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KPMG: Motivation for Fraud RYAN BURNETT CAITLEN EIBECK MIKE DAVIS ACCTG403-001 PENNSYLVANIA STATE UNIVERSITY PROFESSOR IZZO 3/1/2015
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Greed and Pressure Greed Greed can be attributed to personal financial gain, attempts to conceal losses and/or poor job performance that could harm a person’s employment, and enhancing potential bonuses, among other factors. Work Pressure Pressure to be successful and meet quotas/performance marks may tempt employees to misstate assets or misrepresent reports to avoid underperforming. Personal finances are threatened. Performance marks should be realistic and well communicated.
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Opportunity The temptation to commit fraud is higher when the opportunity to do so is easier. Gaps in Defense: From 2007 to 2011 fraud cases that involve the exploitation of weak internal controls by those committing fraud has increased from 49% to 74%. Economic downturn may play a part in the growing gaps of fraud defense. As the economy falls companies are under more pressure to cut resources, including those aimed at detecting and preventing fraud. Economic downturn also affects the company’s employees, who may have more financial concerns and now, due to the decrease of resources, higher opportunity to commit fraud. The ability to catch fraud has also decreased over the years, with 1 in 7 fraud cases discovered now purely by chance. Making it easier not only to commit the initial fraud, but to also get away with doing so after the fact.
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Rationalization Those committing fraud often rationalize his or her actions, often citing: Poor organizational values Unrealistic expectations of goals and benchmarks Company or industry history of such behavior Company Culture Companies who employ a culture with no tolerance of fraud and set realistic targets tend to see less cases of fraud.
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Audit Execution Auditor Awareness Things to Keep in the Back of Your Mind Professional Skepticism – Material misstatements compel the auditor to neither assume nor dismiss the existence of fraudulent activity. But… Although fraud can possibly be present in any misstatement, as auditors we cannot ignore the risk factors that are supported by “typical fraudster” data.
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The Typical Fraudster Certain demographics within the company DO have a high preponderance among all fraudulent activity. Age/Tenure: ages 36-55 combine to total 76% of all fraudsters, while almost all had worked at the firm for over 3 years. Rank: Management and senior management were 64%, but all levels show noteworthy tendencies. Functional Department: Finance, Sales, and the Chief Executive were shown to be the overwhelming majority of all fraudsters. How can we use this?
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Red Flags/Warning Signs Individual Behaviors Supplier/Customer Relationships Performance Disposition Toward Colleagues Lifestyle Values Environment Internal Controls Checks and Balances Staff Turnover Nature of Compensation Morale
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Real World Examples of Fraud We have seen countless corporate fraud scandals throughout the years. Lets take a brief look at some of the most egregious ones in the recent past. 1) Waste Management-1998 Reported $1.7 billion in fake earnings Falsely increased the depreciation time length for their property, plant and equipment on the balance sheet 2) Enron-2001 Lost $74 billion for their shareholders Kept huge debts off of their balance sheets 3) Worldcom-2002 Inflated assets by $11 billion Capitalized line costs instead of expensing and inflated revenues with fake accounting entries 4) HealthSouth-2003 Inflated earnings by $1.4 billion to meet stockholders expectations Made up numbers and transactions
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Professional Guidance Important Websites www.aicpa.org www.aicpa.org American Institute of Certified Public Accountants Here you will find crucial auditing information, including access to the Statements on Auditing Standards SAS 99: Consideration of Fraud in a Financial Statement Audit This is where one should start their research when looking at fraud www.acfe.com/fraud-resources.aspx www.acfe.com/fraud-resources.aspx Association of Certified Fraud Examiners Excellent resource for companies Site contains articles, management tools, and case study podcasts
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Related Articles Fraud www.journalofaccountancy.com/issues/2014/fraud.html Defining Roles in Prevention of Financial Reporting Fraud www.journalofaccountancy.com/news/2014/nov/201411371.html Are Organizations Hindering Employee Whistleblowing? www.journalofaccountancy.com/issues/2014/dec/employee-whistleblowers-corporate-fraud.html Why Employees Commit Fraud www.journalofaccountancy.com/issues/2001/feb/whyemployeescommitfraud.html A five part series on the fraud triangle Overview www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments/www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments/ Opportunity www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-opportunity-factor/www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-opportunity-factor/ Rationalization www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-rationalization-factor/www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-rationalization-factor/ Motivation www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-motivation-factor/www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-motivation-factor/ Perception www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-perception-factor/www.corporatecomplianceinsights.com/incorporating-the-fraud-triangle-into- compliance-risk-assessments-the-perception-factor/
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