Introduction to fraud examination
Hoorcollege 1
Defining 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.
Fraud criminal
Abuse using your occupation to take advantage of the organization.
Occupational fraud is fraud committed by your employees.
This is the occupational fraud
tree.
Most occupational fraud
consists of asset
misappropriations, which is
the theft of assets. This is
logical because it is very active
in the organization.
Fraudulent statements, are
statements in which
companies are lying to their
shareholders/investors
ACFE 2022 Report to the Nation on Occupational Fraud and Abuse (don’t memorize)
The ACFE began a major study of occupational fraud cases in 1993 with the primary goal of
classifying occupational frauds and abuses by the methods used to commit them.
Has become a biannual national fraud survey of those professionals who deal with fraud and
abuse on a daily basis. The 2022 Report is based on data collected on 2,110 cases of
occupational fraud from an online survey conducted between July 2021 and September
2021 (across 23 industries and 133 countries) The total loss was over $3.6 Billion
The frauds reported to ACFE lasted a median of 12 months before being detected.
The median loss was $117,000
Asset misappropriation schemes were by far the most common type of occupational fraud,
comprising 86% of the cases reported; They were also the least costly form of fraud, with a
median loss of $100,000. Financial statement fraud schemes made up just 9% of the cases in
the study but caused the greatest median loss at $593,000.
Occupational fraud is more likely to be detected by a tip than by any other method.
Over half of the tips reporting fraud come from employees of the victim organization.
Elements of fraud
u A material false statement
u Knowledge that the statement was false when it was uttered!!!!!!
u Reliance on the false statement by the victim
u Damages resulting from the victim’s reliance on the false statement
,What is fraud?
Fraud is… Fraud is not…
u intentional u taken by physical force
u to trick or deceive someone out of u a mistake or error
his/her assets u victimless
u theft u insignificant because no one is hurt
u a crime u acceptable or justifiable
Fraud means you are lying about something to someone, they know they are doing
something wrong; it is intentional. You can make mistakes if it is not intentional it is not
fraud. A lot of frauds aren’t reported, because organizations don’t want the fraud on their
name, it is bad for their reputation.
Some Related Financial Crimes
u Larceny look at lecture 2
u Conversion = you are depriving the owner of their resources that were meant for
work.
u Embezzlement = you have access to the bank account/financial accounts, high
position of trust with the organization
u Breach of Fiduciary Duty = person at the highest position of trust who breaches their
duties. You have to complete your responsibility.
Discipline of fraud examination
u Resolving allegations of fraud from tips, complaints, or accounting clues
u Documentary evidence
u Interviewing witnesses
u Writing investigative reports
u Testifying
u Assisting in the detection and prevention of fraud
u Forensic accounting vs. fraud examination. Forensic accounting is anything you do
that is going to end up in the court room, for example: divorce and splitting the
assets.
Auditing vs. fraud examination
An audit is the third-party reviewer
for public statements on financial
reports.
They don’t look at every
transfer/balance, they take samples
of the financial statements.
,Fraud theory approach
When we think of something suspicious,
we analyze available data before going
public. You create a hypothesis from this
data which you are going to research.
If you notice the hypothesis is being
confirmed, you can investigate further.
Tools used in fraud examination
You have to be a good personal observer,
because the fraudsters can change behavior,
and if you have personal logic this can be a
sign of someone who is committing a crime.
Target person that is responsible for the
crime. You have to have all your facts
complete before you interview the target,
because you only have one attempt on
interviewing this person. You have to be really
sure that you have the right person.
Fraud examination methodology
u Predication = it is not a witch hunt; you have to have a good reason for your
information. There has to be a logic statement for your investigation.
u 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
u Fraud examinations must be based on predication, at each point of the
investigation!
Fraud examination: prevention and deterrence
u 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. You have to make sure it is feasible.
u Fraud deterrence refers to creating environments in which people are discouraged
from committing fraud, although it is still possible.
Fraud examination: detection and investigation
u 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.
, u 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
u American Sociologists- considered one of the most influential criminologists of the
20th century
u 1939 First defined “white-collar crime”
u Criminal acts of corporations
u Individuals in corporate capacity
u Crime committed by a person of respectability and high social status in the
course of their occupation
u Theory of differential association
u Crime is learned
u Not genetic (back then people believed that criminal behavior is inherited
through DNA, but it is learned, not genetic)
u Through interaction with others, individuals learn the values, attitudes,
techniques and motives for criminal behavior
Donald R. Cressey
The fraud triangle
These are three main reasons that has
to be present for a fraudulent situation
to occur.
Pressure: non-sharable problems,
personal problems why you need to
commit the fraud, because you are
embarrassed to share your problem.
u Violation of ascribed obligations
u Personal failures
u Business reversals it is not your fault
u Physical isolation don’t have anyone to turn to
u Status gaining
u Employer-employee relations not a good working relation, but you can’t leave
Other motivations: M.I.C.E.
u M: money greed, everyone wants more money
u I: ideology beliefs that fraud is good for the environment, or because the
government is corrupt
u C: coercion forced to commit a fraud
u E: ego (entitlement)
Perceived opportunity
u General information
u Knowledge that the employee’s position of trust could be violated
Hoorcollege 1
Defining 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.
Fraud criminal
Abuse using your occupation to take advantage of the organization.
Occupational fraud is fraud committed by your employees.
This is the occupational fraud
tree.
Most occupational fraud
consists of asset
misappropriations, which is
the theft of assets. This is
logical because it is very active
in the organization.
Fraudulent statements, are
statements in which
companies are lying to their
shareholders/investors
ACFE 2022 Report to the Nation on Occupational Fraud and Abuse (don’t memorize)
The ACFE began a major study of occupational fraud cases in 1993 with the primary goal of
classifying occupational frauds and abuses by the methods used to commit them.
Has become a biannual national fraud survey of those professionals who deal with fraud and
abuse on a daily basis. The 2022 Report is based on data collected on 2,110 cases of
occupational fraud from an online survey conducted between July 2021 and September
2021 (across 23 industries and 133 countries) The total loss was over $3.6 Billion
The frauds reported to ACFE lasted a median of 12 months before being detected.
The median loss was $117,000
Asset misappropriation schemes were by far the most common type of occupational fraud,
comprising 86% of the cases reported; They were also the least costly form of fraud, with a
median loss of $100,000. Financial statement fraud schemes made up just 9% of the cases in
the study but caused the greatest median loss at $593,000.
Occupational fraud is more likely to be detected by a tip than by any other method.
Over half of the tips reporting fraud come from employees of the victim organization.
Elements of fraud
u A material false statement
u Knowledge that the statement was false when it was uttered!!!!!!
u Reliance on the false statement by the victim
u Damages resulting from the victim’s reliance on the false statement
,What is fraud?
Fraud is… Fraud is not…
u intentional u taken by physical force
u to trick or deceive someone out of u a mistake or error
his/her assets u victimless
u theft u insignificant because no one is hurt
u a crime u acceptable or justifiable
Fraud means you are lying about something to someone, they know they are doing
something wrong; it is intentional. You can make mistakes if it is not intentional it is not
fraud. A lot of frauds aren’t reported, because organizations don’t want the fraud on their
name, it is bad for their reputation.
Some Related Financial Crimes
u Larceny look at lecture 2
u Conversion = you are depriving the owner of their resources that were meant for
work.
u Embezzlement = you have access to the bank account/financial accounts, high
position of trust with the organization
u Breach of Fiduciary Duty = person at the highest position of trust who breaches their
duties. You have to complete your responsibility.
Discipline of fraud examination
u Resolving allegations of fraud from tips, complaints, or accounting clues
u Documentary evidence
u Interviewing witnesses
u Writing investigative reports
u Testifying
u Assisting in the detection and prevention of fraud
u Forensic accounting vs. fraud examination. Forensic accounting is anything you do
that is going to end up in the court room, for example: divorce and splitting the
assets.
Auditing vs. fraud examination
An audit is the third-party reviewer
for public statements on financial
reports.
They don’t look at every
transfer/balance, they take samples
of the financial statements.
,Fraud theory approach
When we think of something suspicious,
we analyze available data before going
public. You create a hypothesis from this
data which you are going to research.
If you notice the hypothesis is being
confirmed, you can investigate further.
Tools used in fraud examination
You have to be a good personal observer,
because the fraudsters can change behavior,
and if you have personal logic this can be a
sign of someone who is committing a crime.
Target person that is responsible for the
crime. You have to have all your facts
complete before you interview the target,
because you only have one attempt on
interviewing this person. You have to be really
sure that you have the right person.
Fraud examination methodology
u Predication = it is not a witch hunt; you have to have a good reason for your
information. There has to be a logic statement for your investigation.
u 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
u Fraud examinations must be based on predication, at each point of the
investigation!
Fraud examination: prevention and deterrence
u 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. You have to make sure it is feasible.
u Fraud deterrence refers to creating environments in which people are discouraged
from committing fraud, although it is still possible.
Fraud examination: detection and investigation
u 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.
, u 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
u American Sociologists- considered one of the most influential criminologists of the
20th century
u 1939 First defined “white-collar crime”
u Criminal acts of corporations
u Individuals in corporate capacity
u Crime committed by a person of respectability and high social status in the
course of their occupation
u Theory of differential association
u Crime is learned
u Not genetic (back then people believed that criminal behavior is inherited
through DNA, but it is learned, not genetic)
u Through interaction with others, individuals learn the values, attitudes,
techniques and motives for criminal behavior
Donald R. Cressey
The fraud triangle
These are three main reasons that has
to be present for a fraudulent situation
to occur.
Pressure: non-sharable problems,
personal problems why you need to
commit the fraud, because you are
embarrassed to share your problem.
u Violation of ascribed obligations
u Personal failures
u Business reversals it is not your fault
u Physical isolation don’t have anyone to turn to
u Status gaining
u Employer-employee relations not a good working relation, but you can’t leave
Other motivations: M.I.C.E.
u M: money greed, everyone wants more money
u I: ideology beliefs that fraud is good for the environment, or because the
government is corrupt
u C: coercion forced to commit a fraud
u E: ego (entitlement)
Perceived opportunity
u General information
u Knowledge that the employee’s position of trust could be violated
