1. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Fraud Examination, 4E Chapter 2: Why People Commit Fraud

2. Albrecht, Albrecht, Albrecht, Zimbelman © 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  Know the types of people who commit fraud.  Explain why people commit fraud.  Describe the fraud triangle.  Explain the fraud scale.  Understand how pressure contributes to fraud.  Understand why opportunity must be present for fraud to occur.  Understand why people rationalize.

3. Albrecht, Albrecht, Albrecht, Zimbelman Learning Objectives  Understand how people are recruited to participate in fraud schemes. © 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.

4. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Type of People That Commit Fraud  What type of people commit fraud?  Anyone!  Not demographically or psychologically differentiated  Have the profile of other honest people

5. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Reasons to Commit Fraud  A combination of the following (Fraud Triangle):  Pressure  Opportunity  Rationalization  Immediate financial need  The fraud gets larger and larger as confidence in the fraud gets higher and higher

6. Albrecht, Albrecht, Albrecht, Zimbelman © 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. The Fraud Triangle

7. Albrecht, Albrecht, Albrecht, Zimbelman © 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. The Fire Triangle

8. Albrecht, Albrecht, Albrecht, Zimbelman © 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. The Fraud Scale

9. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Divided into four main groups:  Financial pressures  Vices  Work-related pressures  Other pressures  Approximately 95 percent of all frauds involve either financial or vice-related pressures

10. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Common Financial Pressures: 1.Greed 2.Living beyond one’s means 3.High bills or personal debt 4.Poor credit 5.Personal financial losses 6.Unexpected financial needs

11. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Vice Pressures  Worse kind of pressures to commit fraud  Examples include:  Gambling  Drugs  Alcohol  Expensive extramarital relationships

12. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Vice Pressures  Real-life examples:  Dad that embezzled his six-year-old son’s allowance  Women who stole money to fund her children's drug addiction  Man that used company money to fund his drug addiction  The parents who took their newborn baby from the hospital with heroin under its tongue

13. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Work-Related Pressures  “Get even with the employer”  Motivated by these factors:  Getting little recognition  Feeling job dissatisfaction  Fear of losing one’s job  Being overlooked for a promotion  Feeling underpaid

14. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Work-Related Pressures  Real-life example:  The worker that worked 12- 14 hour days, received a promotion, and accepted kickbacks to compensate for her “overworking.”

15. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Pressure  Other Pressures  Spouse Pressures  Spouse’s lifestyle demands  Life Pressures  Family crisis  Social Pressures  “Being successful”

16. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Opportunity  Six major factors that increase opportunity: 1.Lack of controls 2.Inability to judge performance quality 3.Failure to discipline fraudsters 4.Lack of access to information 5.Ignorance, apathy and incapacity 6.Lack of audit trail

17. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Controls to Prevent/ Detect Fraud  Internal Control Framework  From Committee of Sponsoring Organizations (COSO)  Control Environment  The Accounting System  Control Activities

18. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Controls to Prevent/ Detect Fraud  Control Environment  Management’s Role and Example  Management Communication  Appropriate Hiring  Clear Organizational Structure  Effective Internal Audit Department

19. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Controls to Prevent/ Detect Fraud  Accounting System  Transactions are… 1.Valid 2.Properly authorized 3.Complete 4.Properly classified 5.Reported in the proper period 6.Properly valued 7.Summarized correctly

20. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Controls to Prevent/ Detect Fraud  Control Activities or Procedures: 1.Segregation of duties, or dual custody 2.System of authorizations 3.Independent checks 4.Physical safeguards 5.Documents and records

21. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Rationalization  Third element of Fraud triangle.  Common rationalizations by perpetrators  I deserve more  I am only borrowing the money and will pay it back  Nobody will get hurt  It’s for a good purpose  I pay more than my fair share of taxes  The government wastes money

22. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Recruitment of Fraudsters  Many frauds are committed by more than one person  The majority of frauds—especially financial statement frauds—are collusive  CFO survey results:  67 percent received requests to misrepresent corporate results  55 percent fought off the requests  12 percent yielded

23. Albrecht, Albrecht, Albrecht, Zimbelman © 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. Recruitment of Fraudsters  Types of Power  Reward Power  A’s ability to provide benefits to B  Coercive Power  A’s ability to punish B if B does not comply with A  Expert Power  A’s possession of special knowledge or expertise  Legitimate Power  A’s legitimate right to prescribe behavior for B  Referent Power  The extent to which B identifies with A

24. Albrecht, Albrecht, Albrecht, Zimbelman Recruitment of Fraudsters © 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.

25. Albrecht, Albrecht, Albrecht, Zimbelman Recruitment of Fraudsters © 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.