1. HON 322C Fraud Seminar Prof Bill Dilla Jan. 14, 2003

2. Elements of Fraud 1.A representation 2.About a material point 3.Which is false 4.And intentionally or recklessly so, 5.Which is believed 6.And acted upon by the victim 7.To the victim’s damage

3. Relationship between fraud and illegal / unethical acts Illegal Acts Fraud Unethical Acts

4. Types of fraud: The “big picture”  Occupational fraud (Asset theft) Fraud committed against an organization Usually by employees or managers BUT recent cases by executives exist (e.g., Tyco, Adelphia)—called “corporate looting”  Management fraud Fraud committed on behalf of an organization Fraudulent financial reporting most common type Generating most of the current concern about fraud

5. A more complete fraud list 1.Employee embezzlement 2.Management fraud 3.Investment scams 4.Vendor fraud 5.Customer fraud

6. Fraud can be of more than one type  Employees collude with a vendor to overcharge and take kickbacks Both embezzlement and vendor fraud  Stock option backdating “Corporate looting” Fraudulent financial reporting to cover up expense

7. From an audit and control perspective  Preventing employee embezzlement and fraudulent financial reporting are most important  Controls to prevent embezzlement also help prevent vendor fraud and customer fraud  Customer fraud and vendor fraud are of particular importance in an e-commerce environment

8. Some Fraud Facts Source: 2003 KPMG Survey of Public Companies and State and Federal Agencies http://www.kpmg.com/aci/docs/surveys/Fraud%20Survey_040855_R5.pdf http://www.kpmg.com/aci/docs/surveys/Fraud%20Survey_040855_R5.pdf  Most common type of fraud Theft of assets  Most costly frauds Financial reporting fraud Medical / insurance fraud  Most common methods for uncovering fraud Internal control Internal audit Notification by employee  Least common method for uncovering fraud External audit

9. Fraud Trends (also from KPMG survey—compared to 1998 and 1994)  Internal control and internal audit are catching significantly more frauds  Collusion between employees and 3 rd parties is increasing as a cause of fraud  More companies are taking legal actions or notifying law enforcement

10. Some Other Fraud Trends  Sarbanes-Oxley internal control requirements Intended to address fraudulent financial reporting for public companies Has also increased controls over employee fraud in many cases Some non-public companies have adopted  Use of “in-house” resources for fraud investigation and prevention  “Proactive” as opposed to “reactive” fraud policies