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Fraud: Understanding Fraud and Our Responsibilities

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Fraud: Understanding Fraud and Our Responsibilities
  • 1. Fraud
    Understanding Fraud and
    Our Responsibilities
    Presented by Jason Lundell

2. Famous Fraudsters
3. Charles Ponzi
(March 3, 1882 January 18, 1949) was an Italian swindler, who is considered one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term "Ponzi scheme" is a widely known description of any scam that pays early investors returns from the investments of later investors. He promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.
4. Bernie Ebbers
Bernard John "Bernie" Ebbers (born August 27, 1941, Edmonton, Alberta) is a Canadian-born businessman. He co-founded the telecommunications company WorldCom and is a former chief executive officer of that company.
In 2005, he was convicted of fraud and conspiracy as a result of WorldCom's false financial reporting, and subsequent loss of US$100-billion to investors. The WorldCom scandal was, until the Madoff schemes came to light in 2008, the largest accounting scandal in United States history. He is currently serving a 25-year prison term at Oakdale Federal Correctional Complex in Louisiana. Portfolio.com and CNBC named Ebbers as the fifth-worst CEO in American history; Time Magazine named him the tenth most corrupt CEO of all time.
5. Walt Pavlo
As a senior manager at MCI, and with a meritorious employment history, Mr. Pavlo was responsible for the billing and collection of nearly $1 billion in monthly revenue for MCIs carrier finance division. Beginning in March of 1996, Mr. Pavlo, one member of his staff and a business associate outside of MCI began to perpetrate a fraud involving a few of MCIs own customers. When the scheme was completed, there had been seven customers of MCI defrauded over a six-month period resulting in $6 million in payments to the Cayman Islands.
In January 2001, in cooperation with the Federal Government, Mr. Pavlo pled guilty to wire fraud and money laundering and entered federal prison shortly thereafter. His story highlights the corrupt dealings involving the manipulation of financial records within a large corporation. His case appeared as a cover story in the June 10, 2002 issue of Forbes Magazine, just weeks before WorldCom divulged that it had over $7 billion in accounting irregularities.
(Source:Walt Pavlo executive bio provided by himself)
6. Dennis Kozlowski
(Born November 16, 1946, Newark, New Jersey) is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in purportedly unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $20 million investment banking fee to Frank Walsh, a former Tyco director. He is currently serving 8.33 to 25 years at the Mid-State Correctional Facility in Marcy, New York.
7. Ken Lay
(April 15, 1942 July 5, 2006) was an American businessman, best known for his role in the widely reported corruption scandal that led to the downfall of Enron Corporation. Lay and Enron became synonymous with corporate abuse and accounting fraud when the scandal broke in 2001. Lay was the CEO and chairman of Enron from 1985 until his resignation on January 23, 2003, except for a few months in 2000 when he was chairman and Jeffrey Skilling was CEO.
On July 7, 2004, Lay was indicted by a grand jury on 11 counts of securities fraud and related charges. On January 31, 2006, following four and a half years of preparation by government prosecutors, Lay's and Skilling's trial began in Houston. Lay was found guilty on May 25, 2006, of 10 counts against him; the judge dismissed the 11th. Because each count carried a maximum 5- to 10-year sentence, legal experts said Lay could have faced 20 to 30 years in prison. However, he died while vacationing in Snowmass, Colorado on July 5, 2006, about three and a half months before his scheduled October 23 sentencing. Preliminary autopsy reports state that he died of a heart attack caused by coronary artery disease. As a result of his death, on October 17, 2006, the federal district court judge who presided over the case vacated Lay's conviction.
8. Bernie Madoff
(Born April 29, 1938) is a former stock broker, investment adviser, non-executive chairman of the NASDAQ stock market, and the admitted operator of what has been described as the largest Ponzi scheme in history.
In March 2009, Madoff pleaded guilty to 11 felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi scheme in the early 1990s. However, federal investigators believe the fraud began as early as the 1980s, and the investment operation may never have been legitimate. The amount missing from client accounts, including fabricated gains, was almost $65 billion. The court appointed trustee estimated actual losses to investors of $18 billion. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed.
Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008. The firm was one of the top market maker businesses on Wall Street, which bypassed "specialist" firms by directly executing orders over the counter from retail brokers.
On December 10, 2008, Madoff's sons told authorities that their father had just confessed to them that the asset management arm of his firm was a massive Ponzi scheme, and quoting him as saying it was "one big lie. The following day, FBI agents arrested Madoff and charged him with one count of securities fraud. The U.S. Securities and Exchange Commission (SEC) had previously conducted investigations into Madoff's business practices, but did not uncover the massive fraud; critics contend that these investigations were very incompetently handled.
9. Corporate Frauds and Scandals
10. Understanding Fraud
11. Defintion
Blacks Law Dictionary defines fraud as:
all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the trust.It includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated.
12. Nature of Fraud
Fraud, by its very nature, does not lend itself to being scientifically observed or measured in an accurate manner. One of the primary characteristics of fraud is that it is clandestine, or hidden; almost all fraud involves the attempted concealment of the crime.
13. Fraud Triangle
14. Fraud TreeComplete Classification of Occupational Fraud
15. Three Common Types of Fraud
16. Asset Misapproriation
Asset misappropriation schemes are frauds in which the perpetrator steals or misuses an organizations resources.
Common examples of asset misappropriation include false invoicing, payroll fraud, and skimming.
17. Corruption
In the context of occupational fraud, corruption refers to schemes in which fraudsters use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else.
For example, employees might receive or offer bribes, extort funds from third parties, or engage in conflicts of interest.
18. Financial Statement Fraud
The third category of occupational fraud, financial statement fraud, involves the intentional misstatement or omission of material information from the organizations financial reports; these are the cases of cooking the books that often make front page headlines.
Financial statement fraud cases often involve the reporting of fictitious revenues or the concealment of expenses or liabilities in order to make an organization appear more profitable than it really is.
19. Occurrences of Fraud
20. Association of Certified Fraud Examiners (ACFE) Survey, 2006
Asset misappropriation schemes were both the most commonly reported and the least costly of the three major categories of occupational fraud (although the median loss in asset misappropriation schemes was $150,000, which is still quite significant).
Fraudulent statements, on the other hand, were the least commonly reported type of occupational fraud, but they caused considerably more damage than frauds in the other two categories. The median loss caused by fraudulent statement schemes in our study was $2,000,000, which dwarfed the losses in the other two categories.
Corruption schemes fell in the middle of the spectrum in terms of frequency and cost. Corruption occurred in just over one quarter of the cases reviewed in ACFE study, with a median loss of $375,000.
21. Occupational Frauds by Category Frequency
22. Occupational Frauds by Category Median Loss
23. Breakdown of All Occupational Fraud Schemes Frequency
24. Breakdown of All Occupational Fraud Schemes Median Loss
25. Most Common Fraud Schemes
Revenue recognition fraud schemes are by far the most prevalent, at 41% of the total. This is consistent with previous fraud studies and reinforces the need for focus on this area.
Other fraud schemes involving manipulation of various financial statement items account for more than a third of all fraud schemes identified.
26. Common Types of Revenue Recognition Fraud

  • The top 6 fraud schemes, depicted here account for 70% of all revenue recognition sc
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