This document discusses fraud, fraud examination as a career, and internal controls to prevent fraud. It notes that as fraud detection methods advance, so do fraud perpetration techniques. Fraud examination is a fast-growing and lucrative career that involves investigating deception and trickery. Strong internal controls, including segregation of duties and monitoring, are the most important steps organizations can take to prevent and detect fraud. The fraud triangle of perceived pressure, opportunity, and rationalization helps explain motivations for fraud.
This document discusses fraud, fraud examination as a career, and internal controls to prevent fraud. It notes that as fraud detection methods advance, so do fraud perpetration techniques. Fraud examination is a fast-growing and lucrative career that involves investigating deception and trickery. Strong internal controls, including segregation of duties and monitoring, are the most important steps organizations can take to prevent and detect fraud. The fraud triangle of perceived pressure, opportunity, and rationalization helps explain motivations for fraud.
This document discusses fraud, fraud examination as a career, and internal controls to prevent fraud. It notes that as fraud detection methods advance, so do fraud perpetration techniques. Fraud examination is a fast-growing and lucrative career that involves investigating deception and trickery. Strong internal controls, including segregation of duties and monitoring, are the most important steps organizations can take to prevent and detect fraud. The fraud triangle of perceived pressure, opportunity, and rationalization helps explain motivations for fraud.
Fraud **As fraud detection methods get more sophisticated,
CHAPTER 1 so do fraud perpetration techniques. Fraud examination
Fraud - involves deception, confidence, and trickery is one of the fastest-growing and most financially Fraud is deception that includes the following elements: rewarding careers. It is not part of a financial statement 1. A representation audit but a distinct profession. ** 2. About a material point 3. That is false, CFE 4. Intentionally or recklessly so, - Certified fraud examiner 5. Which is believed - considered to be leaders in the antifraud 6. And acted upon by the victim community 7. To the victim’s damage. ACFE - Association of Certified Fraud Examiners Profit margin - world’s largest antifraud organization and the Net income divide revenue premier provider of antifraud training and education To recover the loss Loss divide profit margin **Financial statement fraud can be very difficult to detect because of the sophistication of the perpetrators Careers for fraud examiners and their positions of trust and authority in the **Many believe that fraud examination and forensic company. ** accounting will be among the fastest growing and most rewarding careers in the future** CASES: Government fraud-fighters, consultant fraud-fighters, As fraud detection methods get more sophisticated, so corporate employee fraud-fighters, and defense and do fraud perpetration techniques. Fraud examination is plaintiff lawyers are just a few of the possible careers one of the fastest-growing and most financially related to fraud prevention and detection. rewarding careers. It is not part of a financial statement audit but a distinct profession. Civil law deals with rights and duties between individuals. Trading after hours Criminal laws generally deal with offenses against - Civil law - By performing trades after approved society as a whole. trading hours, the perpetrators have allowed certain traders to trade with perfect By proceeding in a civil suit, the company can try to information and have prevented other traders recover some of the money lost from the fraud. and brokers from trading equities at a price at By pursuing a criminal suit, the company can ensure which they normally would. If proven guilty, the that when other companies hire the perpetrator, those perpetrators will be forced to compensate companies will know that the employee has committed monetarily for the damages they caused to fraud in the past and will be able to prevent the others. prospective employee from being in a position that - Criminal law - by breaking the law that provides the opportunity to commit fraud again. regulates approved trading hours. If proven guilty, the perpetrators could be sent to jail. Auditing vs. fraud examination - other stock and mutual fund traders were hurt. Auditing - uses sampling to test the account balances to They had an apparent disadvantage to those make sure the accounts are not overstated or traders and brokers who practiced late trading. understated Eventually, however, the perpetrators will incur Fraud examination - cannot be done effectively through the most damage as they are forced to fulfill sampling, each transaction should be reviewed and their civil obligations and endure tarnished evaluated. reputations. CHAPTER 2 Non-control factors that provide opportunities for Fraud triangle: fraud - Perceived pressure - failure to discipline fraud perpetrators; - Perceived opportunity - -lack of access to information; - Rationalization - ignorance, apathy, and incapacity; Fraud scale: - lack of an audit trail. the greater the perceived opportunity or the more intense the perceived pressure, the less rationalization Rationalizing helps minimize the perceived dishonesty it takes to motivate someone to commit fraud. Likewise, of their acts the more dishonest a perpetrator is, the less - The organization owes me. opportunity and/or pressure it takes to motivate fraud. - I am only borrowing the money—I will pay it back. Types of pressures: - Nobody will get hurt. - Financial pressure (greed) - I deserve more. - Vices (addictions) - It’s for a good purpose. - Work-related pressure (feeling overworked) - We’ll fix the books as soon as we get over this - Other types of pressures financial difficulty. - Something has to be sacrificed **Having an effective control structure is probably the **they judge themselves by their intentions and not by single most important step that organizations can take their actions, they do not see themselves as criminals.** to prevent and even to detect fraud** Components in a company’s control structure: Power - the ability to influence someone else. - control environment, When a fraud takes place, the conspirator has the - risk assessment, desire to carry out his or her own will—influence - information and communication, another person to act and do as the perpetrator - control procedures or activities, wishes—regardless of resistance. - monitoring. Fraud perpetrators use power to influence and Internal control activities persuade individuals Preventive controls - reward power (promising a reward or benefit) 1. Segregation of duties (having two people do a task - legitimate power (following the orders of a together or splitting the task into parts so that no one person who is in a position of authority) person handles the complete assignment) - coercive power (making the potential recruit 2. System of authorizations (so that only authorized or feel fear for not joining the fraud scheme) designated individuals have permissions to complete - expert power (through deceiving someone certain tasks) because the potential recruit has a lack of 3. Physical safeguards (locks, keys, safes, fences) knowledge) Detective controls - referent power (influence of a relationship) 1. Independent checks (job rotations, mandatory vacations, audits, and so on) It is the overriding and ignoring of existing controls, not 2. Documents and records (provide an audit trail that the lack of controls, that allows most frauds to be can be followed to check on suspicious activity and to perpetrated. document transactions) CASES How could this fraud have been detected? (Helen case) How will you approach your employee interaction and - The fraud would have been detected if the relationships in the future? (local dept store case) company had possessed a good internal audit - This fraud might have been detected earlier by department, combined with security or loss implementing basic cash accounting and prevention programs. A good accounting reconciliation techniques—separate employee system would have helped in the discovery of ID numbers to log into registers, independent the fraud and would have made it difficult for checks on register totals, two employees always Helen to conceal. being present to count cash, periodic employee How do vices such as gambling motivate people to rotations and vacations, and basic analytic commit fraud? (Ruth case) reviews. - With so much pressure, it takes only a little rationalization and a small opportunity for GREEN GRASS someone to perpetrate a fraud. What symptoms of fraud exist, and what symptoms What factors provided the optometrist with an should the owner look for if he believes fraud may be opportunity to commit fraud? (optometrist) occurring? - The major fraud opportunity in this case was - Fraud symptoms that should be looked for or the inability to judge the quality of performance that are evident in this case include: less time of the optometrist. Although the insurance with office manager, more chemicals being companies clearly could have said that the used than necessary, employee homes receiving services rendered by the optometrist were not unpaid services, and increased revenues with consistent with what they were paying for, they declining profits. Employees may have taken on never had reason to believe they needed to new customer jobs and pocketed the money assess the optometrist’s services. Another because the customers are not entered on the factor was the lack of access to information. computer system. The insurance companies had no way of WATKINS knowing that many of the services being billed Controls or actions that could have detected James’s for were not actually being performed, or that behavior many of the patients did not even exist. - independent checks by the insurance company, List four reasons why Len should have the employee investigations of complaints by customers being prosecuted. charged too much, and investigations of the - Prosecution sets precedence within the apparently rapid growth of his company. company that fraud will not be tolerated. JOHNSON - Prosecution brings about justice. What factors in Johnson’s control environment have - Prosecution may result in recovery of stolen led to and facilitated the manager’s manipulation of funds because of ordered restitution payments. inventory? - Prosecution will help prevent dishonest - does not have a very active board of directors, employees from defrauding other and there is little monitoring of employees. organizations. ARMSTRONG List three reasons why Len might not want to seek - Because investors trusted him, they put prosecution of his employee. substantial amounts of money into his funds. If - Fear that negative publicity will hurt the image the investors had trusted Mr. Armstrong less, of the CPA firm. they would not have given him unlimited - He might feel badly for the employee or his control of their money. family. - If investors had known of Mr. Armstrong’s - He doesn’t want to accept responsibility for background, they would have been less likely to the lax internal controls that existed in his firm. trust him and probably wouldn’t have allowed If you were Len, what would you do? him complete control over so much money. - Prosecution