Introduction to Fraud Examination
Lecture 1: Introduction to Fraud Examination
Occupational Fraud and Abuse:
The use of one’s occupation for personal enrichment through the deliberate misuse or
misapplication of the employing organization’s resources or assets. Common violations
include: asset misappropriation, fraudulent statements, corruption, petty theft, false
overtime, use of company property for personal benefit etc.
Fraud: any crime for gain that uses deception as its principal mode of operation.
Abuse: taking advantage of your position (not necessary criminal).
Cash is most common type of occupational fraud. Already in wished form, easy to
liquidate.
Financial statement is less common, not everyone has ownership over financial
statement. But losses can be much greater.
Occupational fraud is more likely to be detected by an anonymous fraud. Three
categories (also known as fraud tree):
1. Asset misappropriation: involves the theft or misuse of an organization’s
assets.
2. Corruption: involves an act done with the intent to give some advantage
inconsistent with official duty and the rights of others.
3. Fraudulent statements: involves the intentional misreporting of financial
information about a company to mislead the users of the financial
statements.
Occupational abuse: petty crimes and other counterproductive behavior that have
become common and even silently condoned in the workplace. Example: using
company equipment for personal use, arriving at work late/leaving early.
Elements of Fraud:
A materially false statement, doesn’t have to be verbal, it can be a document.
Knowledge that the statement was false when it was uttered. If you’re not aware,
you won’t be charged. You have to know that it’s false.
Reliance on the false statement by the victim.
Damages resulting from the victim’s reliance on the false statement. Damages don’t
have to be suffered; you still get charged.
Fraud is: Fraud is not:
Intentional. Taken by physical force.
,To trick or deceive someone out of assets. A mistake or error.
Theft. Victimless.
A crime. Insignificant because no one is hurt.
Acceptable or justifiable.
Related Financial Crimes:
Larceny: another word for stealing, can be fraud or not.
Conversion: (can be larceny, doesn’t have to be) You can have access to something
legally, but then you didn’t return it. An unauthorized assumption and exercise of the
right of ownership. Example: you give work laptop away. Depriving the owner access.
Embezzlement: (also larceny) Term is used for people usually in a higher position of
trust in an organization (controller, CEO, CFO). Willfully to take, or convert to one’s
own use, another’s money or property. The wrongdoer acquired possession lawfully,
by the reason of some office or employment or position of trust.
Breach of Fiduciary Duty: a person that is held at the highest point of trust, that
breaches their responsibility. Crime for executive managers and board of directors,
they’re there to ensure that company is operation ethically. Didn’t commit fraud,
didn’t benefit from it, but just didn’t care.
Discipline of Fraud Examination:
Resolving allegations of fraud from tips, complaints, or accounting clues.
Documenting evidence
Interviewing witnesses
Writing investigative reports
Testifying
Assisting in the detection and prevention of fraud
Auditing vs. Fraud Examination:
Forensic accounting: everything you do that is going to end up in court (not all is
fraud).
Audit: A general examination of financial data for the purpose of expressing an
opinion on the financial statements. The third-party objective reviewer, they’re there
to give an opinion on the financial statements -> whether they perform to the
standards.
Fraud examination: the discipline of resolving allegations of fraud. Something
happens that triggers investigation. They want to find out what happened and where
the money went.
Issue Auditing Fraud Examination
Timing Recurring Nonrecurring -> only with
sufficient predication
Scope General Specific
Objective Opinion Affix Blame -> did fraud happen yes or no?
And who is responsible?
Relationship Non-adversarial -> does not Adversarial -> involve efforts to affix
seek to affix blame. blame
,Methodology Audit Techniques -> financial Fraud Examination techniques ->
data examination Document examination, review outside data, interviews
Presumption Professional skepticism Proof
Fraud Theory Approach:
To solve a fraud without complete evidence, the examiner must make certain assumptions.
The goal is to determine “if” a crime was committed and “how”.
1. When something triggers investigation, you want to analyze the data first.
2. Use the “worst-case” scenario.
3. Involves developing a “what-if” scenario.
Tools Used in Fraud Examination:
1. Skill in examining the financial statements, books and records, and supporting
documents.
2. Skill in interviewing witnesses with the purpose of obtaining relevant information.
3. Observation.
Neutral third-party Witnesses: someone that can provide evidence but is not
involved.
Corroborative Witnesses: someone that works in the organization but is not involved.
Co-conspirators: people we believe are involved in the fraud.
Target: the person we believe is responsible for the fraud.
Fraud Examination Methodology:
Prediction: totality of circumstances that would lead a reasonable, professionally
trained, and prudent individual to believe a fraud has occurred, is occurring, and/or
will occur -> fraud examinator needs to follow predication.
Fraud prevention: refers to creating and maintaining environments where the risk of
a particular fraudulent activity is minimal and opportunity is eliminated. When fraud
, is prevented, potential victims avoid the costs associated with detection and
investigation -> the actions that we take to prevent fraud in the first place.
Fraud deterrence: creating environments in which people are discouraged from
committing fraud, although it is still possible.
Fraud detection: refers to the process of discovering the presence or existence of
fraud. Fraud detection can be accomplished through the use of well-designed
internal controls, supervision and monitoring and the active search for evidence of
potential fraud -> actively looking for fraud.
Fraud investigation: takes place when indicators of fraud, such as missing cash or
other evidence, suggest that a fraudulent act has occurred and requires investigation
to determine the extent of the losses and the identity of the perpetrator.
Research in Occupational Fraud and Abuse:
Edwin H. Sutherland: American Sociologists – considered one of the most influential
criminologists of the 20th century.
1939: first defined “White-collar crime”
o Criminal acts of corporations
o Individuals in corporate capacity
o Crime committed by a person of respectability and high social status in the
course of their occupation
Developed the “Theory of differential association”
o Crime is learned, not genetic:
Techniques to commit the crime
Attitudes, drives, rationalizations and motives of the criminal mind.
o Learning occurs within an intimate personal group.
Donald R. Cressey:
Hypothesis: trusted persons become trust violators (studied embezzlers) when the conceive
of themselves as having a financial problem which is a non-shareable, are aware this
problem can be secretly resolved by violating of the position of financial trust.
A perceived non-shareable financial need: circumstances that might lead to
embezzlement.
The Fraud Triangle: all elements have to be present for fraud to occur.
Rationalization: is necessary so that the perpetrator can make his illegal behavior to
himself and maintain his concept of himself as a trusted person. They rationalize
their crimes as: non-criminal, justified, part of a general irresponsibility.
o They owe me
o Borrowing
o Nobody will get hurt
o I deserve more
Lecture 1: Introduction to Fraud Examination
Occupational Fraud and Abuse:
The use of one’s occupation for personal enrichment through the deliberate misuse or
misapplication of the employing organization’s resources or assets. Common violations
include: asset misappropriation, fraudulent statements, corruption, petty theft, false
overtime, use of company property for personal benefit etc.
Fraud: any crime for gain that uses deception as its principal mode of operation.
Abuse: taking advantage of your position (not necessary criminal).
Cash is most common type of occupational fraud. Already in wished form, easy to
liquidate.
Financial statement is less common, not everyone has ownership over financial
statement. But losses can be much greater.
Occupational fraud is more likely to be detected by an anonymous fraud. Three
categories (also known as fraud tree):
1. Asset misappropriation: involves the theft or misuse of an organization’s
assets.
2. Corruption: involves an act done with the intent to give some advantage
inconsistent with official duty and the rights of others.
3. Fraudulent statements: involves the intentional misreporting of financial
information about a company to mislead the users of the financial
statements.
Occupational abuse: petty crimes and other counterproductive behavior that have
become common and even silently condoned in the workplace. Example: using
company equipment for personal use, arriving at work late/leaving early.
Elements of Fraud:
A materially false statement, doesn’t have to be verbal, it can be a document.
Knowledge that the statement was false when it was uttered. If you’re not aware,
you won’t be charged. You have to know that it’s false.
Reliance on the false statement by the victim.
Damages resulting from the victim’s reliance on the false statement. Damages don’t
have to be suffered; you still get charged.
Fraud is: Fraud is not:
Intentional. Taken by physical force.
,To trick or deceive someone out of assets. A mistake or error.
Theft. Victimless.
A crime. Insignificant because no one is hurt.
Acceptable or justifiable.
Related Financial Crimes:
Larceny: another word for stealing, can be fraud or not.
Conversion: (can be larceny, doesn’t have to be) You can have access to something
legally, but then you didn’t return it. An unauthorized assumption and exercise of the
right of ownership. Example: you give work laptop away. Depriving the owner access.
Embezzlement: (also larceny) Term is used for people usually in a higher position of
trust in an organization (controller, CEO, CFO). Willfully to take, or convert to one’s
own use, another’s money or property. The wrongdoer acquired possession lawfully,
by the reason of some office or employment or position of trust.
Breach of Fiduciary Duty: a person that is held at the highest point of trust, that
breaches their responsibility. Crime for executive managers and board of directors,
they’re there to ensure that company is operation ethically. Didn’t commit fraud,
didn’t benefit from it, but just didn’t care.
Discipline of Fraud Examination:
Resolving allegations of fraud from tips, complaints, or accounting clues.
Documenting evidence
Interviewing witnesses
Writing investigative reports
Testifying
Assisting in the detection and prevention of fraud
Auditing vs. Fraud Examination:
Forensic accounting: everything you do that is going to end up in court (not all is
fraud).
Audit: A general examination of financial data for the purpose of expressing an
opinion on the financial statements. The third-party objective reviewer, they’re there
to give an opinion on the financial statements -> whether they perform to the
standards.
Fraud examination: the discipline of resolving allegations of fraud. Something
happens that triggers investigation. They want to find out what happened and where
the money went.
Issue Auditing Fraud Examination
Timing Recurring Nonrecurring -> only with
sufficient predication
Scope General Specific
Objective Opinion Affix Blame -> did fraud happen yes or no?
And who is responsible?
Relationship Non-adversarial -> does not Adversarial -> involve efforts to affix
seek to affix blame. blame
,Methodology Audit Techniques -> financial Fraud Examination techniques ->
data examination Document examination, review outside data, interviews
Presumption Professional skepticism Proof
Fraud Theory Approach:
To solve a fraud without complete evidence, the examiner must make certain assumptions.
The goal is to determine “if” a crime was committed and “how”.
1. When something triggers investigation, you want to analyze the data first.
2. Use the “worst-case” scenario.
3. Involves developing a “what-if” scenario.
Tools Used in Fraud Examination:
1. Skill in examining the financial statements, books and records, and supporting
documents.
2. Skill in interviewing witnesses with the purpose of obtaining relevant information.
3. Observation.
Neutral third-party Witnesses: someone that can provide evidence but is not
involved.
Corroborative Witnesses: someone that works in the organization but is not involved.
Co-conspirators: people we believe are involved in the fraud.
Target: the person we believe is responsible for the fraud.
Fraud Examination Methodology:
Prediction: totality of circumstances that would lead a reasonable, professionally
trained, and prudent individual to believe a fraud has occurred, is occurring, and/or
will occur -> fraud examinator needs to follow predication.
Fraud prevention: refers to creating and maintaining environments where the risk of
a particular fraudulent activity is minimal and opportunity is eliminated. When fraud
, is prevented, potential victims avoid the costs associated with detection and
investigation -> the actions that we take to prevent fraud in the first place.
Fraud deterrence: creating environments in which people are discouraged from
committing fraud, although it is still possible.
Fraud detection: refers to the process of discovering the presence or existence of
fraud. Fraud detection can be accomplished through the use of well-designed
internal controls, supervision and monitoring and the active search for evidence of
potential fraud -> actively looking for fraud.
Fraud investigation: takes place when indicators of fraud, such as missing cash or
other evidence, suggest that a fraudulent act has occurred and requires investigation
to determine the extent of the losses and the identity of the perpetrator.
Research in Occupational Fraud and Abuse:
Edwin H. Sutherland: American Sociologists – considered one of the most influential
criminologists of the 20th century.
1939: first defined “White-collar crime”
o Criminal acts of corporations
o Individuals in corporate capacity
o Crime committed by a person of respectability and high social status in the
course of their occupation
Developed the “Theory of differential association”
o Crime is learned, not genetic:
Techniques to commit the crime
Attitudes, drives, rationalizations and motives of the criminal mind.
o Learning occurs within an intimate personal group.
Donald R. Cressey:
Hypothesis: trusted persons become trust violators (studied embezzlers) when the conceive
of themselves as having a financial problem which is a non-shareable, are aware this
problem can be secretly resolved by violating of the position of financial trust.
A perceived non-shareable financial need: circumstances that might lead to
embezzlement.
The Fraud Triangle: all elements have to be present for fraud to occur.
Rationalization: is necessary so that the perpetrator can make his illegal behavior to
himself and maintain his concept of himself as a trusted person. They rationalize
their crimes as: non-criminal, justified, part of a general irresponsibility.
o They owe me
o Borrowing
o Nobody will get hurt
o I deserve more
