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Learning Objectives• Define fraud examination and differentiate it from auditing.• Understand the fraud theory approach.• Define occupational fraud.• Define fraud.• Define abuse.• Know the difference between fraud and abuse.• Describe the criminological contributions of Edwin H. Sutherland.• Understand Donald Cressey’s hypothesis.• Give examples of non-shareable problems that contribute to fraud.• Understand how perceived opportunity and rationalization contribute to fraud.• Explain W. Steve Albrecht’s “fraud scale.”• Summarize the conclusions of the Hollinger-Clark study.• Summarize the results of the 2012 Report to the Nations on Occupational
Fraud and Abuse.
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Discipline of Fraud Examination
• Resolving allegations of fraud from tips, complaints, or accounting clues– Documentary evidence– Interviewing witnesses– Writing investigative reports– Testifying– Assisting in the detection and prevention of fraud
• Forensic accounting vs. fraud examination
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Auditing vs. Fraud Examination
Issue Auditing Fraud ExaminationTiming Recurring Nonrecurring
Presumption Professional Proofskepticism
Objective Opinion Affix blame
Scope General Specific
Relationship Nonadversarial Adversarial
Methodology Audit techniques Fraud examinationtechniques
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Fraud Examination Methodology
• Predication– 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 examinations must be based on predication.
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Fraud Theory Approach
• Analyze available data• Create a hypothesis• Test the hypothesis• Refine and amend the hypothesis
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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
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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
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2012 Report to the Nations on Occupational Fraud & Abuse
• Global survey• Measuring the costs of occupational fraud
– 5 percent lost to fraud– $3.5 trillion worldwide
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Position of Perpetrator
Other
Owner/Executive
Manager
Employee
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
3.2%
17.6%
37.5%
41.6%
Percent of Cases
Pos
itio
n o
f P
erp
etra
tor
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Median Loss by Position
Other
Owner/Executive
Manager
Employee
$0 $200,000 $400,000 $600,000
$100,000
$573,000
$182,000
$60,000
Median Loss
Pos
itio
n o
f P
erp
etra
tor
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Median Loss by Gender
Female Male $0
$50,000
$100,000
$150,000
$200,000
$250,000
$91,000
$200,000
Gender of Perpetrator
Med
ian
Los
s
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Department of Perpetrator
Internal auditLegal
Research and developmentMarketing/PR
Human resourcesBoard of Directors
Manufacturing & productionInformation technology
FinanceWarehousing, inventory
PurchasingOther*
Customer serviceExecutive/upper mgmt
SalesOperations
Accounting
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
0.6%0.6%0.7%1.1%1.2%1.4%1.9%2.0%
3.7%4.2%
5.7%5.9%
6.9%11.9%
12.8%17.4%
22.0%
Percent of Cases
Dep
artm
ent
of P
erp
etra
tor
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Median Loss by Department
Customer serviceInternal audit
Warehousing, inventorySales
Research and developmentInformation technology
Other*Operations
Human resourcesManufacturing & production
Marketing/PRLegal
AccountingPurchasing
Board of DirectorsFinance
Executive/upper mgmt
$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000
$30,000$32,000
$67,000$90,000$100,000$100,000$100,000$100,000
$121,000$160,000$165,000
$180,000$183,000
$200,000$220,000
$250,000$500,000
Median Loss
Dep
artm
ent
of P
erp
etra
tor
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Criminal History of Perpetrator
Other
Had prior convictions
Charged but not convicted
Never charged or convicted
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
1.2%
5.6%
5.9%
87.3%
Percent of Cases
Per
pet
rato
r’s
Cri
min
al H
isto
ry
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Median Loss per Number of Employees
10,000+
1,000-9,999
100-999
<100
$0 $50,000 $100,000 $150,000 $200,000
$140,000
$100,000
$150,000
$147,000
Median Loss
Nu
mb
er o
f E
mp
loye
es
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Initial Detection of Frauds
Other
IT Controls
Confession
Surveillance/Monitoring
Notified by Police
External Audit
Document Examination
Account Reconciliation
By Accident
Internal Audit
Management Review
Tip
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
1.1%
1.1%
1.5%
1.9%
3.0%
3.3%
4.1%
4.8%
7.0%
14.4%
14.6%
43.3%
Percent of Cases
Det
ecti
on M
eth
od
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Occupational Fraud and AbuseAsset
MisappropriationsCorruption
FraudulentStatements
Conflicts of Interest
Bribery
IllegalGratuities
Economic Extortion
Inventory & All Other Assets
Cash
Nonfinancial
Financial
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Frequency of Types of Occupational Fraud and Abuse
Percent of Casesa Median LossAsset Misappropriation 86.7% $120,000Corruption 33.4% $250,000Financial Statement Fraud
7.6% $1,000,000
aThe sum of percentages listed in this column exceeds 100 percent because some cases involved fraud schemes that fell into more than one category. The same is true for every scheme classification chart in this book that is based on the 2011 Global Fraud Survey.