FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Fighting Fraud: An Overview CHAPTER 3

Learning Objectives 1.Understand the importance of fraud prevention 2.Recognize the importance of early fraud detection 3.Describe the different approaches to fraud investigation 4.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. Perceived Pressure 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 Written Communicate to Employees, Customers, Vendors Annual Written Acknowledgement & 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 performance 3.Perceived inequities in the organization 4.Autocratic rather than participative management 5.Low organizational loyalty 6.Unreasonable budget expectations

List Factors Associated with High Levels of Fraud. 7.Unrealistically low pay 8.Poor training and promotion opportunities 9.High turnover and absenteeism 10.Lack of clear organizational responsibilities 11.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 & Managers NOT Auditors Detect Most Frauds 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 Testimonial Evidence Personal Observation Physical Evidence Documentary Evidence

Match Term & Definition. Gathered from Papers, Computers & Written & Printed Sources Fingerprints, Weapons, Stolen Property Often Involves Forensic Analysis Gathered from Individuals, Includes Interviewing, Interrogation & Honesty Tests Collected by the Investigator, Includes Invigilation, Surveillance and Covert Operations

Draw & Explain the Elements of Fraud Triangle. Elements Of Fraud Conversion ConcealmentTheft

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 Information 6.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. Criminal Pursued by Law Enforcement or Statutory Agencies Fines, Prison or Both Possible Restitution Civil Recover Lost Money or Assets Rare - 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 :