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Albrecht 5e Student Ch 01

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Fifth Edition
Chapter 1
The Nature of Fraud
© 2019 Cengage. All rights reserved.
The Definition of Fraud (1 of 2)
•
Seven Specific Parts of Fraud
1. a representation
2. about a material point
3. which is false
4. and intentionally or recklessly so
5. which is believed
6. and acted upon by the victim
7. to the victim’s damage
The Definition of Fraud (2 of 2)
•
•
•
•
•
•
•
•
•
•
•
Fraud is…
intentional
to trick or deceive someone out of his/her assets
theft
a crime
Fraud is not…
taken by physical force
a mistake or error
victimless
insignificant because no one is hurt
acceptable or justifiable
© 2019 Cengage. All rights reserved.
The Various Classifications of Fraud (1 of 2)
• There are many ways to classify the various types of fraud, the most
common way is to simply divide frauds into those that are committed
against organizations and those that are committed on behalf of
organizations
• Employee fraud
• Occupational fraud
• A third classification divides frauds according to victims
© 2019 Cengage. All rights reserved.
The Various Classifications of Fraud (2 of 2)
TYPE OF FRAUD
Employee
embezzlement
PERPETRATO
R
VICTIM
EXPLANATION
Employees of
an organization
The employer
Vendor fraud
Vendors of an
organization
The organization to which
the vendors sell goods or
services
Employees use their positions to take
or divert assets belonging to their
employer. This is the most common
type of fraud.
Customer fraud
Customers of
an organization
The organization which
sells to the customers
Vendors either overbill or provide lower
quality or fewer goods than agreed.
Management fraud
(Financial statement
fraud)
Management of
a company
Shareholders and/or debtholders and regulators
(taxing authorities, etc.)
Customers don't pay, pay too little, or
get too much from the organization
through deception.
Investment scams
and other consumer
frauds
Fraud
perpetrators—
all kinds
Unwary investors
Management manipulates the financial
statements to make the company look
better than it is. This is the most
expensive type of fraud.
Other (Miscellaneous)
types of fraud
All kinds—
depends on the
situation
All kinds—depends on the
situation
These types of frauds are committed
on the Internet and in person and
obtain the confidence of individuals to
get them to invest money in worthless
schemes.
Other (Miscellaneous)
types of fraud
All kinds—
depends on the
situation
All kinds—depends on the
situation
Any time anyone takes advantage of
the confidence of another person to
deceive him or her.
Criminal and Civil Fraud Laws
• When people commit fraud, they can be prosecuted criminally and/or civilly.
• Criminal law is that branch of law that deals with offenses of a public nature
• Civil law deals with the rights of individuals
Fraud-fighting Careers
TYPES OF EMPLOYERS
TYPE OF CAREER
Government and law enforcement
FBI, postal inspectors, Criminal Investigation Division of the IRS,
U.S. marshals, inspector generals of various governmental
agencies, state investigators, and local law enforcement officials.
CPA firms
Conduct investigations, support firms in litigation, do bankruptcyrelated accounting work, and provide internal audit and internal
control consulting work.
Corporations
Prevent, detect, and investigate fraud within a company. Includes
internal auditors, corporate security officers, and in-house legal
counsels.
Consulting
Serve as an independent consultant in litigation fraud work, serve as
expert witness, consult in fraud prevention and detection, and
provide other fee-based work.
Law firms
Lawyers provide litigation and defense work for companies and
individuals being sued for fraud and provide special investigation
services when fraud is suspected.
Fifth Edition
Chapter 2
Why People Commit
Fraud
© 2019 Cengage. All rights reserved.
Type of People That Commit Fraud
•
What type of people commit fraud?
– Anyone!
– Not demographically or psychologically differentiated
– Have the profile of other honest people
The Fraud Triangle
Pressure (1 of 4)
• Divided into four main groups:
– Financial pressures
– Vices
– Work-related pressures
– Other pressures
• Financial pressure is the most common type of pressure to commit fraud.
© 2019 Cengage. All rights reserved.
Pressure (2 of 4)
•
Common Financial Pressures:
1. Greed
2. Living beyond one’s means
3. High bills or personal debt
4. Poor credit
5. Personal financial losses
6. Unexpected financial needs
© 2019 Cengage. All rights reserved.
Pressure (3 of 4)
• Vice Pressures
• Examples include:
– Gambling
– Drugs
– Alcohol
– Expensive extramarital relationships
© 2019 Cengage. All rights reserved.
Pressure (4 of 4)
• Work-Related Pressures
• “Get even with the employer”
• Motivated by these factors:
– Getting little recognition
– Feeling job dissatisfaction
– Fear of losing one’s job
– Being overlooked for a promotion
– Feeling underpaid
© 2019 Cengage. All rights reserved.
Opportunity
•
Six major factors that increase opportunity:
1. Lack of controls
2. Inability to judge performance quality
3. Failure to discipline fraudsters
4. Lack of access to information
5. Ignorance, apathy and incapacity
6. Lack of audit trail
Recruitment of Fraudsters
Chapter 3
Fighting Fraud: An
Overview
© 2019 Cengage. All rights reserved.
To the Student (1 of 2)
• . 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.
• After fraud has been investigated and the perpetrators are known, various
types of legal action are possible.
© 2019 Cengage. All rights reserved.
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
• Preventing fraud is generally the most cost-effective way to reduce losses
from fraud.
© 2019 Cengage. All rights reserved.
Fraud Prevention (1 of 2)
•
•
Create 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
© 2019 Cengage. All rights reserved.
Fraud Prevention (2 of 2)
•
•
Eliminate Fraud Opportunities
Organizations should:
1. Identify sources and measure fraud risks
2. Implement preventative and detective controls
3. Create widespread monitoring by employees
4. Have internal and external auditors
Early Fraud Detection
•
Three Primary Ways to Detect Fraud
1. By chance
2. By providing “whistle-blowing” systems
3. By data mining
• In the past, most frauds were detected by accident.
© 2019 Cengage. All rights reserved.
Fraud Investigation (1 of 2)
• The first approach to fraud investigation is the evidence square.
• How is the evidence square useful in thinking about fraud investigation?
Fraud Investigation (2 of 2)
A second approach to fraud investigation is to focus on the two different fraud
triangles.
Follow-Up Legal Action (1 of 2)
• Civil Action
The purpose of civil action is to recover money or other assets from the
fraud perpetrators and others associated with the fraud.
• Criminal Action
Criminal action can only be brought by law enforcement or statutory
agencies.
© 2019 Cengage. All rights reserved.
Follow-Up Legal Action (2 of 2)
• It is much more difficult to get a criminal conviction than a judgment in a civil
case
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