Learning Objectives Recognize the seriousness and effects of fraud Define fraud Classify types of fraud Distinguish between criminal and civil fraud laws Identify fraud-fighting careers 2
The Seriousness of Fraud Sources of Fraud Statistics – Government Agencies – Researchers – Insurance Companies – Fraud Victims – Association of Certified Fraud Examiners (ACFE) 3
The Seriousness of Fraud Fraud reduces a firm’s net income on a dollar-for-dollar basis FRAUD NET INCOME 4
The Definition of Fraud Seven Specific Parts of Fraud A representation… about a material point… which is false… and intentionally or recklessly so… which is believed… and acted upon by the victim… to the victim’s damage. 5
The Definition of Fraud 6 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.
The Various Classifications of Fraud 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 7
The Various Classifications of Fraud 8 Type of FraudVictimPerpetratorExplanation Employee Embezzlement EmployersEmployees Employees directly or indirectly steal from employers Management Stockholders, lenders, & others relying on financial statements Top management Top management‘s misrepresentation of financial information Investment ScamsInvestorsIndividuals Individuals trick investors into putting money into fraudulent investments Vendor Organizations that buy goods & services Organizations / individuals selling goods & services Overcharged for goods & services or non-shipment of goods paid for Customer Organizations selling goods and services Customers Customers deceive sellers into giving them something they should not have
Criminal and Civil Fraud Laws 9 Criminal Law CaseCivil Law Case PurposeTo right a wrongTo obtain a remedy ConsequencesJail and/or finesRestitution & damage payments Burden of Proof“Beyond a reasonable doubt”“Preponderance of evidence” JuryMust have 12 peopleMay be fewer than 12 persons Organization Determination by a grand jury that sufficient evidence exists to indict Filing of a claim by a plaintiff VerdictUnanimous verdict Parties may stipulate to a less than unanimous verdict ClaimsOnly one claim at a time Various claims my be joined in one action
Fraud-fighting Careers 10 Type of CareerTypes of Employers and Career Description Government and law enforcement FBI, postal inspectors, Criminal Investigation Division of the IRS, U.S. marshals, inspector generals of various governmental agencies, state investigators, and local law enforcement officials. CPA firms Conduct investigations, support firms in litigation, do bankruptcy-related accounting work, provide internal audit and internal control consulting work. Corporations Prevent, detect, and investigate fraud within a company. Includes internal auditors, corporate security officers, and in-house legal counsels. Consulting Serve as an independent consultant in litigation fraud work, serve as expert witness, consult in fraud prevention and detection, and provide other fee-based work. Law firms Lawyers provide litigation and defense work for companies and individuals being sued for fraud and provide special investigation services when fraud is suspected.