2. 1. What is fraud? l2. Classic fraud research3. Fraud triangle
and it`s scope4. Profile of fraudsters5. Who is victimised by fraud
more often?6. Fraud taxonomies7. Fraud tree.8. Evalution of a
typical fraud 3. 1. What is fraud? Fraud as a crime. Fraud is a
generic term, and embraces all the multifarious means thathuman
ingenuity can devise, which are resorted to by one individual, to
get an advantage byfalse means Corporate fraud. Corporate fraud is
any fraud commited by, for, or against a businesscorporation.
Management fraud. Management fraud is the intentional
misrepresentation of corporate orunit performance levels The ACFE
defines financial statement fraud as: the deliberate
misrepresentation of thefinancial condition of an enterprise in
order to deceive financial statement users. 4. 1. What is fraud The
U.S. Supreme Court in 1887 provided a definition of fraud in the
civil sense. The mostimportant point was the 4th: `That it was made
with intent` The defendant can easily defend the claims with the
oops theory that is, oops, I made amistake But, if at the beginning
of the fraud investigation, the victim entitys antifraud personnel
takethe time to establish a pattern, even if that means allowing
the fraudster to continue to stealfor awhile, then the victim can
establish forensic evidence related to intent. The fraudstermight
try the oops defense, but if the victim is able to produce dozen of
instances, thejudge or jury will probably not believe it. 5. 2.
Classis fraud research In order to commit fraud, a rationalization
must exist for the individual to decidefraud is worth committing
The current term fraud was traditionally referred to as
white-collar crime, and thetwo are used synonymously here. Jaspan
and Black tried to derive antifraud measures their book ` The Thief
in theWhite Collar `. Jaspan and Black advise employers to: (1) pay
their employees fairly, (2) treat theiremployees decently, and (3)
listen to their employees problems, if they want to avoidemployee
fraud. But to temper that bit of humanism with a little reality,
they also suggest thatemployers should never place full trust in
either their employees or the securitypersonnel they hire to check
on employees. 6. 2. Classis fraud research Hartung disagrees with
Jaspans and Blacks generalizations and focuses onthe individual. He
argues: Their criminality is learned in the process ofsymbolic
communication, dependent upon cultural sources. In reality, both
Jaspan and Black, and Hartung appear to have been correct. Hartung
noted that individuals are inevitably affected by their
environment. Jaspan and Black suggestions to deter fraud say the
same as modern effortsdo: Create an environment with few reasons
and with few opportunities tocommit fraud. 7. 3. Fraud triangle Why
a person in a position of trust would become a violator of that
trust? 8. 3. Fraud triangleCressey interviewed about 200 embezzlers
in prison. One of the major conclusions of hisefforts was that
every fraud had three things in common: (1) pressure (sometimes
referred to as motivation). Sometimes an insatiable greed
causesrelatively wealthy people to commit frauds. Motives to commit
fraud in business usually arerationalized by the old saying that
all is fair in love and warand in business, which isamoral, anyway.
(2) rationalization (of personal ethics). In an ACFE Report, 93
percent of the reportedfraudsters had no prior criminal
convictions. E.g I am just borrowing the money (3) knowledge and
opportunity to commit the crime. This aspect of the triangle is the
onlyone that auditors can easily observe or control. 9. SCOPE OF
FRAUD Research in the last 10 years has been able to reveal both
the scope of fraud and themost effective means of detecting frauds.
Research by the ACFE reveals that the estimated level of fraud
detected from 1996 to2008 has been consistent in the U.S.
economyapproximately 6 percent of annualrevenues. In 2009, KPMG
released its fourth Fraud Survey. KPMG interviewed 204 executivesin
companies with at least $250 million in revenues. 74 percent of
employees reported they had personally observed wrongdoing in
theirorganization in the prior 12 months. The greatest concern was
the potential loss of public trust, according to 71 percent ofthe
executives 10. 4. PROFILE OF FRAUDSTERS Who? The person is usually
someone who was not suspected, oftentimesleast suspected. Are some
people more prone to commit fraud than others? Gwynn Nettler,in
Lying, Cheating and Stealing, offers these insights on cheaters and
deceivers: People who have experienced failure, who are disliked
and who dislikethemselves, impulsive, distractible, ignorant
people, people who have greatpressure to achieve important
objectives. 11. 4. PROFILE OFonFRAUDSTERS Why Do Employees Lie,
Cheat, and Steal the Job? The employee believes he can get away
with it, she desperately needs or desires themoney or articles
stolen, feels frustrated or dissatisfied about some aspect of the
job,Everybody else steals, so why not me?, has no self-control,
Theyre so big,stealing a little bit wont hurt them, The employee
was economically, socially, orculturally deprived during childhood.
Why is it that, despite the consequences of criminal behavior, it
still occurs?Apparently, it is because the rewards gained often
exceed the risk of punishment. Many times, if not most, when a
fraud is detected, the extent of punishmentregarding the
perpetrator is to be fired, sometimes without even paying back
thefraud losses. 12. High-Level and Low-Level Thieves Hall and
Singleton provide a similar profile like ACFE RTTN for a
typicalfraudster in general. These criminals are: (a) in a key
position in thecompany, (b) are usually male, (c) are more than 50
years old, (d) aremarried, and (e) are highly educated. This
profile leads us to this overallconclusion: A white-collar criminal
does not look like a criminal! 13. High-Level and Low-Level Thieves
Most expensive fraudsMost frequent frauds Have been with the firm
for a long Have been an employee for about the sametime amount of
time as the high-level thieves Earn much less Earn a high income
Could be either male or female (gender Are male doesnt matter) Are
over 60 years of age, Are between the ages of 41 and 50 Are well
educated Have finished high school Have never been charged with
Operate aloneanything criminal And have usually not been charged
with any criminal behavior 14. 5. WHO IS VICTIMIZED BY FRAUD
MOSTOFTEN? Fraud is therefore most prevalent in organizations that
have no controls, notrust, no ethical standards, no profits, and no
future. Small businesses and organizations have a higher risk of
fraud than anyother size entity, because they are more likely to
have one accountant, nosegregation of duties, and no compensating
control, and those factors are themost common in fraud. 15. 6.
FRAUD TAXONOMIESWe focus on frauds in financial statements and
business transactions.The following are some of the ways fraud has
been classified. Fraud can be perpetrated against customers,
creditors investors, suppliers, bankers, insurers, or Consumerand
Investor government authorities (e.g., tax fraud)Frauds Criminal
fraud requires proof of an intentiona deception. Criminal fraud
denotes a false representation of a material fact made by one party
to Criminal and another party with the intent to deceive and induce
the other party to justifiably rely on the fact to his/her
detrimentCivil Fraud Civil fraud requires that the victim suffer
damages. Fraud for Frauds directed against the companyand against
the Company Frauds that benefit the company Internal means all the
ways used to fraud such asprice fixing, corporate tax evasion,
violations of environmental laws, false advertising. Internal and
External fraud such as frauds committed by vendors, suppliers, and
contractors who might overbill, double bill. externalfraud
Management Internal controls are measured by their effectiveness;
they must be monitored constantly to ensure that they are
functioning at the level designedandand intended nonmanage ment
fraud 16. 7. The fraud tree The three main categories are (1)
fraudulent statements, (2) assetmisappropriation, and (3)
corruption. 17. 8. Evolution of a typical fraud3.Rationalization
2.OpportunityFormulate intent without1.MotivationaKnowledge and
self-incrimination; e.g., 4.Commit the fraudFinancial need, greed,
ego. opportunity to commit thejust borrowing the fraud.money, 18.
8. Evolution of a typical fraud6.Conceal the crime8.Suspicion or
discoverydiscovery of variance Use large 7. Red flags or anomaly
including a5.Convert asset to cash volume accounts, rely on Red
flags could sufficient analysis, discrepancies, internalapathy,
alter documents, be a lifestyle change controls, internal
audit,destroy documentsexternal audit, accident 19. 8. Evolution of
a typical fraud9.Predication determined 10.Fraud theory11.Fraud
investigationA The fraud theory 12.Write a report Identify and
gatherfraud professional believes approach helps to identify Almost
all fraud forensic evidence, loss of a fraud has occurred, isthe
most likely schemesinvestigations require aassets confirmed, loss
occurring, or will occurand how they are being report at its
conclusion documentedbecause of circumstances perpetrated 20. 8.
Evolution of a typical fraud14.TrialPresentation of facts and
testimony before trier of13a.Disposition: Termination
13b.Disposition: Prosecution fact, use of expert witness,
presentation of forensic evidence 21. Summary An understanding of
the fraud principles is the foundation to any antifraudactivity,
whether it is developing a fraud policy, investigating a fraud,
ordesigning antifraud controls. Therefore it is vitally important
to know all one can about the fraud triangle,fraud tree, scope of
fraud (it can happen here), profile of a fraudster, andother basic
principles.
