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ACC 413 Chapter 8

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The 2012 report summarized the following findings about fraud:
1. Participants in the survey estimated that organizations lose 5% of their annual revenues to fraud

2. Occupational fraud schemes tend to be extremely costly

3. Occupational fraud schemes frequently continue for years before they are detected. The typical fraud in the study lasted 18 months from the time it began until the time it was caught by the victim organization

4. The most common fraud schemes where asset misappropriation

5. Occupational frauds are much more likely to be detected by a tip than by audits, controls, or other means

6. Corruption and billing schemes pose the greatest risks to organizations throughout the world

7. The longer a perpetrator has work for an organization, the higher the fraud losses tend to be

8. While fraud can occur in any type of organization, the industries most commonly victimized were banking and financial services, government and public administration, and manufacturing

9. Occupational frauds were most often committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing

10. Occupational fraudsters are generally first time offenders

11. Fraud perpetrators often display behavioral traits that serve as indicators of possible illegal behavior
Common fraud perpetrator red flags
1. Living beyond their means

2. Experiencing financial difficulties

3. Excessive organizational pressure
Misappropriation of assets
1. Pilferage (the act of stealing small quantities)
2. Embezzlement
3. Defalcation (money/funds put to wrong use)
Occupational fraud
You did it at work, fraud in the workplace:

1. Falsification of financial statements

2. Asset misappropriation

3. Corruption
Fraud perpetrators need excuses a typical list includes:
1. Everyone's doing it, so I am no different

2. Taking money from the cash till was just a temporary borrowing. The money will be returned when the gambling/betting winnings materialize

3. The employer is underpaying me, so I deserve these perks as reasonable compensation, and the company can certainly afford it

4. I am not hurting anyone - in fact, it's for a good cause

5. It is not really a serious matter
The fraud triangle
1. Rationalization
2. Perceived opportunity
3. Perceived need (pressure)
Fraud reporting, investigation, and resolution
Frauds are more likely to be detected by a tip than by audits, controls, or other means
Risk assessment
The identification and analysis (typically in terms of impact and likelihood) of relevant risks to the achievement of an organization's objectives, forming a basis for determining how the risks should be managed
Risk response
An action, or set of actions, taken by management to achieve a desired risk management strategy. Risk responses can be categorized as risk avoidance, reduction, sharing, or acceptance
Some organizations have developed corporate cultures that encompass strong board governance practices, including:
1. Board ownership of agendas and information flow

2. Access to multiple layers of management and effective control of a whistleblower hotline

3. Independent nomination process

4. Effective senior management team... Evaluations, performance management, compensation, and succession planning.

5. A code of conduct specific for senior management, in addition to the organization's code of conduct

6. Strong emphasis on the board's own independent effectiveness and process through board evaluations, executive session, and active participation in oversight of strategic and risk mitigation efforts
Tone at the top
The entity wide attitude of integrity and control consciousness, as exhibited by the most senior executives of an organization
Successful integrated programs have certain key components of fraud risk management
1. Commitment by the board and senior management

2. Fraud awareness activities that help employees understand the purpose, requirements, and responsibilities of the program

3. An affirmation process that requires employees to affirm periodically, typically annually, that they understand and are complying with policies and procedures

4. A conflict disclosure protocol or process that helps employees self disclose potential or actual conflicts of interest

5. Fraud risk assessment, which helps to identify all reasonable fraud scenarios

6. Reporting procedures and whistleblower protection that provide a well known and easy avenue for individuals, whether inside or outside the organization, to report suspected violations or incidents

7. And investigation process that ensures all matters undergo a timely and thorough investigation, as appropriate

8. Disciplinary and/or corrective actions that address noncompliance with established policies and help deter fraudulent behavior

9. Process evaluation and improvement to provide quality assurance that the program will continue to meet its objectives

10. Continuous monitoring to ensure the program consistently operates as designed
The fraud guide outlines certain elements that should be considered when brainstorming fraud risk scenarios
1. Incentives, pressures, and opportunities

2. Risk of management's override of controls

3. Population of fraud risks

4. Fraudulent financial reporting

5. Misappropriation of assets

6. Corruption

7. Other fraud risks
Warning signals of possible illegal acts
1. Unauthorized transactions, improperly recorded transactions, or transactions not recorded in a complete or timely manner in order to maintain accountability for assets

2. Investigation by governmental agency, enforcement proceeding, or payment of unusual fines or penalties

3. Violations of laws or regulations cited in reports of examinations by regulatory agencies that have been made available to the auditor

4. Large payments for unspecified services to consultants, affiliates, or employees

5. Sales commissions or agents' fees that appear excessive in relation to those normally paid by the client or for the services actually received

6. Unusually large payments in cash, purchases of bank cashiers' checks in large amounts payable to bearer, transfers to numbered bank accounts, or similar transactions

7. Unexplained payments made to government officials or employees

8. Failure to file tax returns or pay government duties or similar fees that are common to the entity's industry or the nature of its business
When leading or participating in a fraud investigation...
Internal auditors may have to deal with evidence that differs from what they are accustomed to on other engagements
What is the primary qualification for fraud specialists
The CFP designation is the primary qualification for fraud specialists, but other specialties also may be needed

For example, when investigators involve fraudulent financial reporting, possessing the CPA/CA credential can be very helpful

Additionally, technology specialists may be able to conduct advanced investigative techniques using tools that are customized for such purposes
Communicating fraud audit outcomes
Internal auditors should identify the criteria, conditions, cause, and effect to summarize their findings from a fraud investigation. They should write their communications in a systematic, organized fashion to enhance clarity and comprehension, which typically includes:

1. A brief, clear statement of the issues

2. A citation of the relevant policies, rules, standards, laws, and regulations that may be applicable to the case at hand

3. The analysis of the evidence gathered to form a professional opinion

4. The conclusion; that is, the findings and recommendations
Prediction is a technical term that refers to:
The ability of a fraud examiner to commence an investigation if a form of evidence exists that fraud has occurred
What fraud schemes were reported to be most common in the ACFEs 2012 report to the nation
Misappropriation of assets by employees
Which of the following is not a typical rationalization of a fraud perpetrator?
I'm smarter than the rest of them
Which of the following is not something all levels of employees should do?
Investigate suspicious activities that they believe maybe fraudulent
An organization that manufactures and sells computers is trying to boost sales between now and the end of the year. It decides to offer its sales representatives a bonus based on the number of units they deliver to customers before the end of the year. The price of all computers is the determined by the vice president of sales and cannot be changed by sales representatives. Which of the following presents the greatest reason a sales representative may commit fraud with this incentive program?
Customers have the right to return a laptop for up to 90 days after purchase
How should an organization handle an anonymous accusation from an employee that a supervisor in the organization has manipulated time reports?
Assess the facts provided by the anonymous party against preestablished criteria to determine whether a formal investigation is warranted
Which of the following is an example of misappropriation of assets?
A small amount of petty cash is stolen
Which of the following is not an example of a fraud prevention program element?
Analyzing cash disbursements to determine whether any duplicate payments have been made
Which of the following types of companies would most likely need the strongest anti-fraud controls?
A bank
A payroll clerk increased the hourly pay rate of a friend and shared the resulting overpayment with the friend. Which of the following controls would have best served to prevent this fraud?
Limiting the ability to make changes in payroll system personnel information to authorized HR department supervisors
Internal audit function's responsibilities with respect to fraud are limited to:
Being aware of fraud indicators, including those related to financial reporting fraud, but not necessarily possessing the expertise of a fraud investigation specialist.
From an organization's standpoint, because internal auditors are seen to be internal control experts they also are:
The best resource for audit committees, management, and others to consult in house when setting up anti-fraud programs and controls, even if they may not have any fraud investigation experience