FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-1 Today’s Topics n Why Fraud? n Who commits fraud n The fraud triangle n Pressures n Opportunity and control issues n Rationalization n Fighting Fraud n Fraud prevention n Early detection n Fraud investigations n Legal intervention

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-2 Who Commits Fraud? n In essence…you and I

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-3 Why Commit Fraud? n The fraud triangle n Situational pressures n Available opportunities n Personal integrity (rationalization)

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-4 Situational Pressures n Greed n Vice n Work related pressures n The thrill or challenge n Extraordinary circumstances “Every man has his price, and he was getting close to mine.” Abraham Lincoln, on throwing a lobbyist out of his office

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-5 Available Opportunities n The role of controls n Control environment n Appropriate systems n Procedures and activities n Note the information in Albrecht

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-6 Control Environment n Management example n Management communication n Hiring practices n Organizational structure n Effective internal audit department

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-7 Non-control Factors n Cannot judge outcomes n Failure to discipline n Complexity or lack of access to information n Apathy n Missing or non-existent audit trail

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-8 Rationalization n Pathological lying n “Everyone does it.” n Frank communication…I question this (see text)

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-9 Fraud Prevention n Culture of honesty and integrity n Manage by example n Hire the right people n Communicate expectations n Positive work environment n Maintain effective policies for punishment n Enterprise risk management n Identify risks-likelihood and impact n Implementing controls n Widespread monitoring n Effective audit function

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-10 Fraud Detection n By chance n By intent-new trend

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-11 Fraud Investigation n Predication: circumstances that lead to past, present or future fraud n Using the evidence square n Testimonial evidence n Documentary evidence n Physical evidence n Personal observation n Using a variation of the fraud triangle n Investigation of theft n Investigation of concealment n Investigation of conversion n Direct inquiry

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-12 Investigation Process n Establish truth n Use experienced investigators n Guard hypotheses n Prudent communication n Independent corroboration of information n Avoidance of questionable techniques n Fair and objective reporting

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 2-13 Legal Action n None n More than 50% n Civil n Good for non employees n Criminal n Restitution and jail time n Harder to convict n Higher degree of evidence