Introduction to Fraud Examination
Lecture 1:
Occupation for personal enrichment through the deliberate misuse or misapplication of the employing
organization’s sources or assets
Most occupational frauds get detected by a tip, over half of the time this tip comes from an employee
of the victim organization.
Elements of Fraud:
- A material false statement
- Knowledge that the statement was false when it was uttered
- Reliance on the false statement by the victim
- Damages resulting from the victim’s reliance on the false statement
Fraud is… intentional, to trick or deceive someone out of assets, theft, a crime
Related Financial Crimes:
- Larceny: theft
- Conversion: borrow without asking, not stealing (joyriding and bringing car back)
- Embezzlement: theft from people with a high level of thrust in the company
- Breach of Fiduciary Duty: when asked to act on someone’s behalf and you did not act in the
best of interest or did not care
Discipline of Fraud Examination: resolving allegations of fraud tips, complaints or accounting clues
- Documentary evidence
- Interviewing witnesses
- Writing investigative reports
- Testifying
- Assisting in the detection and prevention of fraud
Forensic accounting: anything with accounting that could end up in a court. Fraud Examination is a
specific part of this.
Fraud Theory Approach: analyse available data, create a hypothesis, test the hypothesis and refine and
amend the hypothesis
Edwin H. Sutherland: first defined white-collar crime, theory of differential association: crime is
learned, not genetic, through interaction with others, individuals learn values and techniques for
criminal behaviour
Donald Cressey: The Fraud Triangle: pressure (non-sharable problems), opportunity (general
information, technical skill) and rationalization
Fraud Diamond: enhances the Fraud Triangle by adding a fourth element: capability. Someone needs
to be able to lie and manipulate other people.
Albrecht: Fraud Scale. Assembled complete list of pressure, opportunity and integrity variables and
sorted them in perpetrator characteristics and organizational environment.
Fraud Scale: situational pressures, opportunities to commit and personal integrity
, Hollinger-Clark Study (1983): 10.000 workers surveyed, theft caused by job dissatisfaction, true costs
of fraud very understated. Employee perception of detection is critical, increased security does not
help, employee-thieves exhibit other deviance, management should be sensitive to employees and pay
special attention to young employees
The Elements of Fraud: The Act, Concealment and Conversion
Internal controls: the policies, processes, tasks, etc. of an organization that: facilitate effective
operation by responding appropriate to risks, ensuring quality of reporting and staying within laws.’
Objectives of internal controls: efficient conduct of business, safeguarding assets, preventing and
detecting fraud, completeness and accuracy of financial reports and timely preparations financial
statements
Lecture 2: Skimming
Skimming: sales, receivables and refunds & other
Theft of cash from a victim entity prior to its entry in an accounting system. No direct audit trail,
difficulty of detection. After hours sales, understated sales, cash register manipulation.
Preventing and Detecting Sales Skimming: oversight, perception of detection, use customers
Receivables Skimming: more difficult than skimming sales, customers are notified when payment is
not received. Possible when there is a breakdown in internal controls
Preventing and Detecting Receivables Skimming: supervisory approval, mandate vacations, train audit
staff, proactively search for accounting clues
Cash Larceny: intentional taking away of an employer’s cash without the consent and against the will
of the employer, happens when employee has access to cash. At the point of sale: most common point
of access to ready cash, results in an imbalance between the register tape and cash drawer
Larceny Schemes: theft from other registers, death by lots of cuts, reversing transactions, altering cash
counts, destroying register tapes
Preventing and Detecting Cash Larceny at the Point of Sale: separation of duties, independent checks
over the receipting and recording of incoming cash, regularly check is there is nothing standing out
Larceny of Receivables: after the payment has been recorded
Cash Larceny from the deposit: whoever takes the deposit to the bank has an opportunity to steal a
portion of it, matching does not always prevent theft, lack of security. Lapping, deposits in transit
Preventing and Detecting Cash Larceny from the deposit: separation of duties, incoming revenues
should go to centralized department, compare all the slips, bank statements should be delivered to
different persons in the organization, require that deposits be made at a night drop at the bank
Lecture 3: Overview of Accounts Payable
Accounts payable: nearly all payments outside of payroll. Mission is to only pay legitimate and
accurate invoices.
Purchase Order: precisely what a company is ordering from a vendor, computerized or hard copy
Receiving Report: documentation of received goods, quantity and description should match PO
Vendor Invoice: supplier sends invoice for delivered goods on credit, what the vendor billed
Lecture 1:
Occupation for personal enrichment through the deliberate misuse or misapplication of the employing
organization’s sources or assets
Most occupational frauds get detected by a tip, over half of the time this tip comes from an employee
of the victim organization.
Elements of Fraud:
- A material false statement
- Knowledge that the statement was false when it was uttered
- Reliance on the false statement by the victim
- Damages resulting from the victim’s reliance on the false statement
Fraud is… intentional, to trick or deceive someone out of assets, theft, a crime
Related Financial Crimes:
- Larceny: theft
- Conversion: borrow without asking, not stealing (joyriding and bringing car back)
- Embezzlement: theft from people with a high level of thrust in the company
- Breach of Fiduciary Duty: when asked to act on someone’s behalf and you did not act in the
best of interest or did not care
Discipline of Fraud Examination: resolving allegations of fraud tips, complaints or accounting clues
- Documentary evidence
- Interviewing witnesses
- Writing investigative reports
- Testifying
- Assisting in the detection and prevention of fraud
Forensic accounting: anything with accounting that could end up in a court. Fraud Examination is a
specific part of this.
Fraud Theory Approach: analyse available data, create a hypothesis, test the hypothesis and refine and
amend the hypothesis
Edwin H. Sutherland: first defined white-collar crime, theory of differential association: crime is
learned, not genetic, through interaction with others, individuals learn values and techniques for
criminal behaviour
Donald Cressey: The Fraud Triangle: pressure (non-sharable problems), opportunity (general
information, technical skill) and rationalization
Fraud Diamond: enhances the Fraud Triangle by adding a fourth element: capability. Someone needs
to be able to lie and manipulate other people.
Albrecht: Fraud Scale. Assembled complete list of pressure, opportunity and integrity variables and
sorted them in perpetrator characteristics and organizational environment.
Fraud Scale: situational pressures, opportunities to commit and personal integrity
, Hollinger-Clark Study (1983): 10.000 workers surveyed, theft caused by job dissatisfaction, true costs
of fraud very understated. Employee perception of detection is critical, increased security does not
help, employee-thieves exhibit other deviance, management should be sensitive to employees and pay
special attention to young employees
The Elements of Fraud: The Act, Concealment and Conversion
Internal controls: the policies, processes, tasks, etc. of an organization that: facilitate effective
operation by responding appropriate to risks, ensuring quality of reporting and staying within laws.’
Objectives of internal controls: efficient conduct of business, safeguarding assets, preventing and
detecting fraud, completeness and accuracy of financial reports and timely preparations financial
statements
Lecture 2: Skimming
Skimming: sales, receivables and refunds & other
Theft of cash from a victim entity prior to its entry in an accounting system. No direct audit trail,
difficulty of detection. After hours sales, understated sales, cash register manipulation.
Preventing and Detecting Sales Skimming: oversight, perception of detection, use customers
Receivables Skimming: more difficult than skimming sales, customers are notified when payment is
not received. Possible when there is a breakdown in internal controls
Preventing and Detecting Receivables Skimming: supervisory approval, mandate vacations, train audit
staff, proactively search for accounting clues
Cash Larceny: intentional taking away of an employer’s cash without the consent and against the will
of the employer, happens when employee has access to cash. At the point of sale: most common point
of access to ready cash, results in an imbalance between the register tape and cash drawer
Larceny Schemes: theft from other registers, death by lots of cuts, reversing transactions, altering cash
counts, destroying register tapes
Preventing and Detecting Cash Larceny at the Point of Sale: separation of duties, independent checks
over the receipting and recording of incoming cash, regularly check is there is nothing standing out
Larceny of Receivables: after the payment has been recorded
Cash Larceny from the deposit: whoever takes the deposit to the bank has an opportunity to steal a
portion of it, matching does not always prevent theft, lack of security. Lapping, deposits in transit
Preventing and Detecting Cash Larceny from the deposit: separation of duties, incoming revenues
should go to centralized department, compare all the slips, bank statements should be delivered to
different persons in the organization, require that deposits be made at a night drop at the bank
Lecture 3: Overview of Accounts Payable
Accounts payable: nearly all payments outside of payroll. Mission is to only pay legitimate and
accurate invoices.
Purchase Order: precisely what a company is ordering from a vendor, computerized or hard copy
Receiving Report: documentation of received goods, quantity and description should match PO
Vendor Invoice: supplier sends invoice for delivered goods on credit, what the vendor billed
