Chapter 1: The Nature of Fraud © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives Understand the seriousness of fraud and how fraud affects individuals, consumers, organizations, and society. Define fraud. Understand the different types of fraud. Understand the difference between fraud committed against an organization on behalf of an organization. Understand the difference between criminal and civil fraud laws.

Learning Objectives Understand the types of fraud-fighting careers available today. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Introduction to Fraud © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Sources of Fraud Statistics Four Basic Sources Government Agencies Researchers Insurance Companies Victims of Fraud

The Seriousness of Fraud U.S. organizations lose seven percent of annual revenues to fraud Applied to the estimated 2008 U.S. GDP, this seven percent translates to approximately $994 billion in losses Fraud affects how much we pay for goods and services, each of us pays not only a portion of the fraud bill but also for the detection and investigation of fraud Losses incurred from fraud reduce a firm’s income on a dollar-for-dollar basis

The Seriousness of Fraud For every $1 of fraud, net income is reduced by $1 It takes more revenue to recover the effects of the fraud, since fraud reduces the net income

What is Fraud?

What is Fraud? Seven Specific Parts of Fraud a representation about a material point which is false and intentionally or recklessly so which is believed and acted upon by the victim to the victim’s damage

What is Fraud? Fraud is… intentional to trick or deceive someone out of his/her assets theft a crime Fraud is not… taken by physical force a mistake or error victimless insignificant because no one is hurt acceptable or justifiable

The Various Classifications of Fraud The Two General Classifications Committed against an organization Committed on behalf of an organization

The Various Classifications of Fraud Occupational Fraud Occupational fraud is the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

The Various Classifications of Fraud With occupational fraud, the activity… is clandestine violates the employee’s obligations to the organization is for direct or indirect financial benefit costs the organization assets, revenues, or reserves

Classifications of Occupational Fraud Asset misappropriations Corruption Fraudulent statements

The Various Classifications of Fraud Fraud classification according to victims: Company or Organization as victim Employee embezzlement Vendor fraud Customer fraud Shareholders or debt-holders as victims Management fraud Unwary individuals as victims Investment and other consumer fraud Anyone as a victim Miscellaneous fraud

The Various Classifications of Fraud Employee Embezzlement Occupational fraud (most common) Employees steal company assets Is direct or indirect Direct: employee directly steals company cash, inventory, tools, supplies, or other assets Indirect: employee takes bribes or kickbacks from vendors, customers, or others for lower sales prices, higher purchase prices, nondelivery of goods, or the delivery of inferior goods Example: CVC Construction (direct)

The Various Classifications of Fraud Vendor Fraud Two main varieties: through vendors alone through collusion between buyers and vendors Usually results in: overcharge for purchased goods shipment of inferior goods Nonshipment of purchased goods Example: Halliburton

The Various Classifications of Fraud Customer Fraud When customers do not pay for goods get something for nothing deceive organizations into giving them something they should not have Example: Chicago bank

The Various Classifications of Fraud Management Fraud Also known as financial statement fraud top management deceptively misstates financial statements Examples: Enron WorldCom Sunbeam

The Various Classifications of Fraud Investment and Other Consumer Fraud Worthless investments sold to investors Examples: Ponzi schemes Telemarketing fraud Nigerian letter or money scams Identity theft Advance fee scams Redemption/strawman/bond fraud Letter of credit fraud Internet fraud

The Various Classifications of Fraud

Criminal and Civil Fraud Laws

Prepare for a Fraud-fighting Career Skills for Fraud-Fighting Professionals Analytical Skills examine data for symptoms of fraud Communication Skills effectively interview witnesses and suspects communicate findings to witnesses, courts and others Technological Skills search for fraud by effectively using information systems

Prepare for a Fraud-fighting Career More Skills for a Fraud-Fighting Professional Some understanding of accounting and business A knowledge of civil and criminal laws, criminology, privacy issues, employee rights, fraud statutes, and other legal fraud-related issues The ability to speak and write in a foreign language A knowledge of human behavior

Become a Certified Fraud Examiner Be an associate member of the ACFE in good standing Meet minimum academic and professional requirements: Bachelor’s Degree Two years of professional experience directly or indirectly related to fraud examination Be of high moral character Agree to abide by the Bylaws and Code of Professional Ethics of the ACFE

Fraud-fighting Careers