IIF 430

INTRODUCTION TO FRAUD

CHAPTER 1
INTRODUCTION
MADAM SURIZA
LEARNING OBJECTIVES

At the end of the chapter, students should be able to :

• Explain the occupational fraud and abuse
• Identify the types of asset misappropriation
• Discuss about asset
CONTENTS

• Definition of Occupational Fraud and Abuse

• Asset Misappropriations
• Definition of Assets
• How Asset Misappropriations Affect Books of Account
DEFINITION
• Fraud defines as false representation of a matter of fact,
whether by words or by conduct, by false or misleading
allegations, or by concealment of that which should have
been disclosed, which deceives and is intended to deceive
another so that he shall act upon it to his legal injury
• Occupational fraud generally refers to fraud committed
by an organization's employees.
CATEGORIES OF FRAUD
All instances of occupational fraud and abuse can be classified
into one of three major categories:
1) Asset Misappropriations: “any scheme that involves the
theft or misuse of an organization’s assets”
2)Corruption: “any scheme in which a person uses his or her
influence in a business transaction to obtain an unauthorized
benefit contrary to that person’s duty to his or her employer”
3)Fraudulent Financial Reporting: “falsification of an
organization’s financial statements to make it appear more or
less profitable.”
THE FRAUD TRIANGLE
What causes an employee to commit fraud? Human behavior
is complicated. A prominent theory of what causes fraud
identifies three factors: pressure, opportunity, and
rationalization. The theory is known to as the “fraud triangle”.
 PRESSURE OPPORTUNITY RATIONALIZATION
Work pressure • Weak organizational Is justifying a behaviour.
• Performance targets policies and i.e. : I stole ………
• Poor financial procedures • To save a family
performance • Poor organizational member who was sick
• Threat of job loss corporate governance or in jail.
Personal pressure • To save my home, car,
• Extravagant lifestyle etc. from being
• To meet society’s auctioned by the bank
expectation • To reward myself
• To cover errors because the
• Intellectual challenge organization does not
• Financial problems pay me enough.
• Drugs or gambling • To take my children to
• Greed school.
• Medical bills
DEFINITION OF ASSET
• An asset is a resource with economic value that an individual
or corporation owns or controls with the expectation that it
will provide a future benefit.
• Personal assets can include a home, land, financial
securities, jewelry, artwork, gold and silver, or your checking
account. Business assets can include such things as motor
vehicles, buildings, machinery, equipment, cash, and
accounts receivable.
ASSET MISAPPROPRIATION
• Asset misappropriation fraud happens when people who are
entrusted to manage the assets of an organization steal from
it.
• Asset misappropriation fraud involves third parties or
employees in an organization who abuse their position to
steal from it through fraudulent activity. It can also be
known as insider fraud.
• This type of fraud can be committed by company directors,
or its employees, or anyone else entrusted to hold and
manage the assets and interests of an organization.
IMPACT OF ASSET
MISAPPROPRIATION
• Misappropriation is remarkably costly because it directly
affects an organization's bottom line, which means that to
replenish lost income, substantially more revenue must be
generated. For instance, if a company's profit margin is 20%,
it requires five times more revenue to replace the profits lost
from fraud.
TYPES OF ASSET
MISAPPROPRIATION
 TYPES DESCRIPTION OF SCHEME EXAMPLES
Billing schemes Any scheme in which a person causes his or her • Employee creates a shell
employer to issue a payment by submitting company and bills employer for
invoices for fictitious goods or services, inflated non-existent services.
invoices, or invoices for personal purchases. • Employee purchases personal
items, submits invoice to
employer for payment.
Cheque tampering Any scheme in which a person steals his or her • Employee steals blank company
employer’s funds by forging or altering a check on checks, makes them out to
one of the organization’s bank accounts, or steals a himself or herself or an
check the organization has legitimately issued to accomplice.
another payee. • Employee steals outgoing check
to a vendor, deposits it into his
or her own bank account.
Payroll schemes Any scheme in which an employee causes his or • Employee claims overtime for
her employer to issue payment by making false hours not worked.
claims for compensation. • Employee adds ghost
employees to the payroll.
Expense Any scheme in which an employee makes a claim • Employee files fraudulent
reimbursements for reimbursement of fictitious or inflated business expense report, claiming
expenses. personal travel, non-existent
meals, etc.
Register Any scheme in which an employee makes false • Employee fraudulently voids a
disbursements entries on a cash register to conceal the fraudulent sale on his or her cash register
removal of cash and steals the cash.
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