Fraud Examination

1
Fraud Examination

• Day 2 Fraud Basics

2
Review from last time

• Fraud is a major problem in our society
• Different types of fraud
• Employee fraud
• Management fraud
• Others
• Where does fraud occur? Everywhere!
• Who perpetrates fraud? The person next to you!
• All frauds have victims

3
Todays topics

• Fraud related careers
• Fraud and the legal system
• Why does fraud occur?

4
Whats Hot in Accounting--7 Sizzling Areas

• Assurance services--Elder care
• Consulting services
• Information technology services
• Forensic accounting
• Environmental accounting
• International accounting
• Tax and financial planning

This information comes from the American
Institute of CPAs
5
Wanted More Schools for Security Pros

• The U.S. alone will face a shortfall of between
  50,000 and 75,000 security professionals in the
  next few years.
• Al Decker, CEO of Fiderus, Information Security
  Consultants

6
Fraud Related Careers

• Auditing
• Fraud Examination
• Forensic Accounting
• Expert Witnessing
• Consulting
• Security Firms
• Owning a Business

7
Fraud related careers

• CPA Firms
• Internal Audit
• Corporations
• Non-profits
• Educational Institutions
• Government
• FBI, IRS, Treasury, GAO, Postal Service, Other
  Agencies
• Law Firms
• Security Firms
• Fraud Investigation Firms

8
How do I prepare?

• Background in Accounting or Law Enforcement
• Certifications
• CPA, CIA, CISA, CISM, CFS, Cr.FR, CFE
• Patience
• See The Fraud Examiners by Joseph Wells,
  Journal of Accountancy, October 2003.

9
How do I become a CFE

• Be an associate member of the ACFE.
• Bachelors degree (or experience)
• 3 recommendation letters
• CFE Exam Fraudulent financial transactions
• Legal Elements of Fraud
• Fraud Investigation
• Criminology and Ethics
• 2 years of professional experience

10
Will this add value to myself?

• Position CFE Non-CFE
• Executive 139,000 102,000
• Partner/Principle 146,000 121,000
• Manager 88,000 75,000
• Supervisor/Senior 73,000 64,000
• Staff/Analyst 62,000 53,000
• Source ACFE 2004 Compensation Guide

11
Conclusion

• Its something to seriously consider!

12
Fraud and the Law

• Fraud is generally illegal
• Remedies include criminal prosecution and/or
  civil complaints

13
Criminal Approach

• Must prove intent using evidence
• Grand jury determines whether sufficient evidence
  for indictment
• Must prove beyond a reasonable doubt
• Requires unanimous verdict
• Penalties include jail and/or fines

14
Civil Approach

• Must prove intent using evidence
• Plaintiff files a claim/lawsuit
• Requires preponderance of evidence
• Verdict may be less than unanimous
• Penalties include restitution and/or damages

15
What usually happens?

• Referred to Law Enforcement 69
• Outcomes
• Plead Guilty 73
• No Prosecution 16
• Conviction 9
• Acquittal 2

16
What usually happens?

• Civil Suit Filed 19
• Outcomes
• Settled out of court 54
• Judgment for victim 46
• Judgment for perpetrator 0

17
Are assets generally recovered?

• 100 recovery 22
• 75-99 recovery 9
• 50-75 recovery 6
• 25-50 recovery 9
• 1-25 recovery 17
• No recovery at all 37

18
Why not take legal action?

• Private settlement 27
• Fear of bad publicity 26
• Too costly 20
• Victim just wanted closure 17
• Internal discipline sufficient 16
• Dont know 14
• Perp had no assets 11

19
Why not take legal action?

• Govt declined to prosecute 9
• Lack of evidence 9
• Fear of countersuits 6
• Perp disappeared 1
• Other 20

20
Conclusion

• Were doing better at prosecuting and punishing
  fraudsters, but we would do better if we all
  understood more about fraud, including how and
  why it happens!

21
So why does fraud occur?

• Original belief crime is a genetic problem
• Edwin Sutherland (1883-1950)
• Crime is a learned behavior
• Techniques
• Attitudes and rationalizations

22

• Donald Cressey (1919-1987)
• Trusted persons become trust violators when they
  conceive of themselves as having a financial
  problem which is non-shareable, are aware this
  problem can be secretly resolved by violation of
  the position of financial trust, and are able to
  apply to their own conduct in that situation
  verbalizations which enable them to adjust their
  conceptions of themselves as trusted persons with
  their conceptions of themselves as users of the
  entrusted funds or property

23
Discussion of the Fraud Triangle
24
Cheating Example

• Pressures
• Need grades to graduate
• Family expectations
• Graduate/professional school admission
• Scholarships
• Stay in school
• Money/peer acceptance

25
Cheating Example

• Opportunity
• Lack of controls
• Cheaters dont get punished
• Teachers cannot see the process
• High-tech methods

26
Cheating Example

• Rationalization
• Everyone does it
• No one gets hurt by it
• I only cheat a little
• Teachers are always trying to trick me
• Teacher expectations are too high, Im busy
• It doesnt matter, this is not my major
• Honest students lose out
• Its not really cheating. ????

27
Cheating Example

• Who are the victims?
• Other students
• University
• Employers
• Graduate Schools
• Professors
• Student

28
Individual Cases
29
Procedures

• Read the case
• How was the fraud perpetrated?
• What pressures motivated the fraud?
• What opportunities existed?
• How was the fraud (likely) rationalized?
• Who were the victims?

30
Research by Steve Albrecht

• Top 10 pressures
• Living beyond ones means
• Overwhelming desire for personal gain
• High personal debt
• Close association with customers
• Not getting fair pay
• Wheeler-dealer attitude ???
• Need to beat the system
• Gambling habits
• Family or peer pressure
• Insufficient recognition for job performance

31
Research by Steve Albrecht

• Top 10 opportunities
• Too much trust in key employees
• Lack of proper authorization procedures
• Inadequate disclosure of personal incomes
• No separation of authorization from custody
• Lack of independent checks
• Inadequate attention to details
• No separation of custody from accounting
• No separation between accounting functions
• Lack of clear lines of authority/responsibility
• Department not frequently reviewed by internal
  auditors

32
Research by Steve Albrecht

• The Fraud Scale

33

• What is the most effective way to reduce the
  incidence of fraud?

34

• Where did Congress focus in Sarbanes-Oxley?

35

• What else could/should congress do?

36

• What are some specific ways to reduce pressure
  on employees/management?

37

• What are some specific ways to reduce fraud
  opportunities?

38

• What are some specific ways to increase personal
  integrity?

39

• Ethics?