju's personal account," this scenario assumes significance. As such, the hypothesis we raise is that Satyam was a legitimate cash-generating business over time; that Raju misappropriated Satyam's cash; and, that most of the misappropriation was probably not reflected on the company's books.

If this is true, it implies a major failure in corporate governance, including a significant audit failure by Satyam's external auditors. Ironicly, cash is generally considered one of the easiest accounts to audit and junior auditors often complain when assigned to audit of a company's cash balance because the task is perceived to be very basic.

While the authors conclude that, "Only a detailed analysis of the cash flow statements could have caught [the fraud]," I am not completely convinced. While closer scrutiny of the cash flow statements may have helped raise some red flags, I am not sure that it would have been sufficient to uncover this fraud. Instead, I believe that Satyam's auditors would have been more likely to catch the fraud by engaging in additional strategic reasoning.

In other words, Satyam's management was most likely able to fool the auditors by considering the auditor's standard procedures for auditing cash and developing some method of fooling those audit procedures. If the auditors had considered how Satyam's behavior might change in response to their basic procedures, the auditors may have been able to develop better procedures that may have caught the fictitious balance.