Welcome toIntroduction to Fraud ExaminationWhy Study Fraud Examination?Fraud Examination, 3ELearning ObjectivesType of People That Commit FraudReasons to Commit FraudThe Fraud TriangleSlide 9Slide 10PressureSlide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18OpportunityRecruitment of FraudstersSlide 21Slide 22Slide 23Slide 24Controls to Prevent/Detect FraudSlide 26Slide 27Slide 28What If I Don’t Want to Be a Fraud Expert?An Important SourceSeriousness of the Fraud ProblemSlide 32Slide 33What Is Fraud?Slide 35Can we sue the contractor for fraud?Types of FraudMisrepresentation of Material FactsAn Accountant May Be Prosecuted for Fraud who:Concealment of Material FactsBriberyExtortionConflict of InterestEmbezzlementLarcenyTheft of Trade SecretsBreach of Fiduciary DutyDuty of LoyaltyDuty of CareFederal Legislation Related to FraudSlide 51Fraud Against an OrganizationFraud on Behalf of an OrganizationAnother Classification SchemeEmployee EmbezzlementManagement FraudInvestment ScamsVendor FraudCustomer FraudLawSlide 61Slide 62Slide 63Slide 64Slide 651 Welcome to ACG6686 Fraud Examination2 Introduction to Fraud Examination3Why Study Fraud Examination?AICPA called fraud examination (Forensic Accounting) one of the seven hot new “sizzling” career areas in accounting. The size and the number of frauds is increasing.Great Job Opportunities: there will be a shortage of between 25,000 and 50,000 security professionals in the next few years in the United States.4Fraud Examination, 3EWhy People Commit Fraud5Learning ObjectivesKnow the types of people that commit fraudExplain why people commit fraudDescribe the Fraud TriangleUnderstand how pressure contributes to fraudTell why people rationalizeUnderstand how people are recruited to participate in fraud56Type of People That Commit FraudWhat type of people commit fraud?Anyone!Not demographically or psychologically differentiatedHave the profile of other honest people67Reasons to Commit FraudA combination of the following (Fraud Triangle):PressureRationalizationOpportunityImmediate financial needThe fraud gets larger and larger as confidence in the fraud gets higher and higher78The Fraud Triangle8PressureOpportunity RationalizationFraud Triangle99The Fraud TriangleHeatFuel OxygenFire Triangle10The Fraud TriangleThe Fraud Scale10OpportunityPressureIntegrityHighLowHighHighLowLowHigh Chance Small Chance11Pressure11Divided into four main groups:1. Financial pressures2. Vices3. Work-related pressures4. Other pressures12PressureFinancial PressuresCommon Financial Pressures:1. Greed2. Living beyond one’s means3. High bills or personal debt4. Poor credit5. Personal financial losses6. Unexpected financial needs1213Pressure1314PressureVice PressuresWorse kind of pressures to commit fraudExamples include:GamblingDrugsAlcoholExpensive extramarital relationships1415PressureVice PressuresReal-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 new-born baby from the hospital with heroine under its tongue1516PressureWork-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 underpaid1617PressureWork-related PressuresReal-life examples:The worker that worked 12-14 hour days, received a promotion, and accepted kickbacks to compensate for his “over working.”1718Pressure18Other PressuresSpouse PressuresSpouse’s lifestyle demandsLife PressuresFamily CrisisSocial Pressures“Being successful”19OpportunitySix major factors that increase opportunity:Lack of controlsInability to judge performance qualityFail to discipline fraudstersLack of access to informationIgnorance, apathy and incapacityLack of audit trail1920Recruitment of FraudstersMany frauds are committed by more than one personCollusion2021Recruitment of FraudstersA Business Week forum for CFOs:At the forum, participants were queried about whether or not they had ever been asked to “misrepresent corporate results.” Of the attendees, 67 percent of all CFO respondents said they had fought off other executives’ requests to misrepresent corporate results. Of those who had been asked, 12 percent admitted they had “yielded to the requests,” while 55 percent said they had “fought off the requests.”2122Recruitment of Fraudsters22PowerReward PowerLegitimate PowerCoercive PowerReferent PowerExpert Power23Recruitment of FraudstersTypes 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 A2324Recruitment of Fraudsters24Successful Collusion(Recruitment)Perceived Reward PowerPerceived Reward PowerPerceived Coercive PowerPerceived Coercive PowerPerceived Expert PowerPerceived Expert PowerPerceived Legitimate PowerPerceived Legitimate PowerPerceived Referent PowerPerceived Referent PowerDesire for Reward or BenefitDesire for Reward or BenefitFear of PunishmentFear of PunishmentLack of KnowledgeLack of KnowledgeLevel of ObedienceLevel of ObedienceRelationship NeedsRelationship NeedsConspirator (A)Potential Co-Conspirator (B)Pressure25Controls to Prevent/Detect FraudInternal Control Framework (from COSO)Control EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring2526Controls to Prevent/Detect FraudThe Internal Control StructureControl EnvironmentManagement’s Role and ExampleManagement CommunicationAppropriate HiringClear Organizational StructureEffective Internal Audit Department2627Controls to Prevent/Detect FraudThe Internal Control StructureAccounting SystemTransactions are…ValidProperly authorizedCompleteProperly classifiedReported in the proper periodProperly valuedSummarized correctly2728Controls to Prevent/Detect FraudThe Internal Control StructureControl Activities or Procedures:Segregation of duties, or dual custodySystem of authorizationsIndependent checksPhysical safeguardsDocuments and