Fraud Examination, 4E
Chapter 3: Fighting Fraud: An
Overview
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
 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.
2.
3.
4.
Fraud prevention
Early fraud detection
Fraud investigation
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 won’t 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
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
 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 “whistleblowing” 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 management’s
approval
 Pursued only when
predication exists
 Investigators rely heavily on
interviews
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.
The Evidence Square
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
Testimonial Evidence
 Evidence gathered from individuals
Techniques:
 Interviewing
 Interrogation
 Honesty tests
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
 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
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
Physical Evidence







Fingerprints
Tire marks
Weapons
Stolen property
Identification numbers
Marks on stolen objects
Other tangible evidence
Techniques:
 Forensic analysis by experts
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
Personal Observation
 Evidence that is sensed (seen, heard, felt, etc.) by the
investigators
Techniques:
 Invigilation
 Surveillance
 Covert operations
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: 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
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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.