The Dallas Business Journal reports that a federal jury found California-based Cisco Systems Inc. guilty of “fraud by concealment” in a short-lived partnership with New York-based XpertUniverse Inc. Cisco must pay US $70 million in damages and an additional US $34,000 for violating two of XpertUniverse’s patents. 

Lessons Learned 

The type of fraudulent concealment highlighted in this case is one example of a fast-growing fraud type related to intellectual property. Intellectual property is a complex area and covers a range of diverse subjects. As a result, there are vast opportunities for individuals and organizations to take advantage of those wishing to secure protection for their intellectual property or to deploy it a business or personal context.

Intellectual property fraud can occur in many ways, including:

  • Inventors being lured to pay for development of their idea, which does not occur.
  • Investors paying for a nonexistent product or an invention that is never developed.
  • Registration frauds (e.g., an email originating from a domain name registrar or IT consulting company that purports to notify a trademark holder that another entity is seeking to register the client’s trademark or business name as a domain name in another country, pretending to offer to register a brand name — but for nefarious purposes).
  • Promotion firm scams.

What can auditors do to help? As part of regular audit planning and fraud risk assessment processes, auditors can help ensure that the risk and threat of intellectual property fraud is assessed, including the strengths and weaknesses of controls over intellectual property assets and processes.Intellectual property can originate from either inside or outside an organization (or both), so each aspect needs to be addressed. An intellectual property audit is a good first step, and it involves reviewing human resource policies (including conflict of interest, background/criminal checks, and drug tests), physical security, intellectual property rights, and safeguards relating to vendors/suppliers and other business partners.

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