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

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