1 FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT WHO COMMITS FRAUD AND WHYCHAPTER 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 ObjectivesIdentify 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 meNo specific psychological profile70% male, while females make up 30%, females are 2% of property offendersOlderMore religiousLess substance abuse
5 Describe the Profile of Fraud Perpetrators. College StudentsOther Property Offenders
6 Draw & Explain the Fraud Triangle. Perceived PressureRationalizationPerceived Opportunity
7 Define the Following: Perceived Pressure Perceived Opportunity A situation where someone believes that they have a need to commit a fraudPerceived OpportunityA situation where someone believes they have a favorable or promising combination of circumstances to commit an undetectable fraudRationalizationTo devise a self-satisfying but incorrect reasons for one’s behavior
8 What Three Elements Are Common to Every Fraud? Perceived PressureRationalizationPerceived 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 PressureRationalizationPerceived OpportunityNO!
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? VicesFinancialWork-RelatedOther Pressures
14 The First Element - Pressure 95% of frauds are either financial or vice relatedList some common pressuresGreedLiving beyond your meansHigh bills or personal debtPoor creditPersonal financial lossesUnexpected 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 fraudTo conceal fraudTo avoid punishment
17 List Major Factors that Increase Opportunities to Commit Fraud. Lack of or circumvention of internal controls that prevent or detect fraudInability to judge quality of performanceFailure to discipline fraud perpetratorsLack of access to informationIgnorance, apathy, and incapacityLack of an audit trail
18 Match Terms to Definitions. Control EnvironmentSpecific error-checking routines performed by company personnelA set of characteristics that defines good management control features other than accounting policies and proceduresAccounting SystemControl Procedures or ActivitiesPolicies and procedures for recording economic transactions in an orderly manner
19 Comment on the Control Environment. Factoids30% Dishonest30% Situationally Honest40% Honest All the TimeInternal Audit Detects 20% of Detected FraudsModelingManagement CommunicationAppropriate HiringClear Organizational StructureEffective Internal Audit & Security & Loss Prevention Programs
20 What Does Sarbanes-Oxley Require? Honest, ethical conduct including handling of actual and apparent conflicts of interestAvoidance of conflicts of interestFull, fair, accurate, timely and understandable disclosureCompliance with applicable governmental laws, rules and regulationsPrompt internal reporting of code violations to an appropriate person or persons identified in the codeAccountability for adherence to the code
21 What Are 3 Components of Every Fraud? The Theft – Assets Are TakenConcealment – Hide It from OthersConversion – 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 ValidityRequires Proper AuthorizationInsures Complete TransactionsClassifies ProperlyReports in Correct Time PeriodValues ProperlySummarizes 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 CustodySystem of AuthorizationsIndependent Checks and BalancesPhysical SafeguardsDocumentation & Records
26 Describe the Internal Control Structure. Control EnvironmentManagement philosophy & operating style, modelingEffective hiringClear organizational structureEffective internal auditAccounting SystemValid transactionsProperly authorizedCompletenessProper classificationProper timingProper valuationCorrect summarizationControl Activities and ProceduresSegregation of dutiesProper procedures for authorizationAdequate documents & recordsPhysical control over assets & recordsIndependent checks on performance
27 The Third Element - Rationalization Review the conceptProvide 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.