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Fraud Examination

Chapter 1: Introduction. . What is Occupational Fraud and Abuse? . Use of occupationFor personal enrichmentThrough deliberate misuse or misapplicationOf employer's resources/assets. Defining Fraud. Four elements:Material false statementKnowledge that the statement was falseReliance on the statement by victimDamages.

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Fraud Examination

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    1. Fraud Examination Carl W. Coolbaugh CFE, CPA

    2. Chapter 1: Introduction

    3. What is Occupational Fraud and Abuse? Use of occupation For personal enrichment Through deliberate misuse or misapplication Of employer’s resources/assets

    4. Defining Fraud Four elements: Material false statement Knowledge that the statement was false Reliance on the statement by victim Damages

    5. Defining Abuse A deceitful act A corrupt practice or custom Examples: “Borrow” company equipment Use sick leave when not sick Slow or sloppy work Surf the Net at work Work under influence of drugs/alcohol

    6. Research in Occupational Fraud and Abuse

    7. Edwin H. Sutherland First defined “white-collar crime” Criminal acts of corporations Individuals in corporate capacity Theory of differential association Crime is learned Not genetic Learned from intimate personal groups

    8. Donald R. Cressey Studied embezzlers Why people become “trust violators” Developed the Fraud Triangle

    9. The Fraud Triangle

    10. Nonsharable Problems Violation of ascribed obligations Personal failures Business reversals Physical isolation Status gaining Employer-employee relations

    11. Cressey’s Offender Types Independent businessmen “Borrowing” Funds really theirs Long-term violators “Borrowing” Protect family Company cheating them Company generally dishonest

    12. Cressey’s Offender Types Absconders Take the money and run Usually unmarried, loners Blame “outside influences” or “personal defects”

    13. W. Steve Albrecht Nine motivators of fraud Living beyond means Overwhelming desire for personal gain High personal debt Close association with customers Pay not commensurate with job

    14. W. Steve Albrecht Nine motivators of fraud Wheeler-dealer Strong challenge to beat system Excessive gambling Family/peer pressure

    15. The Fraud Scale Situational pressures Immediate problems with environment Usually debts/losses Perceived opportunities Poor controls Personal integrity Individual code of behavior

    16. The Fraud Scale

    17. Richard C. Hollinger Hollinger-Clark study (1983) Surveyed 10,000 workers Theft caused by job dissatisfaction True costs vastly understated

    18. Employee Deviance Two categories: Acts against property Production violations (goldbricking) Strong relationship: theft and concern over financial situation

    19. Age and Theft Direct correlation Younger employees less committed But, higher position = bigger theft Opportunity is only a secondary factor

    20. Job Satisfaction and Deviance Dissatisfied employees More likely to break rules Regardless of age/position Trying to right perceived inequities Wages in kind

    21. Organizational Controls Some impact, but limited Hollinger studied five aspects: Company policy Selection of personnel Inventory control Security Punishment

    22. Hollinger’s Conclusions Employee perception of controls is important Increased security may hurt, not help Employee-thieves exhibit other deviance Sloppy work, sick leave abuses, etc. “Hydraulic effect” Management should be sensitive to employees Pay special attention to young employees

    23. Hollinger’s Conclusions Four key aspects of policy development Understand theft behavior Spread positive info on company policies Enforce sanctions Publicize sanctions

    24. The Report to the Nation on Occupational Fraud and Abuse Largest fraud study ever Study of 2,608 fraud cases Reported by CFEs Total: $15 billion in losses $22 to $2.5 billion

    25. Costs How to measure? Orgs don’t know what they lose Opinions of CFEs Six percent of gross revenues $400 billion per year Twice the U.S. defense budget

    26. Position in the Organization - Cases

    27. Position in the Organization – Median Loss

    28. Median Loss by Gender

    29. Median Loss by Age Direct and linear correlation between age and median loss Older tend to occupy higher ranking positions Greater access to revenues, assets, resources

    30. Median Loss by Age

    31. Median Loss by Marital Status

    32. Median Loss by Education

    33. Median Loss Per Number of Employees

    34. Classifying Occupational Fraud and Abuse

    35. Number of Cases by Scheme Type

    36. *Represents size of misstatement rather than actual cash loss Median Loss by Scheme Type

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