FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT

1. FRAUD EXAMINATIONALBRECHT, 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. Fraud Perpetrators Other Property Offenders College Students Describe the Profile of Fraud Perpetrators.

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

7. Define the Following: • Perceived Pressure • 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. Perceived Pressure Rationalization Perceived Opportunity What Three Elements Are Common to Every Fraud?

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

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. Factoids 30% Dishonest 30% Situationally Honest 40% Honest All the Time Internal Audit Detects 20% of Detected Frauds Comment on the Control Environment. • 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. 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.