Chapter 1: The Nature of Fraud © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

To the Student With this chapter, you are embarking on an exciting journey of the study of fraud. Many of you will find this course more interesting than any other course you have taken before. Chapter 1 will provide an overview of fraud—what is fraud, how serious is the problem, fraud-fighting careers, criminal and civil laws, and other overview topics. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

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 and on behalf of an organization. Understand the difference between criminal and civil fraud laws. Understand the types of fraud-fighting careers available today. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

The Seriousness of Fraud © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Fraud Statistics Four Basic Sources Government Agencies Researchers Insurance Companies Victims of Fraud © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

The Definition of Fraud (slide 1 of 2) 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 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

The Definition of Fraud (slide 2 of 2) 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 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

The Various Classifications of Fraud (slide 1 of 2) There are many ways to classify the various types of fraud, the most common way is to simply divide frauds into those that are committed against organizations and those that are committed on behalf of organizations Employee fraud Occupational fraud A third classification divides frauds according to victims © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

The Various Classifications of Fraud (slide 2 of 2) Any time anyone takes advantage of the confidence of another person to deceive him or her. All kinds—depends on the situation Other (Miscellaneous) types of fraud These types of frauds are committed on the Internet and in person and obtain the confidence of individuals to get them to invest money in worthless schemes. Unwary investors Fraud perpetrators—all kinds Investment scams and other consumer frauds Management manipulates the financial statements to make the company look better than it is. This is the most expensive type of fraud. Shareholders and/or debt-holders and regulators (taxing authorities, etc.) Management of a company Management fraud (Financial statement fraud) Customers don't pay, pay too little, or get too much from the organization through deception. The organization which sells to the customers Customers of an organization Customer fraud Vendors either overbill or provide lower quality or fewer goods than agreed. The organization to which the vendors sell goods or services Vendors of an organization Vendor fraud Employees use their positions to take or divert assets belonging to their employer. This is the most common type of fraud. The employer Employees of an organization Employee embezzlement EXPLANATION VICTIM PERPETRATOR TYPE OF FRAUD © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Criminal and Civil Fraud Laws When people commit fraud, they can be prosecuted criminally and/or civilly. Criminal law is that branch of law that deals with offenses of a public nature Civil law deals with the rights of individuals © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Fraud-fighting Careers Lawyers provide litigation and defense work for companies and individuals being sued for fraud and provide special investigation services when fraud is suspected. Law firms Serve as an independent consultant in litigation fraud work, serve as expert witness, consult in fraud prevention and detection, and provide other fee-based work. Consulting Prevent, detect, and investigate fraud within a company. Includes internal auditors, corporate security officers, and in-house legal counsels. Corporations Conduct investigations, support firms in litigation, do bankruptcy-related accounting work, and provide internal audit and internal control consulting work. CPA firms FBI, postal inspectors, Criminal Investigation Division of the IRS, U.S. marshals, inspector generals of various governmental agencies, state investigators, and local law enforcement officials. Government and law enforcement TYPE OF CAREER TYPES OF EMPLOYERS © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.