Chapter 1 the nature of fraud


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Chapter 1 the nature of fraud

  2. 2. WHAT IS FRAUD? Oxford Dictionary defines as: 1. Criminal deception; the use of false representation to gain an unjust advantage. 2. A dishonest artifice or trick. 3. A person or thing not fulfilling what is claimed or expected of it. Our text book describes as: • Theft by deception • There are two ways to get something illegally • - by force e.g. robbery • - trickery Fraud involves different ways of using trickery to obtain an advantage over another by false representation
  3. 3. What are the different types of Fraud? Firstly the most common types of fraud are: FRAUD THAT IS COMMITTED AGAINST THE ORGRANISATION OR FRAUD THAT IS COMMITTED FOR THE ORGANISATION
  4. 4. OCCUPATIONAL FRAUD ACFE (Association of Certified Fraud Examiners) classifies fraud as “Occupational Fraud” ACFE point out that “The use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organisation’s resources and assets” (ACFE 2012 Report to the Nations on Occupational Fraud and Abuse) “According to the 2012 Report to the Nations on “Occupational Fraud and Abuse” the typical organisation among those surveyed in the Asia-Pacific region loses 5% of its annual revenue to fraud. The median loss from the 338 Asia Pacific cases in the study was (NZ$356,000) almost double the global median.”
  5. 5. ACFE THREE MAJOR CATEGORIES OF OCCUPATIONAL FRAUD 1. ASSET MISAPPROPRIATIONS  Involves theft or misuse of an organisations assets 2. CORRUPTION  Fraudsters wrongfully use their influence in a business transaction in order to procure some benefit for themselves or another person, contrary to their duty to their employer or the rights of others. 3. FRAUDULENT STATEMENTS Falsifying organisations Financial Statements
  7. 7. OTHER VICTIMS • MANAGEMENT FRAUD Victims are shareholders or debt-holders • INVESTMENT SCAMS- OTHER CONSUMER FRAUDS Victims are unwary individuals • MISCELLANEOUS FRAUDS – OTHER FRAUDS
  8. 8. EMPLOYEE EMBEZZLEMENT Employee theft is the most common type of occupational fraud. • The KPMG fraud barometer findings in December 2012 showed that half the fraud cases in New Zealand in the six month period involved employees and management. • Fiona Rotherham from KPMG Fraud Report “When Staff have Sticky Fingers” wrote the most employees who commit fraud are first time offenders and there is a trigger that sets them off, such as financial problems, missing out on salaries which they think they are entitled to.
  9. 9. EMPLOYEE THEFT  Direct Fraud – no third party involved, assets go straight to employee – Stealing cash, stock, tools, stationery, other assets – False supplier invoices (dummy companies) – A payroll ghost (adding fictitious person to payroll – False expense claims
  10. 10. Indirect Fraud – third party involved, such as vendors, customers or others – Employees take bribes or kickbacks – Lower sales price – Higher purchase price – Non delivery of goods – Delivery of inferior goods
  11. 11. “Motivation is always a tricky thing to define but in cases we have been involved over the past years the main five motivations have been: Greed Envy Ego Desperation Revenge Ideology (John Gill FCA, CEO Datacom) New Zealand biggest employee fraud case was that of ASB employee Stephen Versalko who stole 17.8 million, the 51 year old was jailed for six years in 2010. • Employed as investment advisor as ASB between 2000 and 2009 • He used funds belonging to 30 clients to orchestrate what effectively was a Ponzi scheme • He advised clients on investment products but he would never transfer the funds into them • Instead he would transfer the funds into bank accounts he controlled or to other clients in order to perpetrate his scheme
  12. 12. VENDOR FRAUD • Vendor fraud is where vendors of organisations overcharge for goods, or provide inferior goods, or don’s supply the goods at all. • Vendor may act alone or; • May be conducted through buyers and the vendors
  13. 13. VENDOR FRAUD?  On 25 June 2013 Fair Play of Fees lawyer Andrew Hooker filed court documents that will commence legal action against ANZ Bank for unfair fees that banks charge. More than 32,000 customers of banks had registered to take part in the Fair Play on Fees action so far and ANZ is the first bank named to be taken to court, - Vendor Fraud?  One of the biggest corporate fraud cases in Minnesota history involved a vendor (Chip Factory) overcharging an organisation (Best Buy) and estimated 32.8 million
  14. 14. CUSTOMER FRAUD • Customer fraud is where customers do not pay for goods or services or they pay too little, or get too much through deception. • Customer fraud is different from employee and professional fraud as it is committed by individuals who are the victim’s (the organisation’s) target market. The individuals may differ from others committing fraud as their fraudulent act may require an initial monetary outlay. “They may engineer sophisticated schemes that bypass retailers policies and procedures that marketers trust the customer will respect.
  15. 15. EXAMPLES OF CUSTOMER FRAUD • Returning shoplifted items • Returning goods that have been used • Acquiring goods with bad cheques • False insurance claims for goods stolen or goods lost • Fraudulent credit cards • Counterfeit money • OLD POLICY OF THE WAREHOUSE
  16. 16. MANAGEMENT FRAUD • Management fraud or commonly known as financial statement fraud is where managers of the organisational manipulate the financial statements, usually to make the company appear to be doing better than it is. • The victims – shareholders, other stakeholders such as creditors and regulatory authorities such as Securities Commission and Inland Revenue. • Management fraud is the most expansive fraud. • Misleading financial statements cause serious problems in the stock market and the economy.
  17. 17. MANAGEMENT FRAUD: • May result in large losses for investors/shareholders • May create lack of trust in the stock market • May create lack of trust in accounting systems and external auditors • May enhance litigation • May create embarrassment for other management in the organisation as well as external auditors
  18. 18. RECENT CASES Recent New Zealand Cases where Serious Fraud Office has charged offenders with false accounting: • Ross Asset Management Limited • Datasouth Finance Ltd (falsified financial statements by approximately 38 million to obtain on-going finance from South Canterbury Finance • National Finance Limited • South Canterbury Finance pre-trial hearing will commence in August 2013, the Serious Fraud office is charges five individuals with 21 charges including false accounting
  19. 19. INVESTMENT SCAMS & OTHER CONSUMER FRAUDS • These types of investment fraud schemes are closely related to management fraud. This types of fraud sells worthless investments and partnerships to unsuspecting if not naïve investors Investments Scams include: • Ponzi Schemes • Telemarketing Fraud • Nigerian Letter or money scams • Internet fraud – copycat banking login screens asking for customer to log in • Identity theft • Letter of credit fraud • Advance fee scams
  20. 20. CRIMINAL PROSECUTION OF FRAUD When people commit fraud they can be tried criminally and/or civilly. In both cases proof is needed that the person intended to defraud the victim. • Criminal Law • Used to right a wrong • Prosecute someone and send to jail if found guilty • Has a jury of 12 • Must be proven guilty beyond reasonable doubt • Accused can plead guilty for more lenient sentences and help prosecutors in their investigations
  21. 21. CIVIL PROSECUTION OF FRAUD • Civil Law • Civil claims is where one party files a compliant against other to seek remedies usually financial. It is used to compensate for harm or loss does to another individual. A judge can rule over a civil case and their need not be 12 jurors, there may be as little as six and the jurors need not be unanimous. • Hanover Finance Case
  22. 22. CAREERS IN FRAUD IN NZ • Serious Fraud Office • Inland Revenue • Chartered Accountants – Audit, Receivership • Corporations – Audit Risk and Finance, Internal Auditors • Consulting – independent consultant in litigation and fraud work, expert witness, consult in fraud prevention and detection • Law firms – litigation and defense work for companies being sued for fraud and provide specialist services for suspected fraud
  23. 23. References • Albrecht, W.S.,Albrecht, C.O.,Albrecht,.C.C., Zimbelman,M.F. (2012) Fraud Examination (4th Ed.).Australia: South Western Cengage Learning • Gill, J., Woodhouse, H., (2013 May). Theft by an employee. The Journal, NZICA • The Association of Certified Fraud Examiners (ACFE), (2012). The Report to the Nation on Occupational Fraud and Abuse, Austin, Texas:ACFE 2012 • Rotherham, F“When Staff have sticky fingers” Dec 14,2012 • “Couple scammed Best Buy out of 41.6m” • Serious Fraud Office New Zealand Website,
  24. 24. THE END