FRAUD

Key Concepts

• Fraud

• Risk of fraud

• Fraud deterrence

• Money laundering
Fraud , Error, Irregularity & Misstatement

Fraud: Is a deception made for personal gain or to damage another

individual.

Error: refers to unintentional mistakes.

Irregularity: Is contrary(means opposite in nature) to a particular rule or

standard.

Misstatement: Is something stated wrongly.

Prerequisites/ preconditions of fraud

There are three Prerequisites that are required for fraud to occur.(these points are related to

employees only)

• Dishonesty. If the individual is dishonest then he will surely be cheating and commit fraud.

• Opportunity. When the internal control systems are week then there is an opportunity for

employees to commit fraud

• Motivation. If the reward or benefit from the fraud is greater then the penalty . So individuals will

go for fraud
Risk of Fraud

Factors that might indicate an increased risk of fraud and error

includes.

• Management domination by one person.(centerlisation)

• Unnecessarily complex corporate structure

• Poor staff morale

• Lavish lifestyles of employees

• Inadequate segregation of duties

• Lack of monitoring of control(this is the fifth component of Internal control system)

• Unusual transactions(this might be a reason of money laundering)

• Payments for services disproportionate to effort

• Personnel(employees)who do not take leave or holidays

Fraud in a corporate perspective

• Misappropriation/ removal of funds or assets from a business

• Intentional misrepresentation of the financial position of the business

Misappropriation of Funds or other Assets
the following are just the few examples of the basic, unsophisticated frauds which
have been carried out in a business.
• Payroll . Falsified timesheets, expense claims and work done, overstated figures
entered in to the payroll sheets( e,g by payroll staff) and fictitious employees
(employees do not exist, but are paid)
• Purchasing. Dummy suppliers ( payments made for goods and services not
received), advance fees (e.g once received the seller disappears), short deliveries,
invoicing for goods or services not delivered, substandard products etc
• Sales. Diversion of customer (e.g customers directed to companies coneected
with key employees)
• Bogus goods and services paid for but not delivered, bad debt write offs, teeming
and lading is probably the most famous of the sales based frauds. It involve the
theft of cash or cheque receipts usually from credit customer being covered up by
subsequent receipts of cash or cheques. etc
• Inventory. Theft of basic good, theft of valuable scrab, over valuation. etc
• cash. Easily misappropriated cash, forged cheques, electronic transfers, stolen
pin on charge cards, manipulation of bank reconciliation ( beware those prepared
on spreadsheets.
• Investment schemes. Usually referred to as PONZI SCHEMES. The fraudster
initially pays very high return ( to establish the scheme) when sufficient funds
have been collected the fraudster disapper.
Deliberate Misrepresentation of Financial
Position
• Fictitious(means fake) sales

• Questionable accounting policies

• False recognition or over-valuation of assets

• Falsely calculated tax returns

• Manipulation of year-end events

• Understating expenses
Window dressing
• Window dressing is a common fraud carried out at a year end on financial
statements to make them appear healthier than what they are . Simply window
dressing involves changing the timing and cut off of key transactions to improve
the financial position for example
• Recording after date sales as sales made just before year end
• Recording false sales before year end and issuing credit notes after year end
• Issuing cheque payments before year end to reduce the liabilities but not sending
out the cheques until after year end(usually done to improve the liquidity ratio)
Measures to prevent & detect Fraud

The principal strategy of any organization to prevent & detect fraud is to

establish an effective internal control system which comprises five components

1. Control environment

2. Risk assessment

3. Information system

4. Control activities

5. Monitoring of control
Staff Responsibilities

Managers and staff should be cognizant(having knowledge or

awareness)of their responsibilities to help in detecting fraud.

Managers and staff should note

• Signs of petty fraud as well as checking the work staff are doing and

have done

• Unusual trends in accounting data

• Signs of discontent and low morale

• Internal audit staff should constantly ensure that systems and

controls are reliable.

Role of External Auditors

the responsibility of an auditor is to express an opinion on whether the

financial statements give a true and fair view of the company’s

financial position and results. If the fraud is deemed(view as or judge)

immaterial the auditors should ascertain their duty of confidentiality

can be overridden and the matter disclosed in the public interest.

Whistle blowing

Employees who disclose fraud normal practice in their organisations

has increased the likelihood of fraud detection. Some employers

have even laid out clear communicative procedures for

whistleblowers.
The possible implications of fraud to the
company
• Loss of shareholders confidence

• Loss of assets

• Financial difficulties

• Collapse of the company

• Fines by tax and other authorities

Money Laundering(important topic)

Money laundering is the exchange of dirty money and assets that

have been criminally obtained for clean money and assets that have

no clear link to criminal activity.

Stages of money laundering
Offences(breach of a law or rule; an illegal act)
relating to Money Laundering
• Laundering. It is an offence to conceal, disguise(conceal one’s

identity), convert, transfer, or remove criminal property .Concealing

or disguising criminal property includes concealing or disguising its

nature, source, location, disposition, movement or ownership, or any

rights connected with it.

• Failure to report. failing to disclose knowledge or suspicion of money laundering
where they know or suspect, or have reasonable grounds for knowing or
suspecting, that another person is engaged in laundering the proceeds of crime.
This offence only relates to individuals, such as accountants, who are acting in the
course of business in the regulated sector. Any individual who is required to
make disclosure to a nominated money laundering reporting officer within their
organization, or directly to the Serious Organized Crime Agency (SOCA), as soon
as is practicable
• Tipping off. Section 333 states that it is an offence to make a disclosure likely to
prejudice(preconceived opinion that is not based on reason or actual experience)
a money laundering investigation. It therefore covers the situation where an
accountant informs a client that a report has been submitted to SOCA.
Note
Penalties
• The maximum penalty for the s327 offence of money laundering is 14 years'
imprisonment. Failure to report and tipping off are punishable on conviction by a
maximum of five years' imprisonment and/or a fine.
Methods for detecting and preventing money
laundering
Money laundering can be detected and prevented by following means:
• Consolidate, cleanse and transform data from all areas of your business into an
open, flexible, industry-specific data model such that suspicious transactions can
be readily identified.
• Combine customer records from varied sources and match them against lists
of known or suspected criminals.
• Monitor daily transactions for suspicious behavior.
• Use multiple techniques-such as profiling and predictive modeling-to minimize
false-positive alerts while decreasing the risk of true criminal activity going
undetected.
• Ensure the accuracy, effectiveness and efficiency of the system via open access to
the system parameters.
• Broad array of entities, including banks, credit card companies, life insurers,
money service businesses and broker-dealers in securities, are required to report
certain transactions to the governing authorities.
• Financial institutions are required to engage in customer due diligence(is an
investigation, audit or review performed to confirm the facts of a matter under
consideration), which is sometimes known in the parlance as “know your
customer.”
Reporting Suspicions of Money Laundering
Each organization covered by the regulations must appoint money laundering
reporting officer or MLRO. This is the person to whom other partners and members
of staff should report any suspicion. The main points that should be remembered
when making reports of suspicions are as follows:
• Discussions, for example between members of an audit team, should not delay a
report being made to the MLRO
• Clients can be questioned about transactions or events that the accountant
doesn't understand, but as soon as the accountant is suspicious questioning
should stop, as there is a risk of tipping off, which is a criminal offence
• Everyone must know who the MLRO is and how they can be contacted.
• Only the MLRO can decide that a report need not be made to the authorities if
there is already a suspicion
• Once a member of staff has reported a suspicion to the MLRO they have fulfilled
their responsibility.
• The MLRO should issue written acknowledgement of reports received
• Everyone must receive training in money laundering