Chapter 3: Fighting Fraud

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  • 1. Chapter 3 Fighting Fraud 1Prepared by Haitham Al Zadjali
  • 2.  Become familiar with the different ways that organizations fight frauds.  Understand the importance of fraud prevention.  Understand how to create a culture of honesty and high ethics.  Understand why hiring the right kind of employees can greatly reduce the risk of fraud.  Understand how to assess and mitigate the risk of fraud.  Understand the importance of early fraud detection.  Understand different approaches to fraud investigation.  Be familiar with the different options for legal action that can be taken once fraud has occurred. 2
  • 3. 1. Fraud prevention. 2. Early fraud detection. 3. Fraud investigation. 4. Follow-up legal action and/or resolution. 3
  • 4.  Generally is the most-effective way to reduce losses from fraud.  If a fraud has been committed, there are no winners.  Effective fraud prevention involves two fundamental activities: I. Taking steps to create and maintain a culture of honesty and high ethics. II. Assessing the risks for fraud developing concrete responses to mitigate the risks and eliminate the opportunities for fraud. 4
  • 5. I. Creating a Culture of Honesty and High Ethics: 1. Tone at the Top (Proper Modeling) or simply making sure that top management models appropriate behavior. 2. Hiring the Right Kind of Employees. 5
  • 6. 6 Personal Ethical Understanding Right/Wrong, Fairness, Honesty, Personal Integrity, Respect for Others Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Ethical Courage Willingness to Pay the Price for Ethics Ethical Leadership Helping Others to be Ethical
  • 7. 7 Swing Group Could Go Either Way Honest Employees Will be Honest Always Dishonest Employees Policies Won’t Help Much
  • 8. I. Creating a Culture of Honesty and High Ethics: 3. Communicating Expectations of Honesty and Integrity. 4. Creating a Positive Work Environment. 5. Proper Handling of Fraud and Fraud Perpetrators When Fraud Occurs. 8
  • 9. II. Assessing and Mitigating the Risk of Fraud: Organizations can proactively eliminate fraud opportunities by: 1. Accurately identifying sources and measuring risks. 2. Implementing appropriate preventive and detective controls to mitigate those risks. 3. Creating widespread monitoring by employees. 4. Having internal and external auditors who provide independent checks on performance. 9
  • 10. Detection of fraud usually begins by identifying symptoms, indicators, or red flags that tend to be associated with fraud. There are three primary ways to detect fraud:  By chance.  By providing ways for people to report suspicions of fraud, like installing reporting hotlines (Whistle- blowing systems), and  By examining transaction records and documents to determine if there are anomalies that could represent fraud. 10
  • 11. Date $ Stolen 4-1 $10 5-8 $20 6-5 $50 7-16 $600 4-4 $20 5-9 $30 6-9 $30 7-23 $600 4-7 $20 5-12 $30 6-10 $40 8-4 $20 4-9 $20 5-13 $30 6-11 $30 8-8 $20 4-10 $20 5-14 $30 6-12 $50 8-11 $30 4-14 $40 5-15 $30 6-13 $50 8-14 $30 4-16 $30 5-16 $40 6-16 $50 8-19 $20 4-22 $30 5-19 $40 6-17 $50 8-22 $40 4-23 $30 5-20 $40 6-18 $30 8-26 $400 4-24 $30 5-21 $40 6-20 $70 8-27 $600 4-25 $30 5-22 $20 6-23 $100 8-28 $400 4-28 $30 5-27 $30 6-24 $200 9-2 $400 4-29 $30 5-28 $40 6-25 $400 9-5 $100 4-30 $30 5-29 $40 6-26 $600 9-12 $100 5-1 $20 5-30 $50 7-8 $400 9-15 $200 5-5 $30 6-2 $40 7-9 $700 9-16 $400 5-6 $30 6-3 $50 7-14 $400 11Prepared by Sako Mwakalobo -CRO
  • 12. The investigation of fraud symptoms within an organization must have managements approval. Investigation can be quite expensive and should be pursued only when there is reason be believe that fraud has occurred (when prediction is present). I. Approaches to Fraud Investigation:  Evidence Square which are: 1. Testimonial Evidence. 2. Documentary Evidence. 3. Physical Evidence. 4. Personal Observation.  Fraud Triangles: 1. Fraud Motivation Triangle 2. Fraud Element Triangle 12
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  • 14. II. C0nducting a Fraud Investigation: At a minimum, investigations of fraud must proceed as follow: 1. They must be undertaken only to ‘establish the truth of a matter question’. 2. Investigator must experienced and objective. 3. Investigators must ensure that only those who have a need to know (e.g., management) are kept apprised of investigation activities. 4. Good investigators must ensure that all information collected during an inquiry is independently corroborated and determined to be factually correct. 5. Experienced investigators make sure that any investigation technique used is scientifically and legally sound and fair. 6. Investigators must report all facts fairly and objectively. 14
  • 15. Most organizations and other fraud victims usually make one of following three choices: I. Take no legal action. II. Pursue civil remedies. III. Pursue criminal action against the perpetrators. 15
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