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Fraud Examination

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  1. Fraud Examination Accounting 537 M. Popowits

  2. ENRON Accounting 537

  3. AGENDA • Intro to Fraud, what it is, what it isn’t, what it costs, who does it • Walk through the course • Fraud Examination profession • Ethics cases • Fraud Triangle Accounting 537

  4. FRAUD EXAMINATION Introduction

  5. Actg 537 – Fraud Examination • First half of course • Chapters 1-6 • Labs • IDEA homework • Guest speakers • Midterm • Second half of course • Chapters 7-13 • Labs • IDEA homework • Financial statement fraud homework • Guest speakers • Final Exam Accounting 537

  6. Legal Definition of Fraud Four Elements • Material False Statement • Knowledge that the statement was false • Reliance on the statement by the victim • Damages Accounting 537

  7. What are the 3 components of every fraud? • Theft – assets are taken • Concealment – hide if from others • Conversion – spends or converts to cash and spends Accounting 537

  8. Who are Fraud Examiners? • Lawyers • CPA’s • Government employees • FBI, law enforcement • Certified Fraud Examiner (CFE) Accounting 537

  9. Law Accounting Fraud Examination InvestigativeAuditing Criminology Accounting 537

  10. Estimated Costs of Fraud • >$450 Billion (~ U.S. Defense Budget) • $9.00 per day per employee • 6% of revenue lost • 6 cents of every revenue dollar stolen Accounting 537

  11. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Income before Taxes $ 990,000 616,000 374,000 118,000 109,000 107,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  12. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Income before Taxes $1,000,000 616,000 384,000 118,000 109,000 107,000 10,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  13. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Income before Taxes $1,000,000 600,000 400,000 118,000 109,000 107,000 26,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  14. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Income before Taxes $1,000,000 600,000 400,000 100,000 109,000 107,000 44,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  15. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Income before Taxes $1,000,000 600,000 400,000 100,000 100,000 107,000 53,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  16. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Income before Taxes $1,000,000 600,000 400,000 100,000 100,000 100,000 60,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  17. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Fraud Expense Income before Taxes $1,000,000 600,000 400,000 100,000 100,000 100,000 60,000 $ 40,000 Average Company, Inc.Income StatementAny Year Accounting 537

  18. Fraud comes off the bottom line Fraud Profits Accounting 537

  19. Sales COGS Gross Margin Selling Expenses General Expenses Administrative Expenses Fraud Expense Income before Taxes $1,000,000 600,000 400,000 100,000 100,000 100,000 60,000 $ 40,000 Average Company, Inc.Income StatementAny Year ? $ 100,000 $2,500,000 x ? $60,000 / 4% = $1,500,000 Accounting 537

  20. Basic ingredients for fraud TRUST GREED Accounting 537

  21. Who’s Committing Fraud ? The typical perpetrator is a college-educated white male…. Or WAS, in the 1970’s…. And Now? Accounting 537

  22. Number of Cases by GenderACFE 2006 National Fraud Survey

  23. Median Loss by GenderACFE 2006 National Fraud Survey

  24. Median Loss By AgeACFE 2006 National Fraud Survey

  25. Median Loss by Marital Status ACFE 2006 National Fraud Survey

  26. Median Loss by Education ACFE 2006 National Fraud Survey

  27. TYPES OF FRAUD Type of Fraud Victim Perpetrator Explanation 1. Employee embezzlement or occupational fraud Employers Employees Employees directly or indirectly steal from employers 2. Management fraud Stockholders, lenders, & others who rely on Financial Statements Top management Top management provides misrepresentations, usually financial information 3. Investment scams Investors Individuals Individuals trick investors into putting money into fraudulent investments 4. Vendor fraud Organizations that buy goods & services Organizations or individuals that sell goods and services Organizations overcharge for goods & services or non-shipment of goods even though payment is made 5. Customer fraud Organizations that sell goods and services Customers Customers deceive sellers into giving customers something they should not have

  28. NO One more type: OWNER FRAUD If they own the business how can they commit fraud? They defraud you and me by not paying taxes, withholdings and insurance payments. Can fraud by owners of small businesses be prevented? Accounting 537

  29. Number of Cases by Position2006 National Fraud Survey

  30. Median Loss by Position2006 National Fraud Survey

  31. Classifying Occupational Fraud and Abuse Accounting 537

  32. Number of Casesby Scheme Type

  33. Median Loss by Scheme Type

  34. Intentional Trick or deceive someone out of their assets Theft A CRIME Taken by physical force A mistake, error or accident Negligence Victimless FRAUD WHAT IT IS WHAT IT ISN’T Accounting 537

  35. Perceived Pressure Rationalization Perceived Opportunity The Fraud Triangle Accounting 537

  36. Fraud or Honesty? Decision determined by interaction of three forces: No White Collar Crime White Collar Crime High Low Situational Pressures High Low Opportunities Low High Integrity

  37. Types of Pressures Vices Financial Work-Related Other Pressures Accounting 537

  38. Pressures • What are some financial pressures? - High personal debt - “Inadequate” income - Poor credit ratings - Heavy financial losses Accounting 537

  39. Pressures • What are some work-related pressures? - Low Salary - Non-recognition of performance - Job dissatisfaction • Fear of losing job • Overaggressive bonus plans Accounting 537

  40. Pressures • What are some vice-related pressures? - Large gambling debts - Drugs - Living beyond means Accounting 537

  41. Pressures • What are other pressures? - Challenge - Family / Peer pressure • Emotional instability • Need for power of control • Excessive pride or ambition Accounting 537

  42. Perceived Opportunity3 parts • To commit fraud • To conceal fraud • To avoid punishment Accounting 537

  43. What factors increase the opportunity to commit fraud? • Ability to get around internal controls • Inability to judge quality of performance • Failure to discipline fraud perpetrators • Lack of access to information • Ignorance, Apathy, Incapacity • Lack of Audit Trail Accounting 537

  44. Integrity / Rationalization What does INTEGRITY mean? • Tendency toward honesty that is independent of circumstances • Individual decision about one’s character or conduct Accounting 537

  45. Integrity / Rationalization WHAT ARE THE MOST COMMON RATIONALIZATIONS FOR FRAUDULENT BEHAVIOR? • The perpetrator is just “borrowing” the stolen assets, will repay them • The perpetrator is not hurting a real person, just a computer system or an organization • The perpetrator is redressing an injustice Accounting 537

  46. Honesty testing firms have established….

  47. ETHICS?

  48. Some Fraud Allstars…

  49. Jim Bakker PTL Ministries Wire Fraud and Conspiracy $600,000,000 Accounting 537