OBJECTIVE OF THE SEMINAR

To sensitize the participantson the various aspects of

fraudfacilitating timely detection and

enabling corrective action

White Collar fraud -- An introduction

Results of Fraud Surveys & Studies

Profile of Fraud Perpetrators

Common Fraud Schemes & Red Flags

About Us

CONTENTS

White Collar Fraud

- An Introduction

A Fraud is:

A representation (usually of fact) About a material point (important enough to make a

difference) Is False Intentionally and knowingly so (some cases recklessly) Which is believed Acted upon by the victim Caused Damage

DEFINITION OF FRAUD

Fraud Examination involves:

Assisting in Detection & Prevention of Fraud

Obtaining evidence & taking statements

Writing Reports

Testifying to Findings

ELEMENTS OF FRAUD EXAMINATION

FRAUD

TRIANGLE

OPPORTUNITY

PRESSURERATIONALIZATION

FRAUD TRIANGLE - CRESSEY

Personal

Integrity

Low High

Opportunities

To Commit

HighLow

Situational

PressuresLow High

Fraud

Scale

High

Fraud

No

Fraud

FRAUD SCALE

IF PROFIT MARGIN IS 10%, REVENUES MUST INCREASE BY 10 TIMES LOSSES TO RECOVER AFFECT ON NET INCOME LOSSES……. RS. 1 MILLION REVENUE….RS. 10 MILLION

Fraud Robs Income

Revenues Net Income

FRAUD LOSSES REDUCE NET INCOME RS. FOR RS.

MULTIPLIER EFFECT OF FRAUD

A Car Manufacturer

$436 Million Fraud

Profit Margin = 10%

$4.36 Billion in revenues needed

At $20,000 per car, 218,000 cars

Large Bank

$750 million fraud

Profit Margin = 10 %

$7.5 Billion in revenues needed

At $100 per year per checking account, 750 million new accounts

MULTIPLIER EFFECT.. ANOTHER 2 EXAMPLES

Section 217 (2AA) para iii of Companies (Amendment) Act,

2000 regarding Directors’ Responsibility Statement in Board

Report

Codes of Conduct/Values

Foreign Corrupt Practices Act

FOCUSING ON FRAUD -

THE CORPORATE GOVERNANCE WAY

Fraud is increasing

Creates significant behavioral issues in an organization

Disrupts productivity

Losses have a multiplier effect making them much more expensive than the actual amount stolen

Kills careers of Good Managers

Responsibility of Directors for prevention and detection of fraud has increased

FRAUD SHOULD BE TAKEN SERIOUSLY

Tone at the top; create an ethical environment

Lead by Example

Corporate Code of Conduct

Call in Services for reporting unethical practices

Reliable Internal Controls

WHAT AN ORGANIZATION CAN DO

Training Courses on

Ethics Training

Internal Controls

Fraud Prevention

Technological and business changes

Special training for monitors

Reference Checks on New Employees

Code of Sanction for Suppliers/Contractors

WHAT AN ORGANIZATION CAN DO (CONTD.)

Results of Surveys and Studies related to Fraud

Coverage- More than 3400 large organizations

42.5 % were victims of Economic Fraud in last two years

60 % of frauds perpetrated by people within the organization

Cost of Fraud to the victims was Euro 3.6 billion (Rs. 153.7 billion) in last two years (Average cost Euro 6.7 million (Rs.286.09 million))

Most prevalent being Embezzlement and Breach of Trust

58 % of frauds detected by accident/chance

Many organizations did not act on lessons learned

PRICEWATERHOUSECOOPERS ECONOMIC

CRIME SURVEY 2001 REPORT

60% of organisations reported security breaches, where : Manufacturing and financial sector suffered higher revenue

losses Revenue losses occurred at 21% Loss not quantifiable at 58% Culprit not identifiable in 48% Breached by computer hackers 23% Breach detected due to

alert by colleague 53% alert by customer/ supplier 24%

Average down time 29 hours

CII/ PRICEWATERHOUSECOOPERS IT

SECURITY SURVEY RESULT

The OPACITY survey

ranked India 14 out of 24 in corruption amongst 35 countries surveyed

Countries in South Asian region like Pakistan, Singapore, Hong Kong, Japan, Taiwan etc. are better poised than India in this regard

India also ranked amongst the top 25 most corrupt countries according to a recent survey (Transparency International)

PRICEWATERHOUSECOOPERS OPACITY

SURVEY RESULT

Fraud and abuse costs U.S. organizations more than $400 billion annually.

The average organization looses more than $9 per day per employee to fraud and abuse.

The average organization looses about 6% of its total annual revenue to fraud and abuse committed by its own employees.

The median loss caused by males is about $185,000; by females about $48,000.

RESULT OF NATIONAL FRAUD SURVEY 2001

CONDUCTED BY ACFE, USA

Median losses caused by men are nearly four times those caused by women.

Losses caused by managers are four times those caused by employees.

Median losses caused by executives are 16 times those of their employees.

The most costly abuses occur in organizations with less than 100 employees.

The education industry experiences the lowest median losses.

RESULT OF NATIONAL FRAUD SURVEY 2001

CONDUCTED BY ACFE, USA

By Auditors

By Information

By Accident or Internal Control

18%

33%

49%

DETECTION

A STUDY OF 212 FRAUDS

Profile of Fraud Perpetrators

Globally: Older (30 + years) 75% male, 25% female Stable family situation Above-average education Less likely to have criminal record Good psychological health Position of trust Detailed knowledge of accounting systems and

their weaknesses

PROFILE OF FRAUD PERPETRATORS

Median losses caused by men were four times those of caused by women

Losses caused by managers were four times those caused by employees

Median losses caused by executives were 16 times those of their employees

PROFILE OF FRAUD PERPETRATORS

Not driven by principles but by short term advantage

Seeks instant gratification and over-estimates his importance

Does not conform

Impeded, he believes, for artificial reasons

Drug, alcohol and other bad habits

Excessively secretive

PROFILE OF FRAUD PERPETRATORS

Attitude of being above the law

Deals with windfall areas or third parties

Takes unreasonable risks

Three distinct types:

the opportunist

the professional, and

the desperate

PROFILE OF FRAUD PERPETRATORS

“My employer didn’t compensate me well enough, so I took what was due to me” “Everyone else was doing it” “I intended to pay it back” It does not harm anyone To adhere to policy & procedures

Justifications

Motives

“I needed the money”

“I felt cheated and wanted revenge”

“The bribe or kickback was too tempting”

FRAUD PERPETRATORS

Common Fraud Schemes&

Red Flags

Asset

MisappropriationCorruption

Fraudulent

Statements

CashInventory

and all other Assets

COMMON FRAUD SCHEMES

Organisational

Praise

“RED FLAG” are the signals, signs or symptoms which are reflected while certain types of fraud are taking place in an organisation.

What Does “Red Flag”“Red Flag” Mean

Red flags, broadly speaking, are of two types: Situational Opportunity

RED FLAGS – DEFINITION & KINDS

High personal debts

Lives beyond means

Excessive gambling

Extra-marital involvement

Job frustration

Unfavorable economic conditions in industry

Insufficient working capital

Credit Problems

High Debt

SITUATIONAL "RED FLAGS"

Employee Management

Weak management or excessive turnover

Firm always in "crisis mode/training mode"

No rotation/ segregation of job duties among employees

Management over-ride Changes auditors frequently/

use of several audit firms simultaneously

Many adjusting entries required at time of audit

OPPORTUNITY "RED FLAGS"

Employee Management

About Us

Business Ethics Advisory Services

Statutory Compliance Review

Internal Controls & Risk Management

IT Systems Security

Fraud Risk Management

Fraud Investigation

Procurement Review

Training - Risk Management and Fraud Prevention