Fraud Examination, 3ELearning ObjectivesHow Organizations Fight FraudFraud PreventionSlide 5Slide 6Slide 7Early Fraud DetectionSlide 9Slide 10Fraud InvestigationSlide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Follow-Up Legal ActionSlide 23Slide 24Slide 25Fraud Examination, 3EChapter 3: Fighting Fraud—An OverviewCOPYRIGHT © 2009 South-Western, a part of Cengage LearningLearning Objectives•Know how organizations can fight fraud•Know the importance of preventing fraud•Know the importance of detecting fraud early•Know different ways to investigate fraud•Be familiar with legal actions to take once fraud is discovered2How Organizations Fight FraudOrganizations fight fraud by implementing:1.Fraud prevention2.Early fraud detection3.Fraud investigation4.Legal action and/or resolution3Fraud Prevention•Fraud prevention is the most cost-effective way to reduce fraud•Involves two fundamental activities:–Sustain a culture of honesty and high ethics –Assess the risks for fraud, develop concrete responses to mitigate the risks, and eliminate the opportunities for fraud4Fraud PreventionSustain a Culture of Honesty & High EthicsFive critical elements:1. Have management model appropriate behavior2. Hire the right kind of employees3. Communicate expectations and require periodic written acceptance to the expectations4. Create a positive work environment5. Enforce policies for handling fraud5Fraud PreventionResearch on Why People Lie–Have fear of punishment or adverse consequences–Have a habit of lying–Seen others lie or have had negative modeling–Feel if they tell the truth they won’t get what they want6Fraud PreventionEliminate Fraud OpportunitiesOrganizations should:•Identify and measure fraud risks•Implement preventative and detective controls•Create widespread monitoring by employees•Have internal and external auditors7Early Fraud DetectionThree Primary Ways to Detect Fraud1.By chance2.By providing “whistle-blowing” systems3.By data mining8Early Fraud DetectionWhistle-blowing SystemsA reporting hotlines or online system that allows others to call in or submit an anonymous tip of a fraud suspicionExamples:•Internal systems/hotlines•The Association of Certified Fraud Examiners•Allegience9Early Fraud DetectionMining Company DatabasesMining databases for suspicious trends, numbers, and other anomalies.Data-mining programs:•ACL•Picalo10Fraud InvestigationFraud investigation should occur only if a prediction of fraud exists.11Fraud InvestigationConsiderations before investigating fraud:•Need management’s approval•Pursued only when prediction exists•Investigators rely heavily on interviews12Fraud InvestigationThe Evidence Square13Testimonial EvidenceTestimonial EvidencePhysical EvidencePhysical EvidenceDocumentary EvidenceDocumentary EvidencePersonal ObservationPersonal ObservationFraud InvestigationTestimonial EvidenceEvidence gathered from individualsTechniques:–Interviewing–Interrogation–Honesty tests14Fraud InvestigationDocumentary EvidenceGathered from paper, computers, and other written or printed sourcesTechniques:15–Document examination–Data mining–Public records searches–Audits–Computer searches–Net worth calculations–Financial statement analysis–Corporate databases –E-mail serversFraud InvestigationPhysical Evidence–Fingerprints–Tire marks–Weapons–Stolen property–Identification numbers–Marks on stolen objects–Other tangible evidenceTechniques:–Forensic analysis by experts16Fraud InvestigationPersonal ObservationEvidence that is sensed (seen, heard, felt, etc.) by the investigatorsTechniques:–Invigilation–Surveillance–Covert operations17Fraud Investigation18PressureOpportunityRationalizationTheft ActConcealmentConversionThe Fraud Motivational TriangleThe Fraud Element TriangleFraud InvestigationThe Fraud Element Triangle: Theft ActCatch perpetrators in the embezzlement act or to gather information about the actual theft acts19Fraud InvestigationThe Fraud Element Triangle: ConcealmentFocus on records, documents, computer programs and servers, and other places where perpetrators conceal or hide their dishonest acts20Fraud InvestigationThe Fraud Element Triangle: ConversionSearch for ways the perpetrators spent or used their stolen assets.21Follow-Up Legal Action Organizations can…1.take no legal action2.pursue civil remedies, and/or 3.pursue criminal action against the perpetrators22Follow-Up Legal Action No Legal ActionWhat are consequences of taking no legal action?23Follow-Up Legal Action Civil ActionTo recover money or other assets taken•Quite rare with employee fraud – most of the money is spent•More common when other organizations are involved•May sue the auditors or others with “deep pockets”24Follow-Up Legal Action Criminal ActionOnly be brought by law enforcement agenciesUsually involve fines, prison terms, or both•More difficult to get a criminal conviction than a judgment in a civil