CHAPTER 3: Fraud Schemes according to Association of Certified Fraud

Examiners(ACFE)

A. Fraudulent Statements
- misrepresentation or manipulating the Financial Statements to make it
better than it is, such as bloating the revenue, cash, assets, and decreasing the
entity’s business expenses.
- associated with management fraud where it usually occurs.
- reasons why it happen:
1. Tied-up to focus on short-term financial measures
- management took advantage of a good financial statement to
steal from an entity and assumed it would last until the end of time to cover up the
amount stolen.
2. Related to bonus packages being tied to Financial Statements
- manipulating the financial statements by increasing its
revenue may result in receiving bigger incentives which shouldn’t be tolerated
because of a principle that information should be faithfully represented, free from
error, bias, and should be complete and accurate.

B. Corruption
- usually involves executives, managers, employees of an organization, and
collusion with an outsider or even inside the building itself.
- ACFE’s Study: 4 Principal Types of Corruption
1. Bribery
- under the table payments; happens before the act
- involves giving,offering, soliciting, or receiving things that
could influence an official with his/her lawful duties.
- e.g., smuggled goods from BOC

2. Illegal Gratuities (unlawful gifts)

- same as the bribery but an official act has been taken.
- transaction occurs after the act.
- rewarding someone who is in authority/position for making a
favorable decision.
 3. Conflicts of Interest
- employee acts on behalf of a third party during the discharge
of his/her duties.
- self-interest in the activity being performed.
- employee’s conflict of interest is unknown to the employer
and if there is a financial loss, therefore a fraud has occurred.

4. Economic Extortion
- use of a force or threat by an individual or organization to
obtain something valuable, could be financial, economic asset,
information or cooperation for a favorable decision.
- in U.S, to address Economic Extortion, they have a Foreign
Act of 1977 while here in the Philippines, we have the
RA 3019 Anti-Graft and Corrupt Practices Act.

C. Asset Misappropriation
- most often a type of fraud that usually occurs as employee fraud but it can
also happen in the part of management fraud.
1. Skimming or Defalcation
- stealing of cash from an organization before it is recorded on
the organization’s books and records.
- a white-collar crime which involves taking cash of a business
prior to entering the accounting system.
- e.g., Direct Theft or Tax Evasion; payment from customer is
directly to the owner and disposing of any proof of transaction.

2 . Cash Larceny
- cash receipts are stolen from an organization after it have
been recorded on the organization’s books and records.
Stealing of cash is still present but it is recorded already from
books of accounts.
 - usually occurs at the cash register
- if the company has an accurate cash records, it can be
detected during cash reconciliation.
- e.g., Lapping - taking subsequent cash received and apply
it to an accounts receivable to cover the theft.

3 . Check Tampering
- Forging or changing a cheque that the organization issued to
a legitimate payee.
- Forging a payee’s signature and encashing it secretly.

4 . Payroll Fraud
- Non-existent/ghost employees that are issued with a salary.

5 . Expense Reimbursement Schemes

- Bloating the expenses or charging a company with a receipt
to reimburse even from a personal expenses or expenses not
related to business.

6 . Theft of Cash
- direct theft of cash on hand in the organization.
- e.g., An employee who steals cash directly from a vault.

D. Non-Cash Misappropriation
- stealing of inventories or non-cash assets.
- e.g., customer service clerk selling confidential information to a third party.
INTERNAL CONTROL
- policies, practices, and procedures of an organization.

4 BROAD OBJECTIVES:
1. To safeguard assets of the firm.
- to avoid any asset misappropriation.
2. To ensure the accuracy and reliability of accounting records and
information.
- if there is an internal control, an entity can avoid financial
misstatements.
3. To promote efficiency in the firm’s operations.
4. To promote efficiency in the firm’s operations.

MODIFYING ASSUMPTIONS
- guide that will help an organization to have an Internal Control.
1. Management Responsibility
- management is in charge of implementing Internal Control.

2. Reasonable Assurance
- there must be an assurance that the benefit will outweigh its cost of
achieving improved control.

3. Methods of Data Processing

- techniques of achieving the objectives which varies with different types
of technology.
- Internal Control should achieve the 4 objectives regardless of what
data processing method used.