52 terms

Chapters 1-4 (quiz)


Terms in this set (...)

Ponzi Scheme
A fraud that lures investment funds from victims and then gives those victims a premium or interest from money that is paid by subsequent investors
Sources that fraud statistics come from (4)
1) Government agencies
2) Researchers
3) Insurance companies
4) Victims of fraud
$436 million fraud, profit margin (net income as a percentage of revenues) is 10%, how much would you have to generate in additional revenue to restore net income to what it would have been without the fraud
10 times 436,000,000 = 4,360,000,000
$100 million fraud, profit margin (net income as a percentage of revenues) is 5%, bank makes $100 per checking account, how many new checking accounts must the bank generate to compensate for the fraud losses?
100,000,000 / 0.05 = 2,000,000,000 / 100 = 20,000,000 new checking accounts
What percentage of annual revenues do US organizations lose to fraud? and how much money according to 2008 US GDP
7%, $994 billion
On what basis are losses from fraud incurred?
dollar-for-dollar basis, for every $1 of fraud, net income is reduced by $1
Fraud is a generic term, and embraces all the multifarious means which human ingenuity can devise, which are resorted to by one individual, to get an advantage over another by false representations. No definite and invariable rule can be laid down as a general proposition in defining fraud, as it includes surprise, trickery, cunning and unfair ways by which another is cheated. The only boundaries defining it are those which limit human knavery
Seven specific parts of fraud
1. A representation
2. About a material point
3. Which is false
4. And intentionally or recklessly so
5. Which is believed
6. And acted upon by the victim
7. To the victim's damage
What fraud is vs what fraud is not
Fraud is: intentional, to trick or deceive someone out of his/her assets, theft, a crime

Fraud is not: taken by physical force, a mistake or error, victimless, insignificant because no one is hurt, acceptable or justifiable
Two classifications of fraud
1) Committed against an organization
2) Committed on behalf of an organization
Occupational fraud
The use of one's occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets
With occupational fraud the activity is:
- Clandestine
- Violates the employee's obligations to the organization
- is for direct or indirect financial benefit
- costs the organization assets, revenues, or reserves
Classifications of occupational fraud
- Asset misappropriations
- Corruption
- Fraudulent statements
Fraud classifications according to victims (4 types)
- Company or organization as victim (employee embezzlement, vendor fraud, customer fraud)
- Share holders or debt-holders as victims (management fraud)
- Unwary individuals as victims (investment and other consumer frauds)
- Anyone as a victim (miscellaneous frauds)
Employee embezzlement
- Occupational fraud (most common)
- Employees steal company assets
- Is direct (employee directly steals company cash, inventory, tools, supplies, or other assets)
or indirect (employee takes bribes or kickbacks from vendors, customers, or other for lower sales prices, higher purchase prices, nondelivery of goods, or the delivery of inferior goods
Vendor Fraud
Two main varieties: through vendors alone, through collusion between buyers and vendors
Usually results in: overcharge for purchased goods, shipment of inferior goods, non shipment of purchased goods
Customer fraud
When customers do not pay for goods, get something for nothing, deceive organizations into giving them something they should not have
Management fraud
Also known as financial statement fraud
- Top management deceptively misstates financial statements
- Examples: Enron, WorldCom, Sunbeam
Investment and other consumer fraud
Worthless investments sold to investors
- Ponzi schemes
- Telemarketing fraud
- Nigerian letter or money scams
- Identity theft
- Advance fee scams
- Redemption/strawman/bond fraud
- Letter of credit fraud
- Internet fraud
Skills for fraud-fighting professionals
- Analytical skills (examine data for symptoms of fraud)
- Communication skills (effectively interview witnesses and suspects, communicate findings to witnesses, courts and others)
- Technological skills (search for fraud by effectively using information systems)
- Some understanding of accounting and business
- A knowledge of civil and criminal laws, criminology, privacy issues, employee rights, fraud statutes, and other legal fraud-related issues
- The ability to speak and write in a foreign language
- A knowledge of human behavior
How to become a Certified Fraud Examiner (CFE)
- Be an associate member of the ACFE in good standing
- Meet minimum academic and professional requirements: Bachelor's degree, two years of professional experience directly and indirectly related to fraud examination
- Be of high moral character
- Agree to abide by the Bylaws and Code of Professional Ethics of the ACFE
Criminal Law
Branch of law that deals with offenses as a public nature (right a wrong)
Civil Law
The body of law that provides remedies for violations of civil rights, rights of individuals (obtain a remedy)
Using the float time between banks to give the impression that you have money in your accounts
Fraud triangle
- Perceived pressure
- Rationalization
- Perceived opportunity
Perceived pressure
1) Financial Pressure: greed, living beyond one's means, inability to pay bills or personal debt, poor credit, personal financial losses, unexpected financial needs
2) Vice Pressure: gambling, drugs, alcohol, and expensive extramarital relationships
3) Work-related pressures: getting little recognition, job dissatisfaction, fear or losing job, feeling underpaid
4) Other pressures: spouse insists on improved lifestyle
Perceived opportunity
1. Lack of internal controls that prevent and/or detect fraudulent behavior
2. Inability to judge quality of performance
3. Failure to discipline fraud perpetrators
4. Lack of access to information or asymmetrical information
5. Ignorance, apathy, or incapacity
6. Lack of an audit trail
Committee of Sponsoring Organization (COSO)
Established the common internal control framework that most businesses subscribe
Being an example
Internal control environment elements
1) Management's role and example
2) Management communication
3) Appropriate hiring
4) Clear organization structure
5) Effective internal audit department
Composition of fraud/Fraud Element Triangle
1) Theft act (catch the personal in the act)
2) Concealment (fictitious journal entries, etc.)
3) Conversion (convert stolen money into expensive improvements/objects, etc.)
Transactions must be:
- Valid
- Properly authorized
- Complete
- Properly classified
- Reported in the proper period
- Properly valued
- Summarized correctly
Control activities
1) Segregation of duties (diving a task into 2 parts) or dual custody (requires 2 individuals to work together on the same task)
2) System of authorizations (passwords, etc.)
3) Physical safeguards --> vaults, safes, fences, locks and keys
** 1-3 SAP, prevent fraud
4) Indecent checks
5) Documents and records --> creates record of transactions and audit trail
** 4-5 ID, detect fraud
Factors that allow fraud to take place
1) Inability to judge the quality of performance
2) Failure to discipline fraud perpetrators
3) Lack of access to information or asymmetrical information
4) Ignorance, apathy, or incapacity
5) Lack of an audit trail
The probability that a person can carry out his or her own will despite resistance
Types of Power (5)
1) Reward Power: the ability of a fraud perpetrator to convince a potential victim that he or she will receive a certain benefit through participation in the fraud scheme
2) Coercive Power: Make an individual perceive punishment if they don't participate
3) Expert Power: Convince other person that you have knowledge/expertise
4) Legitimate Power: Convince individual that you have power over them
5) Referent Power: Perpetrator relates to the potential co-conspiritor
4 activities to mitigate fraud
1) Fraud prevention
2) Early fraud detection
3) Fraud investigation
4) Follow-up legal action and/or resolution

(many organizations focus on the last two, which are most costly and least effective)
Fraud prevention
1) Take steps to create and maintain a culture of honesty and high ethics
2) Assessing the risks for fraud and developing concrete responses to mitigate the risks and eliminate the opportunities for fraud
Critical and common elements of a culture of honesty and high ethics
1) Making sure that top management models appropriate behavior
2) Hiring the right kind of employees
3) Communicating the right expectations and requiring periodic information
4) Creating a positive work environment
5) Developing and maintaining an effective policy for handling fraud when to does occur
Ethics Development Model
Top: Ethical leadership (helping others to be ethical)
Next down: Ethical courage (willingness to pay the price for ethics)
Next down: Application of ethics to business situations (fraudulent practices, misleading advertising, unfairness)
Bottom: Personal ethical understanding (right/wrong, fairness, honesty, personal integrity, respect for others)
Steps to eliminate fraud activities
1) Accurately identifying sources and measuring risks
2) Implementing appropriate preventative and detective controls
3) Creating widespread monitoring by employees
4) Having internal and external auditors who provide independent checks on performance (20% of all frauds are detected by auditors)
5) Discouraging collusion between employees and customers or vendors
6) Creating an expectation of punishment
Primary ways to detect fraud
1) by chance
2) by providing ways for people to report suspicions of fraud
3) by proactively examining transaction records and documents to determine if there are anomalies that could represent fraud
Whistle-blowing hotlines
Reporting hotline where employees, co-workers, and others can call in using a telephone or submit an anonymous tip of a suspicious fraud
The circumstances taken as a whole, that would lead a reasonable, prudent professional to believe a fraud has occurred, is occurring, or will occur
Evidence Square
1. Testimonial evidence (interviewing, interrogation, honesty tests)
2. Documentary evidence (document examination, data mining, public records searches, audits, computer searches, net worth calculations, financial statement analysis)
3. Physical evidence (fingerprints, tire marks, weapons, stolen property, tangible evidence)
4. Personal observation (surveillance, invigilation, covert operations)
What act dictate that public companies must have a code of conduct
Sarbanes-Oxley Act of 2002
Assessing risk and implementing preventative controls model
Assess risk --> Segregation of duties --> Controls
Physical controls (SAP)
Independent checks
Documentation (ID)
Reasons why whistle-blowing systems fail (4)
1) Lack of anonymity
2) Cultures (people fear being reprimanded by management)
3) Policies (If policies in relation to acceptable behavior and ethics are not abundantly clear within an organization, employees will be uncertain about what constitutes misconduct and whether or not to report suspicious activity)
4) Lack of awareness
Elements necessary for whistle-blowing systems to be effective (4)
1) Anonymity
2) Independence (employees feel more comfortable about reporting misconduct to an independent party that is not in any way related to the organization or the part or parties involved in the misconduct)
3) Accessibility
4) Follow - up
Current model for dealing with fraud
1) Fraud incident
2) Fraud investigation
3) Action
4) Resolution
Better model for dealing with fraud
1) Tone at the top
2) Education and training
3) Integrity risks and controls
4) Reporting and monitoring
5) Proactive fraud detection
6) Investigation & follow-up