4/19/2024

By: CPA Innocent Kimaro (Msc A&F, Bcom-Acc, CPA-T)

 The formal definition:

 Fraud is the use of one’s occupation for personal
enrichment through the deliberate misuse or misapplication
of the employing organization’s resources or assets.
 Or
 Fraud is the intentional act or omission designed to deceive
others, resulting in the victim suffering a loss and/or the
perpetrator achieving a gain.

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 Fraud is an intentional act by one or more individuals among

management, those charged with governance (management
fraud), employees (employee fraud) or third parties
involving the use of deception to obtain an unjust or illegal
advantage.

 Why some people commit fraud?

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 A fraud triangle is a tool used in forensic auditing that

explains three interrelated elements that assist the
commission of fraud- Pressure (motive), opportunity (ability
to carry out the fraud) and rationalization (justification of
dishonest intentions).

 PRESSURE FACTORS:
 Force which makes some one to do some act. Pressure is what causes
a person to commit fraud. Desperate people do Desperate things.
Pressures comes from many forms as Financial or Non Financial. For
instances:
 Repayment of Debt;
 Desire to live well;
 High amount of personal debts and health expenditures.

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 OPPORTUNITY FACTORS
 Weakened internal controls, lack of oversight, or the ability to
manipulate financial data provide opportunities. For instance
 Weak moral policies;
 In capabilities to assess the quality of job performed by the
employees;
 Absence of well disciplined environment in which fraudsters will
be published;
 Ignorance, indifference and inabilities of top management;

 Rationalization
 It is the defense mechanism of fraudsters in order to justify
his/her action. The examples include:
 I had borrowed the money, I would pay back;
 This is in return for my efforts for the business;
 Nobody has suffered as a result of this;
 I have taken the money for the good purpose;

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 Deception: It involves an intentional act or omission to

mislead others for unlawful gain.
 Concealment: Fraudsters often take steps to hide the
deceit, making it challenging to detect.
 Breach of Trust: Perpetrators violate the trust placed in
them, causing harm to individuals or organizations

 Poor internal controls

 Management override of internal controls
 Collusion between employees
 Collusion between employees and third parties

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 There are four elements that must be present for a person

or employee to commit fraud:
 Opportunity (Placement)
 Low chance of getting caught (Placement)
 Rationalization in the fraudsters mind, and (Can become
Career Criminal)
 Justification that results from the rationalization
(Emotional, Financial, etc. NEED)

 A red flag is a set of circumstances that are unusual in nature or

vary from the normal activity. It is a signal that something is out
of the ordinary and may need to be investigated further.
 Keep in Mind:
 >Do not ignore a red flag
 >Sometimes an error is just an error
 Red flags that are common to most types of fraudulent activity
can be categorized as employee and management red flags.

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 Employee lifestyle changes: expensive cars, jewelry, homes, clothes

 Significant personal debt and credit problems
 Behavioral changes: these may be an indication of drugs, alcohol,
gambling, or just fear of losing the job
 High employee turnover, especially in those areas which are more
vulnerable to fraud
 Refusal to take vacation or sick leave
 Lack of segregation of duties in the vulnerable area

 Reluctance to provide information to auditors

 Managers engage in frequent disputes with auditors
 Management decisions are dominated by an individual or small
group
 Managers display significant disrespect for regulatory bodies
 There is a weak internal control environment
 Accounting personnel are lax or inexperienced in their duties
 Decentralization without adequate monitoring
 Excessive number of checking accounts

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 The forensic accountant could be asked to investigate many different

types of fraud. The most common involves theft, including cash,

inventory and fraudulent payments. The three categories of frauds
are corruption, asset misappropriation and financial statement fraud.

 There are three types of corruption frauds: conflicts of

interest, bribery, and extortion. Research shows that
corruption is involved in around one third of all frauds.
 In a conflict of interest fraud: the fraudster exerts his/her
influence to achieve a personal gain which detrimentally
affects the company. The fraudster may not benefit
financially, but rather receives an undisclosed personal
benefit as a result of the situation.

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 Bribery is when money (or something else of value) is

offered in order to influence a situation in one’s favour.
 Extortion is the opposite of bribery, and happens when
money is demanded (rather than offered) in order to secure
a particular outcome

 By far the most common frauds are those involving asset

misappropriation, and there are many different types of
fraud which fall into this category.
 The common feature is the theft of cash or other assets
from the company, for example:
 Cash theft: Misappropriation of cash , the stealing of
physical cash, for example petty cash, from the premises of
a company.
 Fraudulent disbursements: raising fake invoices, company
funds being used to make fraudulent payments.

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 This is also known as fraudulent financial reporting, and is a

type of fraud that causes a material misstatement in the
financial statements.
 It can include deliberate falsification of accounting records;
omission of transactions– either revenue or expenses, non-
disclosure of relevant details from the financial statements,
balances or disclosures from the financial statements; or
the misapplication of financial reporting standards.

 This is often carried out with the intention of presenting the

financial statements with a particular bias, for example
concealing liabilities in order to improve any analysis of liquidity
and gearing.
 Companies get into this type of fraud to try to show the
company’s financial performance as better than what it actually
is.
 The goal of presenting fraudulent numbers may be to improve
liquidity, ensure top management continue receiving bonuses, or
to deal with pressure for market performance.

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