1. Chapter 3: Fighting Fraud: An Overview
Fraud Examination, 4E
Chapter 3: Fighting Fraud: An Overview
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. Learning Objectives
Become familiar with the different ways that organizations can fight fraud.
Understand the importance of fraud prevention.
Understand how to create a culture of honesty and high ethics.
Understand why hiring the right kind of employees can greatly reduce the risk of fraud.
Understand how to assess and mitigate the risk of fraud.
Know different ways to investigate fraud
Be familiar with legal actions to take once fraud is discovered
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3. Learning Objectives
Understand the importance of early fraud detection.
Understand different approaches to fraud investigation.
Be familiar with the different options for legal action that can be taken once fraud has occurred.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. How Organizations Fight Fraud
Organizations fight fraud by implementing:
Fraud prevention
Early fraud detection
Fraud investigation
Follow-up legal action and/or resolution
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5. Fraud Prevention
Fraud prevention is the most cost-effective way to reduce fraud
Involves two fundamental activities:
Sustain a culture of honesty and high ethics
Assess the risks for fraud, develop concrete responses to mitigate the risks, and eliminate the opportunities for fraud
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. Fraud Prevention Sustain a Culture of Honesty & High Ethics
Five critical elements:
Have top management model appropriate behavior
Hire the right kind of employees
Communicate expectations and require periodic written acceptance to the expectations
Create a positive work environment
Enforce policies for handling fraud
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7. Fraud Prevention Tone at the Top (Proper Modeling)
Research on Why People Lie
Have fear of punishment or adverse consequences
Have a habit of lying
Seen others lie or have had negative modeling
Feel if they tell the truth they won’t get what they want
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8. Fraud Prevention Hiring the Right Kind of Employees
Proactive hiring procedures include:
Background investigations
References
Tests for honesty
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9. Ethical Maturity Model
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10. Fraud Prevention Communicating Expectations
Identify and codify appropriate values and ethics
Training employees in fraud awareness
Communicating consistent expectations about punishment of violators
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Fraud Prevention Creating a Positive Work Environment
Fraud occurs less frequently when employees have
Positive feelings about an organization
A sense of ownership in the organization
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Fraud Prevention Proper Handling of Fraud and Fraud Perpetrators
Ensure that
Facts are investigated thoroughly
Firm and consistent actions are taken against perpetrators
Risks and controls are assessed and improved
Communication and training are ongoing
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13. Fraud Prevention Eliminate Fraud Opportunities Organizations should:
Identify and measure fraud risks
Implement preventative and detective controls
Create widespread monitoring by employees
Have internal and external auditors
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14. Early Fraud Detection Three Primary Ways to Detect Fraud By chance
By providing “whistle-blowing” systems
By data mining
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Early Fraud Detection Whistle-blowing Systems Examples:
A reporting hotline or online system that allows others to call in or submit an anonymous tip of a fraud suspicion
Examples:
Internal systems/hotlines
The Association of Certified Fraud Examiners
Allegience
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Early Fraud Detection Mining Company Databases
Mining databases for suspicious trends, numbers, and other anomalies.
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17. Fraud Investigation
Fraud investigation should occur only if a predication of fraud exists.
Predication refers to the circumstances, taken as a whole, that would lead a reasonable, prudent professional to believe a fraud has occurred, is occurring, or will incur.
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18. Fraud Investigation Considerations before investigating fraud:
Need management’s approval
Pursued only when predication exists
Investigators rely heavily on interviews
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19. The Evidence Square
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20. Fraud Investigation Testimonial Evidence Techniques:
Evidence gathered from individuals
Techniques:
Interviewing
Interrogation
Honesty tests
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Fraud Investigation Documentary Evidence
Gathered from paper, computers, and other written or printed sources
Techniques:
Document examination
Data mining
Public records searches
Audits
Computer searches
Net worth calculations
Financial statement analysis
Corporate databases
servers
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Fraud Investigation Physical Evidence Techniques: Fingerprints
Tire marks
Weapons
Stolen property
Identification numbers
Marks on stolen objects
Other tangible evidence
Techniques:
Forensic analysis by experts
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23. Fraud Investigation Personal Observation Techniques:
Evidence that is sensed (seen, heard, felt, etc.) by the investigators
Techniques:
Invigilation
Surveillance
Covert operations
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24. Fraud Investigation The Fraud Element Triangle: Theft Act
Catch perpetrators in the embezzlement act or to gather information about the actual theft acts
The Fraud Element Triangle: Concealment
Focus on records, documents, computer programs and servers, and other places where perpetrators conceal or hide their dishonest acts
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25. Fraud Investigation The Fraud Element Triangle: Conversion
Search for ways the perpetrators spent or used their stolen assets.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Conducting a Fraud Investigation
Undertaken only to “establish the truth”
Experienced and objective investigators
Confidentiality
Need to know
Evidence independently corroborated
No questionable investigative techniques
Fair and objective communication
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27. Follow-Up Legal Action
Organizations face the options to…
take no legal action
pursue civil remedies, and/or
pursue criminal action against the perpetrators
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28. Follow-Up Legal Action
No Legal Action
What are consequences of taking no legal action?
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29. Follow-Up Legal Action
Civil Action
To recover money or other assets taken
Quite rare with employee fraud – most of the money is spent
More common when other organizations are involved
May sue the auditors or others with “deep pockets”
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30. Follow-Up Legal Action
Criminal Action
Only be brought by law enforcement agencies
Usually involve fines, prison terms, or both
More difficult to get a criminal conviction than a judgment in a civil case
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.