Fraud Examination, 4E

Chapter 3: Fighting Fraud: An

Overview

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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
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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
Albrecht, Albrecht, Albrecht, Zimbelman
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.
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.

Albrecht, Albrecht, Albrecht, Zimbelman

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.
How Organizations
Fight Fraud
Organizations fight fraud by
implementing:
1. Fraud prevention
2. Early fraud detection
3. Fraud investigation
4. Follow-up legal action
and/or resolution

Albrecht, Albrecht, Albrecht, Zimbelman

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.
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

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Fraud Prevention

Sustain a Culture of Honesty & High Ethics

Five critical elements:
1. Have top management model 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. Enforce policies for handling fraud

Albrecht, Albrecht, Albrecht, Zimbelman

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.
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 wont get what they want

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Fraud Prevention

Hiring the Right Kind of

Employees
Proactive hiring
procedures include:
Background investigations
References
Tests for honesty

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Ethical Maturity Model

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Fraud Prevention

Communicating Expectations
1. Identify and codify appropriate values and ethics
2. Training employees in fraud awareness
3. Communicating consistent expectations about
punishment of violators

Albrecht, Albrecht, Albrecht, Zimbelman

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.
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

Albrecht, Albrecht, Albrecht, Zimbelman

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.
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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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.
Fraud Prevention

Eliminate Fraud Opportunities

Organizations should:
1. Identify and measure fraud risks

2. Implement preventative and detective controls

3. Create widespread monitoring by employees

4. Have internal and external auditors

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Early Fraud Detection

Three Primary Ways to

Detect Fraud
1. By chance

2. By providing whistle-
blowing systems

3. By data mining

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Early Fraud Detection

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
Allegience

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Early Fraud Detection

Mining Company
Databases
Mining databases for
suspicious trends, numbers,
and other anomalies.

Albrecht, Albrecht, Albrecht, Zimbelman

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.
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.

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Fraud Investigation

Considerations before
investigating fraud:
Need managements
approval

Pursued only when

predication exists

Investigators rely heavily on

interviews

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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
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The Evidence Square

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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
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Fraud Investigation

Testimonial Evidence
Evidence gathered from individuals

Techniques:
Interviewing

Interrogation

Honesty tests

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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.
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
E-mail servers
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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
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Fraud Investigation

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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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.
Fraud Investigation

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

Techniques:
Invigilation

Surveillance

Covert operations

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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.
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

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Fraud Investigation

The Fraud Element

Triangle: Conversion
Search for ways the
perpetrators spent or used
their stolen assets.

Albrecht, Albrecht, Albrecht, Zimbelman

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
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Conducting a Fraud
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
Albrecht, Albrecht, Albrecht, Zimbelman
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.
Follow-Up Legal Action

Organizations face the

options to
take no legal action
pursue civil remedies,
and/or
pursue criminal action
against the perpetrators

Albrecht, Albrecht, Albrecht, Zimbelman

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.
Follow-Up Legal Action

No Legal Action
What are consequences of taking no legal action?

Albrecht, Albrecht, Albrecht, Zimbelman

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.
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
Albrecht, Albrecht, Albrecht, Zimbelman
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.
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

Albrecht, Albrecht, Albrecht, Zimbelman

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.