13-3 The Fraud Problem Organizations in the United States lose hundreds of billions of dollars per year to fraud. Many believe that most frauds against organizations are never reported to law enforcement authorities to avoid negative publicity and legal liability. Many companies actually consider employee or vendor theft as a cost of doing business. Law enforcement is likely to choose not to pursue an embezzlement case involving a only few hundred or even thousand dollars. Frauds can sometimes be hard to prove without a confession.
13-4 Who Commits Fraud The fraud triangle helps to explain who commits fraud. Pressure Usually related to financial pressure such as large medical bills, gambling problems, drug habits, and extravagant living. Opportunity Required to commit fraud. Rationalization Likely depends on the type of criminal and the criminal’s personality type or possible personality disorder.
13-7 Cash Processing Frauds (These frauds overlap revenue cycle frauds) Cash stolen in transmission Lapping of accounts receivables Short bank deposits Noncustodial theft of money Check tampering Check washing Check laundering.
13-8 Check Washing
13-9 Accounts Receivables Frauds Fraudulent credit approvals Dishonest employees could intentionally engage in fraudulent credit approval by granting credit accounts to fictitious customers. Improper credits Accounts receivable clerks could make improper credits to friends’ accounts. Improper write-offs Employees also could make improper write-offs to friends’ accounts instead of sending the accounts to collection.
13-10 Expenditure Cycle Frauds Improper Purchases and Payments Unauthorized Purchases Fraudulent Purchases to Related Parties Misappropriation of Petty Cash Abuse of Company Credit Cards or Expense Accounts Unauthorized Payments Theft of Company Checks Fraudulent Returns Theft of Inventory and Other Assets Payroll Fraud Improper hiring Improper changes to employee personnel files for pay raises Improper work-related reporting
13-11 Production Cycle and Other Frauds Production cycle fraud involves theft of raw materials and finished goods. Waste, Scrap, and Spoiled Goods Other Types of Employee Fraud Financial Statement Fraud Insider Trading Employee Fraud in General Many other employee fraud schemes are not discussed here.
13-12 Vendor Frauds Short shipments A company is susceptible to paying for goods not received if it does not count its incoming shipments and match the counts against purchase orders and vendors’ invoices. Balance due billing Some vendors send their customers statements that show only the balance due. Companies whose vendors bill this way are at high risk for being overbilled. Substandard goods Vendors can ship substandard goods if the receiving company does not have a method of receiving and inspecting goods. Fraudulent cost-plus billing
13-13 Employee Fraud Methods In Electronic AISs Input manipulation (the most common mode of attack) Abuse of Access Privileges Unauthorized Access. Direct File Alteration (bypass normal access software) Program Alteration (requires access and technical skill) Data Theft (hard to detect and prove) Sabotage (typically by disgruntled employees)