Forensic Examination

1. UGBA 127-5; Homework Antonia FICOVA
Haas School of Business, 24116680
UC Berkeley; 2012
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1.5 Explain the theory of the fraud triangle.
First of all is necessary to point out that hypothesis of Fraud Triangle has been
developed by Cressey. These term describes conditions when fraud occurs, that includes 3
factors presented by Kranacher,
Riley, Wells (2011, 12-13), as can
be seen in Figure 1. First, Perce-
ived Pressure means when people
has some access to cash, checks,
etc. On the one hand, this pressure
can arise from financial problems,
for example high debt, poor credit,
investment losses and on the other
hand represents different analyst´s expectations, deadlines, cutoffs. Second, perceived
opportunity means when perpetrator needs the opportunity to commit a fraud. Due to this fact,
is important to minimize opportunity through internal control, training of personal, monitoring
of company by auditors, antifraud programms, strong ethical culture. As we know, fraud
begins in the employee´s mind and logic is hard to dispute. Third, Rationalization represents
when fraud perpetrators that has no criminal history, are in position of trust and develop
rationalization for their actions, like lack of recognition for job well done, low compensation.
As a conclusion from all of these factors, these triangle explains motivation that can be used
for understanding financial disputes.
1.6 List the legal elements of fraud.
If we look at common law, fraud includes factors as follows: a material false
statement, knowledge that the statement was false when it was spoken, reliance on the false
statement by the victim, damages resulting from victim´s reliance on the false statement. If we
focus on legal definition of fraud, criminal cases must meet a higher burden of proof. The
question is, what are the major categories of fraud? Answer has been described by Kranacher,
Riley, Wells (2011, 2-5) and contains three factors. First, Asset Misappropriations that
involve the theft of misuse of an organization´s assets, like skimming revenues, stealing
inventory, payroll fraud. Second, Corruption, that means wrongful misuse of influence in
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RationalizationPerceived Pressure
Fraud
Triangle
Figure 1: The Fraud Triangle
Source: Author´s according to Kranacher, Riley, Wells (2011, 12)
Perceived Opportunity

2. UGBA 127-5; Homework Antonia FICOVA
Haas School of Business, 24116680
UC Berkeley; 2012
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business transaction to procure personal benefit, contrary to an individual´s duty to employer.
Third, Financial Statement Fraud and other fraudulent statements that points out that
intentional misrepresentation of financial or nonfinancial information to mislead others who
are relying on it to make economic decisions. In sum, we can see in recent years examples of
fraudulent financial reporting like Enron, WorldCom, Adelphia, Tyco.
1.7 Identify common fraud schemes.
However, the Fraud can be categorized by a number of different methods, referred to
as either internal or external frauds, committed by individuals against other individuals,
organizations. In this light, internal fraud refers fraud committed by one or more employees of
an organization. Common fraud schemes provided Kranacher, Riley, Wells (2011, 5-6) as
follows: 1. Asset Misappropriation includes cash, skimming, fraudulent disbursement (billing
schemes, payroll schemes, check tampering, 2. Corruption includes conflicts of interest,
bribery, illegal gratuities, economic extortion, 3. False statement like financial statement, 4.
Specific Fraud Contexts such as bankruptcy fraud, contract and procurement fraud, tax fraud,
consumer fraud, intellectual property, finally 4. Noteworthy industry specific fraud includes
financial institutions, insurance fraud, health care fraud, securities fraud.
2.3 Define the role of fraud examination and financial forensic skills related to mana-
gement and those charged with corporate governance responsibilities.
According to the Kranacher, Riley, Wells (2011, 42, 46) fraud examination utilize
knowledge, skills and abilities from other forensic sciences such as crime scene investigation,
forensic chemistry, biology. If we look at fraud risk management that includes factors like
written policy of fraud, prevention and detection techniques, a reporting process. If we focus
on corporate governance, that simply means the way a corporation is governed through proper
accountability for managerial and financial performance. On the other hand, with a respect to
financial statement fraud, there has been a great deal of concern of public trading companies
so it is necessary to protect investor interests over the financial reporting process. In sum,
management´s ethical behavior and operating style depending on skills can have a significant
impact on the effectiveness of corporate governance, include board of directors, the audit
committee, senior management, governing bodies, etc.
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3. UGBA 127-5; Homework Antonia FICOVA
Haas School of Business, 24116680
UC Berkeley; 2012
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3.1 Describe occupational fraud and abuse.
imply definition of this term provided Kranacher, Riley, Wells (2011, 60) and means
the use of one´s occupation for personal enrichment through the deliberate misuse or
misapplication of the employing organization´s resources or assets. Moreover, fraud and
abuse involves a wide variety of conduct by executives, employees, managers. Elements of
these scheme has been identified by the Association of Certified Fraud Examiners as follows:
activity is clandestine, violates the employee´s fiduciary duties to the organizattion, purpose
of financial benefit, costs of employing organization assets, revenues, reserves.
S
3.6 Explain the relationship between an employee´s position and the level of theft
(according to the Hollinger and Clark´s research).
esults coming out from their hypothesis show that employees steal primarily as a result
of workplace conditions. Moreover, with thefts being highest in jobs with greater
access to the things of value in the organization for example retail cashiers with daily access
to cash had the highest incidence with theft. They also concluded that the true costs of
employee theft are vastly understated according to the Kranacher, Riley, Wells (2011, 71, 74).
R
3.7 Analyze the role of corporate governance mechanisms in fraud prevention.
ollinger and Clark in their study of control and deviance pointed out that exist five
different control mechanisms as follows: compay policy, selection of personnel,
inventory control, security and punishment. Their data indicated that the impact of
organizational controls is neither uniform nor very strong. In short, formal organizational
controls do negatively influence theft prevalence, but these effects must be understood in
combination with the other factors influencing this phenomenon as is described in Kranacher,
Riley, Wells (2011, 74-5).
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4.2 Explain why collusion poses unique prevention and detection challenges.
he important point of collusion is that may be among individuals within an
organization, individuals across organizations and multiple organizations. Moreover,
fraud losses increase dramatically when collusion is involved, especially when losses are
caused by individual predators that work with others. However, when collusion is involved
T
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4. UGBA 127-5; Homework Antonia FICOVA
Haas School of Business, 24116680
UC Berkeley; 2012
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internal control are generally ineffective in preventing fraud and other financial crimes.
Consequently, internal controls can not prevent collusive fraud and financial crimes as
highlighted Kranacher, Riley, Wells (2011, 88).
4.4 Explain the difference between „following the money“ and „tracing money“.
racing and following1
are both exercises in locating assets which are or may be taken to
represent an asset belonging to the plaintiffs and to which they assert ownership. The
processes of following and tracing are, however, distinct what is explained as follows:
Following is the process of following the same asset as it moves from hand to hand and
Tracing is the process of identifying a new asset as the substitute for the old. On the other
hand, tracing is also distinct from claiming. It identifies the traceable proceeds of the
claimant’s property so it enables the claimant to substitute the traceable proceeds for the
original asset as the subject matter of his claim.
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4.8 Identify and describe the different types of banks.
ranacher, Riley, Wells (2011, 101) presented that investigators may run across a
number of different type of banks including following banks. Commercial banks are
institutions which accepts deposits, makes business loans, and offers related services. Federal
savings banks are also known as savings and loan banks. Offshore banks2
are located outside
the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that
provides financial and legal advantages. Private banks are owned by either an individual or a
general partner(s) with limited partner(s) to facilitate transactions. Central banks, like U.S.
Federal Reserve, CEO is Bernanke, are responsible for maintaining and protecting the country
´s currency, especially interest rate. We also know another type of banks such as
correspondent, cyber banks, bank holding companies, securities brokerages. In sum, when
business competing internationally will usually require international banking services.
K
1
Ch. Mitchell, "Tracing, following, and claiming the proceeds of stolen assets", The Jersey Law Review -
February 2003, available at:
http://www.jerseylaw.je/publications/jerseylawreview/feb03/jlr0302_mitchell.aspx#_ftnref8, July 18, 2012
2
Note: Offshore centres including following countries: Bahamas, Barbados, British Virgin Islands, Cayman
Islands, Cook Islands.
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