OVERVIEW OF FRAUD

PRESENTED BY R. Gitaga

FRAUD
Objectives. The general overview of Fraud. At the end of this presentation the auditor should be able to: Understand what Fraud is , why people commit Fraud. Understand how fraud can be detected. Who is responsible for reporting Fraud.
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Definition of Fraud
Definition No finite rule to define fraud as it includes surprise, tricks, cunning and unfair ways by which one is cheated. Generic term which embraces all means that human ingenuity can devise to get an advantage by false representation.
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Definition contd
an intentional deception or a willful misrepresentation of a material fact. Examples; Impersonation with intent to take advantage. Passing valueless cheques Obtaining credit by false pretences

 Falsifying financial statements Destroying or altering signatures Making false promises and statements Including false taxation returns Retaining property not ones own. Note: Fraud is a criminal act. It must be proven in a court of law beyond any reasonable doubt
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contd

Types of Fraud
Types fraud depends on country and organization. Most common one are: Financial statement Fraud Organizational Fraud Occupational Fraud Health care Fraud Public sector Fraud Consumer Fraud Insurance Fraud Tax Fraud Computer and Internet Fraud Cheque and credit card Fraud Intellectual property Fraud

Why do people commit Fraud?

Donald R. Cressey came up with an hypothesis Fraud triangle". He explained that people commit Fraud because; Pressure Perceived non-sharearable financial needs e.g. dowry, school fees, entertainment etc.

Reasons contd
Opportunity open door in terms of position, skill and information. Rationalization Justifying a fraud that has already occurred e.g. Am underpaid and deserve what I have taken others ( our bosses) are doing it.

Reasons contd
The government is big Am just borrowing and intend to repay it.

Opportunity

Pressure

Rationalization

Fraud triangle by Donald Cressey

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Indicators of Fraud ( Red flags)

a) Personal characteristics b) Organizational environment Personal characteristics Individuals living beyond their means High personal debts A close association with customers Feeling underpaid
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Indicators of Fraud contd

Strong desire to beat the system Excessive gambling habits Presence of criminal records Not taking vacations Alcohol/ drug problem Not allowing someone else to reach area of responsibility Undisclosed conflict of interest
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Indicators of Fraud contd

Organization environment Placing too much trust in key employees Lack of proper procedures for authorization of transactions Inadequate disclosures of personal incomes and investments Poor segregation of duties Rewards pegged on performance
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Indicators of Fraud contd

Lack of frequent review by auditors Unusual transaction especially at odd times. Possible evidence of altered or falsified documents. Large payments in cash to, or via overseas shell companies

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Impact to the state

Poor economic performance leading to: a)unemployment and increase in poverty levels b)currency fluctuation and increased inflation and interest rates c) increased tax burden d)increased prizes of goods and services e)inability to forecast economics, social and political outcomes

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Impact to the Organization

Assets losses. Erosion of organizational morals and ethics. Loss of confidence. Hinders organizational growth and development. High staff turn-over. Reduced disposable incomes.
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Impact to the Individual (Fraudster)

Criminal prosecution Loss of job Other parties lose confidence/ trust. Loss of economic opportunity Family/Social instability

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Detection and Prevention of Fraud

Prevention of fraud By mitigating the effect of pressure, opportunity and lack of integrity. Monitor for suspicious activity. Redefine job descriptions to maintain integrity Implement a hotline for reporting fraud cases. Put in place a clear mission statement. Segregation of duties Staff rotation Safekeeping of documents Promote a positive work environment
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contd
Detection of fraud Fraud consist of three elements: Fraudulent act Conversion of asset Cover- up of stolen asset

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contd
Many frauds are detected by noticing signs and signals of fraud (red flags) then follow the trail of missing, mutilated or false documents that are part of the accounting records cover- up.

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Reporting of Fraud cases.

Customers Shareholders Employees current and former Directors Auditors Both internal and external Suppliers Government agencies
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contd
Why do fraud cases go unreported? No corrective action is taken No confidentiality of reports Retaliation by superiors Retaliation by co-workers Unsure whom to contact.

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In conclusion
PREVENTING FRAUD IS GOOD BUSINESS. INSPIRING EMPLOYEES TO FOLLOW ETHICAL STANDARDS STARTS WITH THE TONE AT THE TOP IN THE EXECUTIVE SUITE. LEARN THE STEPS TO PREVENT FRAUD IN YOUR WORKPLACE.

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