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FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT. WHO COMMITS FRAUD AND WHY. CHAPTER 2. Learning Objectives. Recognize who commits fraud. Understand why people commit fraud. Become familiar with the fraud triangle. Understand how pressure contributes to fraud.

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FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT

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Fraud examination albrecht albrecht albrecht

FRAUD EXAMINATIONALBRECHT, ALBRECHT, & ALBRECHT

WHO COMMITS FRAUD AND WHY

CHAPTER 2


Learning objectives

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.


Learning objectives1

Learning Objectives

  • Identify controls that prevent or detect fraudulent behavior.

  • Identify noncontrol factors that provide opportunities for fraud.

  • Understand why people rationalize.


What does the fraudster look like

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


Describe the profile of fraud perpetrators

Fraud Perpetrators

Other Property Offenders

College Students

Describe the Profile of Fraud Perpetrators.


Draw explain the fraud triangle

Perceived Pressure

Rationalization

Perceived Opportunity

Draw & Explain the Fraud Triangle.


Define the following

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


What three elements are common to every fraud

Perceived Pressure

Rationalization

Perceived Opportunity

What Three Elements Are Common to Every Fraud?


Why is it important to understand the fraud triangle

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.


What does this imply for the fraud examiner

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.


Do the three elements need to be in equal proportion to commit fraud

NO!

Perceived Pressure

Rationalization

Perceived Opportunity

Do the Three Elements Need to be in Equal Proportion to Commit Fraud?


How does personal integrity affect likelihood to commit fraud

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


What are the four types of pressure

What Are the Four Types of Pressure?

Vices

Financial

Work-Related

Other Pressures


The first element pressure

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


Comment on the lengths people will go to support their vices

Comment on the Lengths People Will Go to Support Their Vices.


The second element perceived opportunity

The Second Element – Perceived Opportunity

  • What are the three component of perceived opportunity?

    • To commit fraud

    • To conceal fraud

    • To avoid punishment


List major factors that increase opportunities to commit fraud

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


Match terms to definitions

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


Comment on the control environment

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


What does sarbanes oxley require

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


What are 3 components of every fraud

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


What does a good accounting system do

What Does a Good Accounting System Do?

It provides a good audit trail…

which allows frauds to be detected.


What does a good accounting do for transactions

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


Discuss control activities

Discuss Control Activities.

Individuals commit fraud to conceal personal expenditures with business assets and evade paying taxes.


What are the five primary control procedures discuss

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


Describe the internal control structure

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


The third element rationalization

The Third Element - Rationalization

  • Review the concept

  • Provide examples of how you have heard people rationalize unacceptable behavior


What are some common rationalizations

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.


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