The Department of Accounting

1
The Department of Accounting Information
Systems at North Dakota State University
presents

• ACCT 410/610 Fraud Examination
• Topic 12 April 15, 2003
• A course developed taught by
• Thomas Buckhoff, Ph.D., CFE, CPA
• EideBailly Professor of Forensic Accounting

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Quote for the Day

• The antidote for crime should be administered in
  childhood, by the parents. The problem is not
  that of the improper child so much as it is that
  of the improper home.
• John W. Hill, CFE

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Agenda for Today

• Official crime statistics
• Fraud survey by KPMG, LLP
• The criminal justice system
• The court system
• Economic crimes
• Video Little Favor, Big Mistake

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Official Crime Statistics

• Uniform Crime Report (UCR)
• Compiled by the FBI from gt17,000 law enforcement
  agencies.
• National Crime Survey (NCVS)
• Survey of 49,000 households or about 101,000
  individuals

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Uniform Crime Reports (UCR)

• Provides a measure of the number of crimes
  reported to law enforcement agencies throughout
  the United States.
• Overall trend for serious crimes Declining

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National Crime Victimization Survey (NCVS)

• Primary source of information on the
  characteristics of criminal victimization and on
  the number and types of crimes not reported to
  law enforcement authorities.

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Occupational Fraud and Abuse

• The use of ones occupation for personal gain
  through the deliberate misuse or theft of the
  employers resources.

• No official crime statistics exist concerning the
  nature and extent of
  fraud in our society.

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Fraud Survey by KPMG

• Survey pool consisted of
• Top 2,000 companies measured by revenue from
  Dun Bradstreet
• A sample of 2,250 companies with 50
  million or more in revenue
• The top 100 universities
• The top counties and municipalities
• A sample of federal and state agencies

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Average Fraud Losses by Type of Scheme
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Expected Trend of Fraud in Business

• Do you believe the incidence of fraud will
  increase, stay the same, or decrease?

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Leading reasons for expected increase

• Economic pressures
• Inadequate punishment of offenders
• Weakening of societys values
• Insufficient training/emphasis on prevention and
  detection

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How were frauds detected?

• Tip/complaint from employee
• Internal controls
• Internal auditor review
• Tip/complaint from customer
• By accident
• Anonymous reporting system
• Fraud hotline
• Specific investigation by management or
  employee

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Red flags indicating fraud

• Personal financial pressure
• Problem with vices
• Drugs, alcohol, gambling
• Extravagant lifestyle
• Perceived grievances against the
  company
• Related party transactions
• Internal pressure to meet budgets
• Short vacations/unexplained hours

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What allowed the frauds to take place?

• Poor internal controls
• Management override of internal controls
• Collusion between employees and management
  or third parties
• Lack of control over management by directors
• Poor or nonexistent corporate ethics policy

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Actions Taken Upon Detection

• Conduct investigation
• Report to law enforcement
• Termination of offender
• Seek civil action for recovery
• Solicit resignation from offender
• Review by audit committee
• File an insurance claim
• Negotiate a settlement
• Outsource to an appropriate forensic
  organization

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Fraud Prevention Efforts

• Established code of conduct
• Background checks on employees
• Employment contracts
• Reviewed and improved internal controls
• Fraud audit
• Training courses in fraud prevention and
  detection
• Increased focus of senior management on fraud and
  abuse

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Fraud Survey Conclusions

• The complexity of todays business transactions
  and information systems provides widespread
  opportunities for employees to engage in theft or
  fraud.
• Occupational fraud and abuse is on the rise in
  virtually every industry, including the
  not-for-profit sector.
• Businesses need to be proactive in the fight
  against fraud and abuse.

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Quote for the Day 2

• Fraud is often a crime and many fraudsters are
  criminals. An understanding of theories of crime
  is therefore essential why people commit them,
  how they are prevented, and what happens to
  people who perpetrate them.
• Source HCJS, p. 12.

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The Criminal Justice System

• Includes the agencies and processes that
  apprehend, adjudicate, sanction, and treat
  criminal offenders.
• See HCJS Link.

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Models of Justice

• Crime control Assumes crime is a rational choice
  and emphasizes
• protection of society, and
• compensation of victims.
• Rehabilitation Assumes crime is a function of
  social injustice rather than individual
  responsibility.
• Due process Advocates justice, treatment, and
  rehabilitation.
• emphasizes rights of the offender

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Models of Justice

• Non-Intervention Advocates diversion from the
  formal court process, and decriminalization of
  less serious offenses.
• Radical-Conflict Assumes the justice system is
  designed to control or exploit the laboring
  classes.
• The Justice Model Assumes rehabilitation efforts
  are ineffective.
• Emphasizes fairness in criminal procedures and
  determinate sentences.

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Choice and Deterrence Theories

• Classical Criminology
• Routine Activities Theory
• Deterrence and Special Deterrence
• Biological Psychological Theories
• Social Structure Theories
• Social Process Theories
• Conflict Theories
• Rehabilitation

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CJ Theories Summary

• Criminologists do not agree on causes of criminal
  behavior
• None address white-collar crime
• The Fraud Triangle best explains white-collar
  criminal behavior
• Opportunity
• Pressure
• Rationalization

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The Court System

• Four aspects to consider
• Court structure
• Federal and state
• Court Personnel
• Processing of offenders
• Sentencing criminals

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Processing Offenders

• Initial appearance Offender notified of charges,
  bail set.
• Preliminary hearing Determine if sufficient info
  exists to try offender.
• Indictment Grand jury reviews strength of the
  evidence.
• Arraignment Offender is charged and
  enters plea.
• Trial Determines guilt or innocence.
• Sentencing Sets the punishment.

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Types of Sanctions

• Pretrial diversion Completion of treatment
  programs preempts trial and criminal record.
• Probation Suspends sentence in return for
  promise of good behavior.
• Incapacitation Eliminates opportunity to commit
  offenses.

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Sentencing
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Highest Incarceration Rates(per 100,000
population)
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Global Incarceration Rates(per 100,000
population)
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Economic Crimes

• Definition
• Acts in violation of criminal law which are
  designed to bring financial rewards.

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Common Economic Crime Schemes

• Larceny
• False pretenses
• a.k.a. Fraud
• Bad checks
• Shoplifting
• Auto theft
• Arson for profit
• Credit card theft

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Video Little Favor, Big Mistake

• 15 million credit card fraud ring
• View the video in terms of the Fraud Triangle.

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Fraudwise

• Specializing in fraud detection, investigation,
  and prevention consulting services
• Senior Forensic Consultant
• Thomas Buckhoff, Ph.D., CFE, CPA
• 2974 Southgate Drive
• Fargo, ND 58103-3524
• 701-231-8512
• www.fraud-wise.com