13-1

McGraw-Hill/Irwin
13-2
13
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

13-3
 Organizations in the United States lose hundreds of billions of dollars per year to fraud.
 Many believe that most frauds against organizations are never reported to law enforcement authorities to avoid negative publicity and legal liability.
 Many companies actually consider employee or vendor theft as a cost of doing business.
 Law enforcement is likely to choose not to pursue an embezzlement case involving a only few hundred or even thousand dollars.
 Frauds can sometimes be hard to prove without a confession.

13-4
 The fraud triangle helps to explain who commits fraud.
 Pressure Usually related to financial pressure such as large medical bills, gambling problems, drug habits, and extravagant living.
 Opportunity Required to commit fraud.
 Rationalization Likely depends on the type of criminal and the criminal’s personality type or possible personality disorder.

13-5


 Basic Sales Skimming

“Your meal free if you don’t get a receipt.”
 Advanced Sales Skimming
 Forged receipt for service

Anecdote about “business on the side”
 Checks Swapped for Cash

Automated check approval; don’t take checks?
 Cash Box Robbery
 If sales, cash not reconciled
 Shortchange Sales (by the clerk)
 Mail Room Theft
13-6

(These frauds overlap revenue cycle frauds)
 Cash stolen in transmission
 Lapping of accounts receivables
 Short bank deposits
 Noncustodial theft of money
 Check tampering
 Check washing
 Check laundering.
13-7

13-8

13-9
 Fraudulent credit approvals Dishonest employees could intentionally engage in fraudulent credit approval by granting credit accounts to fictitious customers.
 Improper credits Accounts receivable clerks could make improper credits to friends’ accounts.
 Improper write-offs Employees also could make improper writeoffs to friends’ accounts instead of sending the accounts to collection.

13-10
 Improper Purchases and Payments
 Unauthorized Purchases
 Fraudulent Purchases to Related Parties
 Misappropriation of Petty Cash
 Abuse of Company Credit Cards or Expense Accounts
 Unauthorized Payments
 Theft of Company Checks
 Fraudulent Returns
 Theft of Inventory and Other Assets
 Payroll Fraud
 Improper hiring
 Improper changes to employee personnel files for pay raises
 Improper work-related reporting

13-11
 Production cycle fraud involves theft of raw materials and finished goods.
 Waste, Scrap, and Spoiled Goods
 Other Types of Employee Fraud
 Financial Statement Fraud
 Insider Trading
 Many other employee fraud schemes are not discussed here.

13-12
 Short shipments A company is susceptible to paying for goods not received if it does not count its incoming shipments and match the counts against purchase orders and vendors’ invoices.
 Balance due billing Some vendors send their customers statements that show only the balance due. Companies whose vendors bill this way are at high risk for being overbilled.
 Substandard goods Vendors can ship substandard goods if the receiving company does not have a method of receiving and inspecting goods.
 Fraudulent cost-plus billing

13-13
 Input manipulation (the most common mode of attack)
 Abuse of Access Privileges
 Unauthorized Access.
 Direct File Alteration (bypass normal access software)
 Program Alteration (requires access and technical skill)
 Data Theft (hard to detect and prove)
 Sabotage (typically by disgruntled employees)

13-14