AFX5120Forensic

accountingandFraud
examination
FraudExamination
Chapter3
Fighting Fraud: An Overview

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TotheStudent
You should now understand the various types of fraud and fraud-
fighting careers as well as those who commit fraud and why they do it.
This chapter is a transition chapter to introduce you to the various
ways in which organizations deal with fraud. The most cost-effective
fraud-fighting activities involve preventing fraud from occurring.

The second most cost-effective fraud-fighting activities involve

implementing proactive approaches to detect fraud early, before it has
a chance to grow.

Once fraud has been detected (or there is predication that fraud might
be occurring), organizations undertake various types of fraud
investigation methods.

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TotheStudent
After fraud has been investigated and the perpetrators are known,
various types of legal action are possible. This chapter provides an
over view of each of these activities. We then provide detailed
coverage of these topics in the later chapters of this book.

Essentially, this chapter provides an overview of the remainder of the

book.

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LearningObjectives
Become familiar with the different ways that organizations 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.

Understand the importance of early fraud detection.

Understand the different approaches to fraud investigation.

Be familiar with the different options for legal action that can be taken
once fraud has occurred.
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HowOrganizationsFight
Fraud
Organizations fight fraud by implementing:
1. Fraud prevention
2. Early fraud detection
3. Fraud investigation
4. Legal action and/or
resolution

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FraudPrevention
Fraud prevention is the most cost-effective way to
reduce fraud

Involves two fundamental activities:

I. Sustain a culture of honesty and high ethics
II. Assess the risks for fraud, develop concrete responses
to mitigate the risks, and eliminate the opportunities for
fraud

Creating a Culture of Honesty & High

Albrecht,Ethics
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FraudPrevention
I. A Culture of Honesty & High Ethics
Five critical elements:
1. Make sure top management models appropriate
behavior
2. Hire the right kind of employees
3. Communicate expectations and require periodic
written acceptance to the expectations
4. Create a positive work environment
5. Develop and maintain policies for handling fraud

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FraudPrevention
1. 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 wont get what they
want

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FraudPrevention
2. Hiring the Right Kind of Employees
Proactive hiring procedures include:
Background investigations
References
Tests for honesty

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EthicalMaturityModel

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FraudPrevention
3. Communicating Expectations

1. Identify and codify appropriate values and ethics

2. Training employees in fraud awareness
3. Communicating consistent expectations about
punishment of violators

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FraudPrevention
4. Creating a Positive
Work Environment
Fraud occurs less
frequently when
employees have
Positive feelings about an
organization
A sense of ownership in the
organization

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FraudPrevention
5. 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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FraudPrevention
II. 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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EarlyFraudDetection
Three Primary Ways to Detect Fraud
1. By chance: Most frauds are detected by accident.
2. By providing whistle-blowing systems
3. By data analysis and mining

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EarlyFraudDetection
Whistle-blowing Systems
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

Mining Company Databases

Mining databases for suspicious trends, numbers, and other
anomalies.
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FraudInvestigation
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.
Considerations before investigating fraud:
Need managements approval
Pursued only when predication exists
Investigators rely heavily on interviews
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FraudInvestigation
The first approach to
fraud investigation is the
evidence square.

How is the evidence

square useful in thinking
about fraud investigation?

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FraudInvestigation
Testimonial Evidence

Evidence gathered from individuals

Techniques:
Interviewing
Interrogation
Honesty tests

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FraudInvestigation
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
E-mail servers

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FraudInvestigation
Physical Evidence
Fingerprints
Tire marks
Weapons
Stolen property
Identification numbers
Marks on stolen objects
Other tangible evidence
Techniques:
Forensic analysis by experts

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FraudInvestigation
Personal Observation

Evidence that is sensed (seen, heard, felt, etc.) by the

investigators
Techniques:
Invigilation
Surveillance
Covert operations

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FraudInvestigation
A second approach to fraud investigation is to focus
on the two different fraud triangles.

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FraudInvestigation
The Fraud Element Triangle:
1. Theft Act
Catch perpetrators in the embezzlement act or to
gather information about the actual theft acts

2. Concealment
Focus on records, documents, computer programs and
servers, and other places where perpetrators conceal
or hide their dishonest acts

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FraudInvestigation
3. Conversion
Search for ways the perpetrators spent or used their
stolen assets.

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ConductingaFraud
Investigation
1. Undertaken only to establish the truth
2. Experienced and objective investigators
3. Confidentiality
4. Need to know
5. Evidence independently corroborated
6. No questionable investigative techniques
7. Fair and objective communication
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FollowUpLegalAction
Organizations face the
options to
take no legal action
(consequences?)
pursue civil remedies,
and/or
pursue criminal action
against the perpetrators

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FollowUpLegalAction
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

Criminal Action
Only be brought by law enforcement agencies, etc
Usually involve fines, prison terms, or both
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FollowUpLegalAction

It is much more difficult to

get a criminal conviction
than it is to get a judgment
in a civil case.

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