1. Albrecht, Albrecht, Albrecht, Zimbelman Fraud Examination, 4E © 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. Chapter 1: The Nature of Fraud

2. © 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. Albrecht, Albrecht, Albrecht, Zimbelman 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 on behalf of an organization.  Understand the difference between criminal and civil fraud laws.

3. Albrecht, Albrecht, Albrecht, Zimbelman Learning Objectives  Understand the types of fraud-fighting careers available today. © 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 Introduction to Fraud © 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.

5. Albrecht, Albrecht, Albrecht, Zimbelman Sources of Fraud Statistics  Four Basic Sources  Government Agencies  Researchers  Insurance Companies  Victims of Fraud

6. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Seriousness of Fraud  U.S. organizations lose seven percent of annual revenues to fraud  Applied to the estimated 2008 U.S. GDP, this seven percent translates to approximately $994 billion in losses  Fraud affects how much we pay for goods and services, each of us pays not only a portion of the fraud bill but also for the detection and investigation of fraud  Losses incurred from fraud reduce a firm’s income on a dollar-for-dollar basis

7. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Seriousness of Fraud  For every $1 of fraud, net income is reduced by $1  It takes more revenue to recover the effects of the fraud, since fraud reduces the net income

8. © 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. Albrecht, Albrecht, Albrecht, Zimbelman What is Fraud?

9. © 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. Albrecht, Albrecht, Albrecht, Zimbelman What is Fraud?  Seven Specific Parts 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

10. © 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. Albrecht, Albrecht, Albrecht, Zimbelman What is Fraud? 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

11. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  The Two General Classifications  Committed against an organization  Committed on behalf of an organization

12. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Occupational Fraud Occupational fraud is the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

13. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  With occupational fraud, the activity…  is clandestine  violates the employee’s obligations to the organization  is for direct or indirect financial benefit  costs the organization assets, revenues, or reserves

14. © 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. Albrecht, Albrecht, Albrecht, Zimbelman Classifications of Occupational Fraud  Asset misappropriations  Corruption  Fraudulent statements

15. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Fraud classification according to victims:  Company or Organization as victim  Employee embezzlement  Vendor fraud  Customer fraud  Shareholders or debt-holders as victims  Management fraud  Unwary individuals as victims  Investment and other consumer fraud  Anyone as a victim  Miscellaneous fraud

16. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Employee Embezzlement  Occupational fraud (most common)  Employees steal company assets  Is direct or indirect  Direct: employee directly steals company cash, inventory, tools, supplies, or other assets  Indirect: employee takes bribes or kickbacks from vendors, customers, or others for lower sales prices, higher purchase prices, nondelivery of goods, or the delivery of inferior goods  Example: CVC Construction (direct)

17. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Vendor Fraud  Two main varieties:  through vendors alone  through collusion between buyers and vendors  Usually results in:  overcharge for purchased goods  shipment of inferior goods  Nonshipment of purchased goods  Example: Halliburton

18. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Customer Fraud  When customers  do not pay for goods  get something for nothing  deceive organizations into giving them something they should not have  Example: Chicago bank

19. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Management Fraud  Also known as financial statement fraud  top management deceptively misstates financial statements  Examples:  Enron  WorldCom  Sunbeam

20. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud  Investment and Other Consumer Fraud  Worthless investments sold to investors  Examples:  Ponzi schemes  Telemarketing fraud  Nigerian letter or money scams  Identity theft  Advance fee scams  Redemption/strawman/bond fraud  Letter of credit fraud  Internet fraud

21. © 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. Albrecht, Albrecht, Albrecht, Zimbelman The Various Classifications of Fraud

22. © 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. Albrecht, Albrecht, Albrecht, Zimbelman Criminal and Civil Fraud Laws

23. © 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. Albrecht, Albrecht, Albrecht, Zimbelman Prepare for a Fraud-fighting Career  Skills for Fraud-Fighting Professionals  Analytical Skills  examine data for symptoms of fraud  Communication Skills  effectively interview witnesses and suspects  communicate findings to witnesses, courts and others  Technological Skills  search for fraud by effectively using information systems

24. © 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. Albrecht, Albrecht, Albrecht, Zimbelman Prepare for a Fraud-fighting Career  More Skills for a Fraud-Fighting Professional  Some understanding of accounting and business  A knowledge of civil and criminal laws, criminology, privacy issues, employee rights, fraud statutes, and other legal fraud-related issues  The ability to speak and write in a foreign language  A knowledge of human behavior

25. © 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. Albrecht, Albrecht, Albrecht, Zimbelman Become a Certified Fraud Examiner  Be an associate member of the ACFE in good standing  Meet minimum academic and professional requirements:  Bachelor’s Degree  Two years of professional experience directly or indirectly related to fraud examination  Be of high moral character  Agree to abide by the Bylaws and Code of Professional Ethics of the ACFE

26. © 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. Albrecht, Albrecht, Albrecht, Zimbelman Fraud-fighting Careers