FRAUD EXAMINATIONALBRECHT, ALBRECHT, &

ALBRECHT

Fighting Fraud: An Overview

CHAPTER 3

Learning Objectives1. Understand the importance of fraud

prevention2. Recognize the importance of early

fraud detection3. Describe the different approaches to

fraud investigation4. Be familiar with the different options

for legal action that can be taken once fraud has occurred

What Are the Four Keys to Fight Fraud?

1. Fraud Prevention

2. Early Detection

3. Investigation

4. Legal Action & Resolution

Circle the 2 Most Effective & Least Costly

List the Negative Affects of Fraud.

Review the Fraud Triangle.

Perc

eive

d Pr

essu

re Rationalization

Perceived Opportunity

List 2 Activities Fundamental to Fraud Prevention?

Create and Maintain a Culture of Honesty &

Integrity

Assess the Risk of Fraud & Develop Concrete

Responses to Minimize Risk & Eliminate

Opportunity

How Does an Organization Encourage Dishonesty?

Poor examples by management

Quotas or meeting targets

Rewarding individuals not groups

Competition among employees

What Expectations Should Management Communicate?

1. Appropriate Values & Ethics

2. Fraud Awareness & Training

3. Consistent Punishment of Violators

Comment on Codes of Conduct.

Must Be Must Be WrittenWritten

Communicate to

Employees, Customers,

Vendors Annual Written Acknowledgemen

t & Agreement with Code of

Ethics by Employees

List Factors Associated with High Levels of Fraud.

1. Top management doesn’t care about or pay attention to appropriate behavior

2. Lack of recognition of job performance3. Perceived inequities in the organization4. Autocratic rather than participative

management5. Low organizational loyalty6. Unreasonable budget expectations

List Factors Associated with High Levels of Fraud.

7. Unrealistically low pay8. Poor training and promotion

opportunities9. High turnover and absenteeism10. Lack of clear organizational

responsibilities11. Poor communication practices within

the organizations

How Can Opportunity Be Eliminated?

1. Accurately Identify Sources and Measures of Risk

2. Implement Appropriate Fraud Prevention & Detection Controls

3. Create a System of Widespread Monitoring by Employees

4. Install Independent Checks, Including an Effective Audit Function

Who Detects Most Frauds?

Employees Employees & &

ManagersManagers NOTNOT

Auditors Auditors Detect Detect Most Most

FraudsFrauds

Research Shows…Research Shows…

What Does Sarbanes-Oxley Say about Employees Reporting Fraud?

It recognizes the value of having a system for employees and others to report wrong doing. “Fraud, Waste and Abuse Hotlines”

Section 307 requires a “whistle-blower” be in place.

Section 806 prohibits retaliation against “whistle-blowers” or others.

Can Fraud by Owners of Small Businesses be Prevented?

YES

If they own the business they can commit fraud.

They defraud you and me by not paying

taxes, withholdings and insurance

payments.

What is Meant by “Prediction of Fraud?”

Circumstances, Taken as a Whole, that Leads a Reasonable Prudent

Professional to Believe a Fraud is Occurring, or Has

Occurred, or Will Occur

To Begin a Fraud Investigation, What is a Critical Element?

A Manager’s Approval

Why?

Because It Is Expensive

Draw & Explain the Evidence Square.

14

3

2Testimoni

al Evidence

Personal Observati

on

Physical Evidence

Documentary Evidence

Match Term & Definition.

14

3

2Testimonial Evidence

Personal Observation

Physical Evidence

Documentary Evidence

14

3

2

14

3

2Testimonial Evidence

Personal Observation

Physical Evidence

Documentary Evidence

Gathered from Papers, Computers & Written & Printed SourcesFingerprints, Weapons, Stolen Property Often Involves Forensic AnalysisGathered from Individuals, Includes Interviewing, Interrogation & Honesty TestsCollected by the Investigator, Includes Invigilation, Surveillance and Covert Operations

3

2

1

4

Draw & Explain the Elements of Fraud Triangle.

Elements

Of Fraud

Conversion

Concealment

Theft

List Guidelines for Conducting a Fraud Investigation.

List 7 Steps for Conducting a Fraud Investigation.

1. Undertake to Establish the Truth of the Matter Under Consideration

2. Don’t Jump to Conclusions-Investigator Needs Experience & Objectivity

3. Keep Information to Yourself, Keep Speculation to Yourself

4. Keep Those Who Need to Know Informed

5. Independently Corroborate Information6. Use Investigative Techniques that Are

Legally Sound & Fair

7. Report All the Facts Fairly & Objectively- Point to the Guilty & Exonerate the Innocent

List 7 Steps for Conducting a Fraud Investigation.

What Action Do Most Businesses Take After Discovering a Fraud?

1. Pursue No Legal Action

2. Pursue Civil Remedies

3. Pursue Criminal Remedies

Factoid

More Than 80% of

Organizations Do #1

Summarize the Effects & Results of Taking Legal Action.

CriminalPursued by Law

Enforcement or Statutory Agencies

Fines, Prison or Both

Possible Restitution

CivilRecover Lost Money or

AssetsRare - Money Is Usually

Already Spent Becoming More

Common - Easier to Get a Judgment

Requires a Preponderance of Evidence (50% +)

How Do Organizations Contribute to More Fraud?

Individuals to go do it all over again

someplace else.

Employees to get the message that you can get away with

fraud without suffering any

penalty.

Termination without Prosecution and Publicity of the Fraud Allows: