FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT

1. FRAUD EXAMINATIONALBRECHT, ALBRECHT, & ALBRECHT Fighting Fraud: An Overview CHAPTER 3

2. Learning Objectives • Understand the importance of fraud prevention • Recognize the importance of early fraud detection • Describe the different approaches to fraud investigation • Be familiar with the different options for legal action that can be taken once fraud has occurred

3. Circle the 2 Most Effective & Least Costly What Are the Four Keys to Fight Fraud? • Fraud Prevention • Early Detection • Investigation • Legal Action & Resolution

4. List the Negative Affects of Fraud. Legal Conviction Humiliation Lost Assets Lost Time Taxes & Restitution Payments Negative Publicity Legal Fees Embarassment

5. Perceived Pressure Rationalization Perceived Opportunity Review the Fraud Triangle.

6. Create and Maintain a Culture of Honesty & Integrity Assess the Risk of Fraud & Develop Concrete Responses to Minimize Risk & Eliminate Opportunity List 2 Activities Fundamental to Fraud Prevention?

7. How Does an Organization Encourage Dishonesty? • Poor examples by management • Quotas or meeting targets • Rewarding individuals not groups • Competition among employees

8. What Expectations Should Management Communicate? • Appropriate Values & Ethics • Fraud Awareness & Training • Consistent Punishment of Violators

9. Must Be Written Comment on Codes of Conduct. Communicate to Employees, Customers, Vendors Employee Ownership Annual Written Acknowledgement & Agreement with Code of Ethics by Employees

10. List Factors Associated with High Levels of Fraud. • Top management doesn’t care about or pay attention to appropriate behavior • Lack of recognition of job performance • Perceived inequities in the organization • Autocratic rather than participative management • Low organizational loyalty • Unreasonable budget expectations

11. List Factors Associated with High Levels of Fraud. • Unrealistically low pay • Poor training and promotion opportunities • High turnover and absenteeism • Lack of clear organizational responsibilities • Poor communication practices within the organizations

12. How Can Opportunity Be Eliminated? • Accurately Identify Sources and Measures of Risk • Implement Appropriate Fraud Prevention & Detection Controls • Create a System of Widespread Monitoring by Employees • Install Independent Checks, Including an Effective Audit Function

13. Research Shows… Employees & ManagersNOT Auditors Detect Most Frauds Who Detects Most Frauds?

14. What Does Sarbanes-Oxley Say about Employees Reporting Fraud? • It recognizes the value of having a system for employees and others to report wrong doing. “Fraud, Waste and Abuse Hotlines” • Section 307 requires a “whistle-blower” be in place. • Section 806 prohibits retaliation against “whistle-blowers” or others.

15. YES Can Fraud by Owners of Small Businesses be Prevented? If they own the business they can commit fraud. They defraud you and me by not paying taxes, withholdings and insurance payments.

16. What is Meant by “Prediction of Fraud?” Circumstances, Taken as a Whole, that Leads a Reasonable Prudent Professional to Believe a Fraud is Occurring, or Has Occurred, or Will Occur

17. To Begin a Fraud Investigation, What is a Critical Element? A Manager’s Approval Why? Because It Is Expensive

18. 2 1 4 3 Draw & Explain the Evidence Square. Testimonial Evidence Documentary Evidence Physical Evidence Personal Observation

19. Match Term & Definition. Gathered from Papers, Computers & Written & Printed Sources Fingerprints, Weapons, Stolen Property Often Involves Forensic Analysis Gathered from Individuals, Includes Interviewing, Interrogation & Honesty Tests Collected by the Investigator, Includes Invigilation, Surveillance and Covert Operations 2 3 1 4

20. Conversion Elements Of Fraud Concealment Theft Draw & Explain the Elements of Fraud Triangle.

21. List Guidelines for Conducting a Fraud Investigation. Perform Steps in Correct Order Perform Investigation Correctly Protect Confidentiality

22. List 7 Steps for Conducting a Fraud Investigation. • Undertake to Establish the Truth of the Matter Under Consideration • Don’t Jump to Conclusions-Investigator Needs Experience & Objectivity • Keep Information to Yourself, Keep Speculation to Yourself • Keep Those Who Need to Know Informed

23. List 7 Steps for Conducting a Fraud Investigation. • Independently Corroborate Information • Use Investigative Techniques that Are Legally Sound & Fair • Report All the Facts Fairly & Objectively- Point to the Guilty & Exonerate the Innocent

24. Factoid More Than 80% of Organizations Do #1 What Action Do Most Businesses Take After Discovering a Fraud? • Pursue No Legal Action • Pursue Civil Remedies • Pursue Criminal Remedies

25. Criminal Pursued by Law Enforcement or Statutory Agencies Fines, Prison or Both Possible Restitution Civil Recover Lost Money or Assets Rare - Money Is Usually Already Spent Becoming More Common - Easier to Get a Judgment Requires a Preponderance of Evidence (50% +) Summarize the Effects & Results of Taking Legal Action.

26. How Do Organizations Contribute to More Fraud? Individuals to go do it all over again someplace else. Employees to get the message that you can get away with fraud without suffering any penalty. Termination without Prosecution and Publicity of the Fraud Allows: