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  • 1. HON 322C Fraud Seminar Prof Bill Dilla Jan. 14, 2003
  • 2. Elements of Fraud
    • A representation
    • About a material point
    • Which is false
    • And intentionally or recklessly so,
    • Which is believed
    • And acted upon by the victim
    • To the victim’s damage
  • 3. Relationship between fraud and illegal / unethical acts Illegal Acts Fraud Unethical Acts
  • 4. Types of fraud: The “big picture”
    • Occupational fraud (Asset theft)
      • Fraud committed against an organization
      • Usually by employees or managers
      • BUT recent cases by executives exist (e.g., Tyco, Adelphia)—called “corporate looting”
    • Management fraud
      • Fraud committed on behalf of an organization
      • Fraudulent financial reporting most common type
      • Generating most of the current concern about fraud
  • 5. A more complete fraud list
    • Employee embezzlement
    • Management fraud
    • Investment scams
    • Vendor fraud
    • Customer fraud
  • 6. Fraud can be of more than one type
    • Employees collude with a vendor to overcharge and take kickbacks
      • Both embezzlement and vendor fraud
    • Stock option backdating
      • “Corporate looting”
      • Fraudulent financial reporting to cover up expense
  • 7. From an audit and control perspective
    • Preventing employee embezzlement and fraudulent financial reporting are most important
    • Controls to prevent embezzlement also help prevent vendor fraud and customer fraud
    • Customer fraud and vendor fraud are of particular importance in an e-commerce environment
  • 8. Some Fraud Facts Source: 2003 KPMG Survey of Public Companies and State and Federal Agencies http://www.kpmg.com/aci/docs/surveys/Fraud%20Survey_040855_R5.pdf
    • Most common type of fraud
      • Theft of assets
    • Most costly frauds
      • Financial reporting fraud
      • Medical / insurance fraud
    • Most common methods for uncovering fraud
      • Internal control
      • Internal audit
      • Notification by employee
    • Least common method for uncovering fraud
      • External audit
  • 9. Fraud Trends (also from KPMG survey—compared to 1998 and 1994)
    • Internal control and internal audit are catching significantly more frauds
    • Collusion between employees and 3 rd parties is increasing as a cause of fraud
    • More companies are taking legal actions or notifying law enforcement
  • 10. Some Other Fraud Trends
    • Sarbanes-Oxley internal control requirements
      • Intended to address fraudulent financial reporting for public companies
      • Has also increased controls over employee fraud in many cases
      • Some non-public companies have adopted
    • Use of “in-house” resources for fraud investigation and prevention
    • “ Proactive” as opposed to “reactive” fraud policies