1. FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT
WHO COMMITS FRAUD AND WHY
CHAPTER 2

2. Learning Objectives Recognize who commits fraud.
Understand why people commit fraud.
Become familiar with the fraud triangle.
Understand how pressure contributes to fraud.
Know why opportunities must be present in order for fraud to be committed.

3. Learning Objectives
Identify controls that prevent or detect fraudulent behavior.
Identify noncontrol factors that provide opportunities for fraud.
Understand why people rationalize.

4. What Does the Fraudster Look Like?
Like you and me
No specific psychological profile
70% male, while females make up 30%, females are 2% of property offenders
Older
More religious
Less substance abuse

5. Describe the Profile of Fraud Perpetrators.
College Students
Other Property Offenders

6. Draw & Explain the Fraud Triangle.
Perceived Pressure
Rationalization
Perceived Opportunity

7. Define the Following: Perceived Pressure Perceived Opportunity
A situation where someone believes that they have a need to commit a fraud
Perceived Opportunity
A situation where someone believes they have a favorable or promising combination of circumstances to commit an undetectable fraud
Rationalization
To devise a self-satisfying but incorrect reasons for one’s behavior

8. What Three Elements Are Common to Every Fraud?
Perceived Pressure
Rationalization
Perceived Opportunity

9. Why is it Important to Understand the Fraud Triangle?
Just as a fire can be prevented or extinguished by removing one the three elements in the fire triangle, so to can fraud be prevented by removing one of the three elements of fraud from the fraud triangle.

10. What Does This Imply for the Fraud Examiner?
Look for who has the three elements of the fraud triangle necessary to commit fraud, then put controls in place to prevent fraud.

11. Do the Three Elements Need to be in Equal Proportion to Commit Fraud?
Perceived Pressure
Rationalization
Perceived Opportunity
NO!

12. How Does Personal Integrity Affect Likelihood to Commit Fraud?
The higher the personal integrity the less likely to commit fraud.
Will take much more of the three fraud elements to move them to commit fraud.
Fraud studies show that levels of honesty are decreasing

13. What Are the Four Types of Pressure?
Vices
Financial
Work-Related
Other Pressures

14. The First Element - Pressure
95% of frauds are either financial or vice related
List some common pressures
Greed
Living beyond your means
High bills or personal debt
Poor credit
Personal financial losses
Unexpected financial needs

15. Comment on the Lengths People Will Go to Support Their Vices.

16. The Second Element – Perceived Opportunity
What are the three component of perceived opportunity?
To commit fraud
To conceal fraud
To avoid punishment

17. List Major Factors that Increase Opportunities to Commit Fraud.
Lack of or circumvention of internal controls that prevent or detect fraud
Inability to judge quality of performance
Failure to discipline fraud perpetrators
Lack of access to information
Ignorance, apathy, and incapacity
Lack of an audit trail

18. Match Terms to Definitions.
Control Environment
Specific error-checking routines performed by company personnel
A set of characteristics that defines good management control features other than accounting policies and procedures
Accounting System
Control Procedures or Activities
Policies and procedures for recording economic transactions in an orderly manner

19. Comment on the Control Environment.
Factoids
30% Dishonest
30% Situationally Honest
40% Honest All the Time
Internal Audit Detects 20% of Detected Frauds
Modeling
Management Communication
Appropriate Hiring
Clear Organizational Structure
Effective Internal Audit & Security & Loss Prevention Programs

20. What Does Sarbanes-Oxley Require?
Honest, ethical conduct including handling of actual and apparent conflicts of interest
Avoidance of conflicts of interest
Full, fair, accurate, timely and understandable disclosure
Compliance with applicable governmental laws, rules and regulations
Prompt internal reporting of code violations to an appropriate person or persons identified in the code
Accountability for adherence to the code

21. What Are 3 Components of Every Fraud?
The Theft – Assets Are Taken
Concealment – Hide It from Others
Conversion – Spends or Converts to Cash and then Spends

22. What Does a Good Accounting System Do?
It provides a good audit trail…
which allows frauds to be detected.

23. What Does a Good Accounting Do for Transactions?
Provides Validity
Requires Proper Authorization
Insures Complete Transactions
Classifies Properly
Reports in Correct Time Period
Values Properly
Summarizes Correctly

24. Discuss Control Activities.
Individuals commit fraud to conceal personal expenditures with business assets and evade paying taxes.

25. What Are the Five Primary Control Procedures? Discuss.
Segregation of Duties or Dual Custody
System of Authorizations
Independent Checks and Balances
Physical Safeguards
Documentation & Records

26. Describe the Internal Control Structure.
Control Environment
Management philosophy & operating style, modeling
Effective hiring
Clear organizational structure
Effective internal audit
Accounting System
Valid transactions
Properly authorized
Completeness
Proper classification
Proper timing
Proper valuation
Correct summarization
Control Activities and Procedures
Segregation of duties
Proper procedures for authorization
Adequate documents & records
Physical control over assets & records
Independent checks on performance

27. The Third Element - Rationalization
Review the concept
Provide examples of how you have heard people rationalize unacceptable behavior

28. What Are Some Common Rationalizations?
They owe it to me.
I’m only borrowing the money.
Nobody will get hurt.
I deserve more.
It’s for a good cause.
We’ll fix the books as soon as we get past this little financial problem.
It’s for my sick child.