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Fraud principles1


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Fraud principles1

  1. 1. II. Fraud Principles
  2. 2. 1. What is fraud? l2. Classic fraud research3. Fraud triangle and it`s scope4. Profile of fraudsters5. Who is victimised by fraud more often?6. Fraud taxonomies7. Fraud tree.8. Evalution of a typical fraud
  3. 3. 1. What is fraud?• Fraud as a crime. Fraud is a generic term, and embraces all the multifarious means that human ingenuity can devise, which are resorted to by one individual, to get an advantage by false means• Corporate fraud. Corporate fraud is any fraud commited by, for, or against a business corporation.• Management fraud. Management fraud is the intentional misrepresentation of corporate or unit performance levels• The ACFE defines financial statement fraud as: ‘‘the deliberate misrepresentation of the financial condition of an enterprise in order to deceive financial statement users.
  4. 4. 1. What is fraud• The U.S. Supreme Court in 1887 provided a definition of fraud in the civil sense. The most important point was the 4th: `That it was made with intent`• The defendant can easily defend the claims with the ‘‘oops’’ theory that is, oops, I made a mistake• But, if at the beginning of the fraud investigation, the victim entity’s antifraud personnel take the time to establish a pattern, even if that means allowing the fraudster to continue to steal for awhile, then the victim can establish ‘‘forensic’’ evidence related to intent. The fraudster might try the ‘‘oops defense,’’ but if the victim is able to produce dozen of instances, the judge or jury will probably not believe it.
  5. 5. 2. Classis fraud research• In order to commit fraud, a rationalization must exist for the individual to decide fraud is worth committing• The current term fraud was traditionally referred to as white-collar crime, and the two are used synonymously here.• Jaspan and Black tried to derive antifraud measures their book ` The Thief in the White Collar `.• Jaspan and Black advise employers to: (1) pay their employees fairly, (2) treat their employees decently, and (3) listen to their employees problems, if they want to avoid employee fraud.• But to temper that bit of humanism with a little reality, they also suggest that employers should never place full trust in either their employees or the security personnel they hire to check on employees.
  6. 6. 2. Classis fraud research• Hartung disagrees with Jaspan’s and Black’s generalizations and focuses on the individual. He argues: Their criminality is learned in the process of symbolic communication, dependent upon cultural sources.• In reality, both Jaspan and Black, and Hartung appear to have been correct.• Hartung noted that individuals are inevitably affected by their environment.• Jaspan and Black suggestions to deter fraud say the same as modern efforts do: Create an environment with few reasons and with few opportunities to commit fraud.
  7. 7. 3. Fraud triangle• Why a person in a position of trust would become a violator of that trust?
  8. 8. 3. Fraud triangle• Cressey interviewed about 200 embezzlers in prison. One of the major conclusions of his efforts was that every fraud had three things in common:• (1) pressure (sometimes referred to as motivation). Sometimes an insatiable greed causes relatively wealthy people to commit frauds. Motives to commit fraud in business usually are rationalized by the old saying that all is fair in love and war—and in business, which is amoral, anyway.• (2) rationalization (of personal ethics). In an ACFE Report, 93 percent of the reported fraudsters had no prior criminal convictions. E.g ‘‘I am just borrowing the money’’• (3) knowledge and opportunity to commit the crime. This aspect of the triangle is the only one that auditors can easily observe or control.
  9. 9. SCOPE OF FRAUD• Research in the last 10 years has been able to reveal both the scope of fraud and the most effective means of detecting frauds.• Research by the ACFE reveals that the estimated level of fraud detected from 1996 to 2008 has been consistent in the U.S. economy—approximately 6 percent of annual revenues.• In 2009, KPMG released its fourth Fraud Survey. KPMG interviewed 204 executives in companies with at least $250 million in revenues.• 74 percent of employees reported they had personally observed wrongdoing in their organization in the prior 12 months.• The greatest concern was the potential loss of public trust, according to 71 percent of the executives
  10. 10. 4. PROFILE OF FRAUDSTERS• Who? The person is usually someone who was not suspected, oftentimes least suspected.• Are some people more prone to commit fraud than others? Gwynn Nettler, in Lying, Cheating and Stealing, offers these insights on cheaters and deceivers:• People who have experienced failure, who are disliked and who dislike themselves, impulsive, distractible, ignorant people, people who have great pressure to achieve important objectives.
  11. 11. 4. PROFILE OFonFRAUDSTERS Why Do Employees Lie, Cheat, and Steal the Job?• The employee believes he can get away with it, she desperately needs or desires the money or articles stolen, feels frustrated or dissatisfied about some aspect of the job, ‘‘Everybody else steals, so why not me?’’, has no self-control, ‘‘They’re so big, stealing a little bit won’t hurt them”, The employee was economically, socially, or culturally deprived during childhood.• Why is it that, despite the consequences of criminal behavior, it still occurs? Apparently, it is because the rewards gained often exceed the risk of punishment.• Many times, if not most, when a fraud is detected, the extent of punishment regarding the perpetrator is to be fired, sometimes without even paying back the fraud losses.
  12. 12. High-Level and Low-Level Thieves• Hall and Singleton provide a similar profile like ACFE RTTN for a typical fraudster in general. These criminals are: (a) in a key position in the company, (b) are usually male, (c) are more than 50 years old, (d) are married, and (e) are highly educated. This profile leads us to this overall conclusion: A white-collar criminal does not look like a criminal!
  13. 13. High-Level and Low-Level Thieves Most expensive frauds Most frequent frauds• Have been with the firm for a long • Have been an employee for about the same time amount of time as the high-level thieves • Earn much less• Earn a high income • Could be either male or female (gender• Are male doesn’t matter)• Are over 60 years of age, • Are between the ages of 41 and 50• Are well educated • Have finished high school• Have never been charged with • Operate alone anything criminal • And have usually not been charged with any criminal behavior
  14. 14. 5. WHO IS VICTIMIZED BY FRAUD MOST OFTEN?• Fraud is therefore most prevalent in organizations that have no controls, no trust, no ethical standards, no profits, and no future.• Small businesses and organizations have a higher risk of fraud than any other size entity, because they are more likely to have one accountant, no segregation of duties, and no compensating control, and those factors are the most common in fraud.
  15. 15. 6. FRAUD TAXONOMIESWe focus on frauds in financial statements and business transactions.The following are some of the ways fraud has been classified. • Fraud can be perpetrated against customers, creditors investors, suppliers, bankers, insurers, or Consumer and Investor government authorities (e.g., tax fraud) Frauds • Criminal fraud requires proof of an intentiona deception. Criminal fraud denotes a false representation of a material fact made by one party to Criminal and another party with the intent to deceive and induce the other party to justifiably rely on the fact to his/her detriment Civil Fraud • Civil fraud requires that the victim suffer damages. Fraud for •Frauds directed against the company and against the Company •Frauds that benefit the company • Internal means all the ways used to fraud such asprice fixing, corporate tax evasion, violations of environmental laws, false advertising. Internal and • External fraud such as frauds committed by vendors, suppliers, and contractors who might overbill, double bill. external fraud Management • Internal controls are measured by their effectiveness; they must be monitored constantly to ensure that they are functioning at the level designed and and intended nonmanage ment fraud
  16. 16. 7. The fraud tree• The three main categories are (1) fraudulent statements, (2) asset misappropriation, and (3) corruption.
  17. 17. 8. Evolution of a typical fraud 3.Rationalization 2.Opportunity Formulate intent without 1.Motivationa Knowledge and self-incrimination; e.g., 4.Commit the fraudFinancial need, greed, ego. opportunity to commit the ‘‘just borrowing the fraud. money,’’
  18. 18. 8. Evolution of a typical fraud 6.Conceal the crime 8.Suspicion or discovery discovery of variance Use large 7. Red flags or anomaly including a5.Convert asset to cash volume accounts, rely on Red flags could sufficient analysis, discrepancies, internal apathy, alter documents, be a lifestyle change controls, internal audit, destroy documents external audit, accident
  19. 19. 8. Evolution of a typical fraud9.Predication determined 10.Fraud theory 11.Fraud investigation A The fraud theory 12.Write a report Identify and gatherfraud professional believes approach helps to identify Almost all fraud forensic evidence, loss of a fraud has occurred, is the most likely schemes investigations require a assets confirmed, loss occurring, or will occur and how they are being report at its conclusion documentedbecause of circumstances perpetrated
  20. 20. 8. Evolution of a typical fraud 14.Trial Presentation of facts and testimony before trier of13a.Disposition: Termination 13b.Disposition: Prosecution fact, use of expert witness, presentation of forensic evidence
  21. 21. Summary• An understanding of the fraud principles is the foundation to any antifraud activity, whether it is developing a fraud policy, investigating a fraud, or designing antifraud controls.• Therefore it is vitally important to know all one can about the fraud triangle, fraud tree, scope of fraud (it can happen here), profile of a fraudster, and other basic principles.