Fraud always involves deception, confidence, and trickery.
Fraud is a deception that includes the following elements:
1. a representation
2. about a material point
3. that is false,
4. intentionally or recklessly so,
5. which is believed
6. and acted upon by the victim
7. to the victim's damage
How does fraud affect individuals, consumers, and organizations?
Fraud lowers organizations' net income dollar for dollar. To recover these costs, consumers and individuals pay more for goods and services.
5 types of fraud
1. employee embezzlement: employees deceive their employers by taking company assets (directly or indirectly)
2. management fraud: distinguished from other types of fraud both by nature of the perpetrators and by the method of deception. Management fraud is deception perpetrated by top management's manipulation of financial statements
3. investment scams or consumer scams: fraudulent and usually worthless investments are sold to unsuspecting investors
4. vendor fraud: perpetrated by vendors; comes in 2 main varieties; fraud pepetrated by vendors acting alon, and fraud perpetrated through collusion between buyers and vendors
5. customer fraud: customers not paying for goods purchased, getting something for nothing, or deceiving organization into giving them something they should not have
Charles Ponzi scheme
Convert his Dollar in to favorable exchange rate currency.
Use the funds to purchase international postal coupons in countries with weak economies.
Exchange the coupons back into a favorable foreign currency and finally back into American funds.
He gave early investors a return on their initial investments.
If company has a profit margin of 10%, to make up for a $1,000,000 fraud the company would have to have additional revenue of about....
$10,000,000
(1,000,000 * 10) or (1,000,000/0.10)
T/F
In civil cases, fraud experts are rarely used as expert witnesses.
False: In civil cases, fraud experts often serve as expert witnesses
T/F
The only group/ business that must report employee embezzlement is the federal government.
Fales: Banks are required to report their frauds to the government because of their FDIC insurance
T/F
The single most critical element for a fraud to be successful is opportunity.
False: Confidence is the single most critical element for a fraud to be successful.
T/F
Occupational fraud is fraud committed on behalf of an organization.
False: Occupational fraud is usually committed agains an organization.
Direct vs. Indirect fraud
Direct fraud does not involve third parties
Indirect Fraud invovles third parties
T/F
When fraud is committed, criminal prosecution usually proceeds first.
True
Corporate employee fraud fighters...
prevent, detect, and investigate fraud within a company.
What types of people commit fraud?
Anyone can commit fraud. Fraud perpetrators usually cannot be distinguished from other people based on demographics or psychological characteristics. The types of people who commit fraud are ordinary people, just like you and me.
What motivates people to commit fraud?
Financial pressures: greed, living beyond one's means, high bills or debt, poor credit, personal financila losses and unexpected financial needs
vices: addictions
work-related pressures: feeling overworked or underpaid
perceived opportunity
ability to rationalize that what they are doing is not wrong
Fraud triangle
Perceived pressure
perceived opportunity
rationalization
The fraud triangle is important because it helps us to determine the motives, reasons, and opportunities that someone had in committing fraud
Fraud scale
Illustrates the relationship between the 3 elements of the fraud triangle.
Example: the greater the perceived opportunity or the more intense the perceived pressure, the less rationalization it takes to mmotivate someone to commit fraud.
5 components in a company's control structure
the control environment
risk assessment
information and communication
control procedures or activities
monitoring
T/F
Management's example or modeling is of little importance to the control environment.
False: Management's example is a very important part of the control environment.
T/F
Effective fraud fighters usually put most of their time and effort into minimizing the pressures for fraud perpetrators to commit fraud.
False: Effective fraud fighters put their effors into trying to elimiate all three parts of the fraud trangle, especially reducing opportunities.
T/F
Fraud perpetrators who are prosecuted, incarcerated, or severely punished usually commit fraud again.
False: Fraud perpetrators who are prosecuted, incarcerated, or severally punished usually do not commit fraud again. In fact, they have a very low rate of recidivism, while perpetrators who aren't preosecuted have a high rate of recidivism.
T/F
A proper system of authorization will help ensure good internal controls.
True
T/F
Good documents and records are some of the best preventive controls.
False: Documents rarely serve as preventive controls, but they provide excellent detective controls.
Opportunity involves:
opportunity to conceal fraud
opportunity to avoid being punished for fraud
opportunity to commit fraud
Which one of the following is not one of the three elements of the control system of an organization?
B. management
Which of the following kinds of pressure is most often associated with fraud?
B.
Which of the following is not a primary control procedure?
C.
Which of the following is not a control activity?
A.
Reward power
ability of a fraud perpetrator to convince a potential victim that he or she will receive a certain benefit through participation in the fraud scheme
Coercive power
ability of the fraud perpetrator to make an individual perceive punishment if he or she does not participate in the fraud
expert power
ability of the fraud perpetrator to influence another person because of expertise or knowledge
legitimate power
ability of the fraud perpetrator to convince a potential perpetrator that he or she truly has power over him or her
referent power
abiliyt of the perpetrato to relate to the potential co-conspirator
Common factors that allow fraud to take place within organizations (5)
inability to judge the quality of performance
failure to discipline fraud perpetrators
lack of access to information
ignorance, apathy, and incapacity
lack of audit trail
Control Environment (5)
Managements role and example
Management communication
appropriate hiring
clear organizational structure
effective internal audit department
The Accounting System
An effective accounting system provides an audit trail that allows frauds to be discovered and makes concealment difficult
A good accounting system should ensure that recorded transactions are
1. valid
2. properly authorized
3. complete
4. properly classified
5. reported in the proper period
6. properly valued
7. summarized correctly
Control activities (procedures)
Segregation of duties, or dual custody
system of authorizations
independent checks
physical safeguards
documents and records
Why is it important to conduct a thorough fraud investigation when fraud is suspected?
to avoid wrongly targeting innocent people
gather sufficient factual evidence about the suspected fraud
ensure a complete report of all the facts and circumstances both incriminating and exonerating
"evidence square"
testimonial evidence: interviews, interrogations, and honesty tests
Documentary evidence: evidence gathered from paper, computers, and other written or printed sources
Physical evidence: fingerprints, tiremarks, weapons, stolen property, id numbers,
personal observation: evidence collected by the investigators
2 fundamental activities that prevent fraud
taking steps to create and maintain a culture of honesty and high ethics
assessing the risk of fraud and developing concrete response to mitigate the risks and eliminate the opportunities for fraud
The three elements of the fraud triangle by which the investigative techniques are often classifies are
the theft act
concealment efforts
conversion methods
3 critical factors in creating a culture of honesty, openness, and assistance
hiring honest people and training them in fraud awareness
creating a positive work environment
providing employee assistance programs (EAPs)
5 methods companies can use to reduce actual or perceived opportunities for fraud
install good internal controls
discourage collusion, and alert vendors and contractors to company policies
monitor employees, and install tip hotlines
create an expectation of punishment
practively audit for fraud
Proactive fraud auditing is conducted by following 4 steps
identifying risk exposures
identifiying the fraud symptoms for each exposure
building audit programs that proactively look for symptoms and exposures
investigating identified symptoms
T/F
Even with the right opportunity or significant pressure, most people would probably not steal or embezzle
False: under extreme pressure or with the right opportunity, most people would probably steal or embezzle
T/F
An important factor in creating a culture of honesty, openness, and assistance in the workplace is maintaining an employee assistance program.
True
Which of the following is not a reason identified by Deloitte why whistle-blowing systems fail?
