What is fraud, its conditions,components, types of fraud. How we difference between management fraud, employee fraud.

1. Habib Ullah Qamar
Govt. college of Commerce Gujranwala
3/27/2016

2. https://en.wikipedia.org/wiki/
Double_Shah

3.  Detection
 Of Fraud
 US found the cause of the failure of the
alleged firms is
 Where are auditors?
 Fraud denotes a false representation of a
material fact made by one party to another
party with the intent to deceive and induce
the other party to justifiably rely on the fact
to his or her loss(injury).

4.  False representation. There must be a false
statement or a nondisclosure.
 Material fact. A fact must be a substantial factor
in inducing someone to act.
 Intent. There must be the intent to deceive or the
knowledge that one’s statement is false.
 Justifiable reliance. The misrepresentation must
have been a substantial factor on
 which the injured party relied.
 Injury or loss. The deception must have caused
injury or loss to the victim of the fraud.

5.  Fraud in the business environment has a
more specialized meaning. It is an intentional
deception, misappropriation of a company’s
assets, or manipulation of its financial data to
the advantage of the perpetrator.
 In accounting literature, fraud is also
commonly known as white-collar crime,
defalcation, embezzlement, and irregularities.
 Levels of Frauds?

6.  A fraud by non-management employees, is
generally designed to directly convert cash or
other assets to the employee’s personal
benefit.
 An employee dodge the company’s internal
control system for personal gain.
 How can it be prevented or detected?
 An effective system of internal control

7.  It involves three steps
 stealing something of value (an asset)
 converting the asset to a usable form (cash)
 hiding the crime to avoid detection.
 The third step is often the most difficult. It
may be relatively easy for a storeroom clerk
to steal inventories from the employer’s
warehouse, but altering the inventory
records to hide the theft is more of a
challenge.

8.  Management fraud is more dangerous than
employee fraud because it often escapes
detection until the organization has suffered
permanent damage or loss.
 Usually management fraud does not involve
the direct theft of assets.

9.  Top management may engage in fraudulent
activities to drive up the market price of the
company’s stock.
 This may be done to meet investor
expectations
 The Commission on Auditors’ Responsibilities
 Performance fraud, which often involves
deceptive practices to inflate earnings or to
prevent the recognition of either bankruptcy
or a decline in earnings.

10.  Lower-level management fraud typically
involves materially misstating financial data
and internal reports to gain additional
compensation, to garner a promotion, or to
escape the penalty for poor performance.

11.  The fraud is carried out at levels of
management above the one to which internal
control structures generally relate.
 The fraud frequently involves using the
financial statements to create a false
impression that an entity is healthier and
more wealthy than, in fact, it is.
 If the fraud involves misappropriation of
assets, it frequently is covered in a network
of complex business transactions, often
involving related third parties.

12.  Why people engage in frauds?
 people engage in fraudulent activity as a
result of an interaction of forces both within
an individual’s personality and the external
environment.
 Situational Pressures
 Opportunities
 Personal characteristics (ethics)

14.  Male or Female?
 Male
 Employee or manager
 Manager
 Teenagers, young or Old man?
 Oldman
 Literate or illiterate?
 Literate

15.  Unless we intend to eliminate all managers
and male employees over the age of 25 who
have received degrees in higher education,
the fraud classification scheme appears on
the surface to provide little in the way of
antifraud decision-making criteria.
 Upon closer examination, personal ethics and
situational pressures are less but opportunity
is the factor that most produce fraud.
 Opportunity can be defined as control over
assets or access to assets.

16.  Gender. Whereas the demographic picture is
changing, more men than women occupy positions of
authority in business organizations, which provide
them greater access to assets.
 Position. Those in the highest positions have the
greatest access to company funds and assets.
 Age. Older employees tend to occupy higher-ranking
positions and therefore generally have greater access
to company assets.
 Education. Generally, those with more education
occupy higher positions in their organizations and
therefore have greater access to company funds and
other assets.
 Collusion. One + one make eleven (1+1=11)

17.  ACFE classification format. Three broad
categories of fraud schemes are defined
 Fraudulent statements : Fraudulent statements
are associated with management fraud
 Corruption : Corruption involves an executive,
manager, or employee of the organization in
collusion with an outsider.
 Asset misappropriation: The most common form
of fraud scheme involves some type of asset
misappropriation. 92% of the frauds included in
the ACFE study fall in this category.

19.  Accounting information Systesm : Chapter 3
James A Hall
 http://www.fraudessentials.com/people-
who-commit-fraud/
 https://en.wikipedia.org/wiki/Fraud

20.  Frauds and its types
 Internal Control
 Pre-reading will be appreciated and will give
you more benefit…

21. See you again in sha ALLAH
3/27/2016