FRAUD EXAMINATION
ALBRECHT, ALBRECHT, & ALBRECHT
Fighting Fraud:
An Overview
CHAPTER 3
Learning Objectives
1. Understand the importance of fraud
prevention
2. Recognize the importance of early
fraud detection
3. Describe the different approaches to
fraud investigation
4. Be familiar with the different options
for legal action that can be taken once
fraud has occurred
What Are the Four Keys to
Fight Fraud?
1. Fraud Prevention
2. Early Detection
3. Investigation
4. Legal Action & Resolution
Circle the 2 Most Effective & Least Costly
List the Negative Affects of
Fraud.
Review the Fraud
Triangle.
Perceived Opportunity
List 2 Activities Fundamental
to Fraud Prevention?
Create and Maintain a
Culture of Honesty &
Integrity
Assess the Risk of Fraud &
Develop Concrete Responses
to Minimize Risk & Eliminate
Opportunity
How Does an Organization
Encourage Dishonesty?
Poor examples by
management
Quotas or meeting
targets
Rewarding
individuals not
groups
Competition among
employees
What Expectations Should
Management Communicate?
1. Appropriate
Values & Ethics
2. Fraud
Awareness &
Training
3. Consistent
Punishment of
Violators
Comment on
Codes of Conduct.
Communicate
to Employees,
Customers,
Vendors
Must Be
Written
Annual Written
Acknowledgement
& Agreement with
Code of Ethics by
Employees
List Factors Associated with
High Levels of Fraud.
1. Top management doesn’t care about or
pay attention to appropriate behavior
2. Lack of recognition of job performance
3. Perceived inequities in the
organization
4. Autocratic rather than participative
management
5. Low organizational loyalty
6. Unreasonable budget expectations
List Factors Associated with
High Levels of Fraud.
7. Unrealistically low pay
8. Poor training and promotion
opportunities
9. High turnover and absenteeism
10. Lack of clear organizational
responsibilities
11. Poor communication practices within
the organizations
How Can Opportunity
Be Eliminated?
1. Accurately Identify Sources and
Measures of Risk
2. Implement Appropriate Fraud
Prevention & Detection Controls
3. Create a System of Widespread
Monitoring by Employees
4. Install Independent Checks, Including
an Effective Audit Function
Who Detects Most Frauds?
Research Shows…
Employees
& Managers
NOT
Auditors
Detect Most
Frauds
What Does Sarbanes-Oxley Say
about Employees Reporting
Fraud?
It recognizes the value of having a
system for employees and others to
report wrong doing. “Fraud, Waste and
Abuse Hotlines”
Section 307 requires a “whistle-blower”
be in place.
Section 806 prohibits retaliation
against “whistle-blowers” or others.
Can Fraud by Owners of Small
Businesses be Prevented?
If they own the business
they can commit fraud.
YES
They defraud you and
me by not paying
taxes, withholdings
and insurance
payments.
What is Meant by
“Prediction of Fraud?”
Circumstances, Taken as a
Whole, that Leads a
Reasonable Prudent
Professional to Believe a
Fraud is Occurring, or Has
Occurred, or Will Occur
To Begin a Fraud Investigation,
What is a Critical Element?
A Manager’s
Approval
Why?
Because It Is
Expensive
Draw & Explain the
Evidence Square.
Testimonial
Evidence
2
Documentary
Evidence
1
4
Physical
Evidence
Personal
Observation
3
Match Term & Definition.
2
Testimonial Documentary
Evidence
Evidence
1
4
Physical
Evidence
Personal
Observation
3
Gathered from Papers,
Computers & Written &
Printed Sources
2
Fingerprints, Weapons, Stolen
Property Often Involves
3
Forensic Analysis
Gathered from Individuals,
Includes Interviewing,
1
Interrogation & Honesty Tests
Collected by the Investigator,
Includes Invigilation,
4
Surveillance and Covert
Operations
Draw & Explain the
Elements of Fraud Triangle.
Conversion
Elements
Of
Fraud
Concealment
Theft
List Guidelines for Conducting
a Fraud Investigation.
List 7 Steps for Conducting a
Fraud Investigation.
1. Undertake to Establish the Truth of the
Matter Under Consideration
2. Don’t Jump to ConclusionsInvestigator Needs Experience &
Objectivity
3. Keep Information to Yourself, Keep
Speculation to Yourself
4. Keep Those Who Need to Know
Informed
List 7 Steps for Conducting a
Fraud Investigation.
5. Independently Corroborate Information
6. Use Investigative Techniques that Are
Legally Sound & Fair
7. Report All the Facts Fairly &
Objectively- Point to the Guilty &
Exonerate the Innocent
What Action Do Most Businesses
Take After Discovering a Fraud?
1. Pursue No Legal
Action
2. Pursue Civil
Remedies
3. Pursue Criminal
Remedies
Factoid
More Than
80% of
Organizations
Do #1
Summarize the Effects &
Results of Taking Legal Action.
Criminal
Pursued by Law
Enforcement or
Statutory
Agencies
Fines, Prison or
Both
Possible
Restitution
Civil
Recover Lost Money or
Assets
Rare - Money Is Usually
Already Spent
Becoming More
Common - Easier to
Get a Judgment
Requires a
Preponderance of
Evidence (50% +)
How Do Organizations
Contribute to More Fraud?
Termination without
Prosecution and
Publicity of the Fraud
Allows:
Individuals to go do it
all over again
someplace else.
Employees to get the
message that you
can get away with
fraud without
suffering any
penalty.