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HON 322C Fraud Seminar

HON 322C Fraud Seminar. Prof Bill Dilla Jan. 14, 2003. Elements of Fraud. A representation About a material point Which is false And intentionally or recklessly so, Which is believed And acted upon by the victim To the victim’s damage.

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HON 322C Fraud Seminar

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  1. HON 322C Fraud Seminar Prof Bill Dilla Jan. 14, 2003

  2. Elements of Fraud • A representation • About a material point • Which is false • And intentionally or recklessly so, • Which is believed • And acted upon by the victim • To the victim’s damage

  3. Relationship between fraud and illegal / unethical acts Unethical Acts Illegal Acts Fraud

  4. Types of fraud: The “big picture” • Occupational fraud (Asset theft) • Fraud committed against an organization • Usually by employees or managers • BUT recent cases by executives exist (e.g., Tyco, Adelphia)—called “corporate looting” • Management fraud • Fraud committed on behalf of an organization • Fraudulent financial reporting most common type • Generating most of the current concern about fraud

  5. A more complete fraud list • Employee embezzlement • Management fraud • Investment scams • Vendor fraud • Customer fraud

  6. Fraud can be of more than one type • Employees collude with a vendor to overcharge and take kickbacks • Both embezzlement and vendor fraud • Stock option backdating • “Corporate looting” • Fraudulent financial reporting to cover up expense

  7. From an audit and control perspective • Preventing employee embezzlement and fraudulent financial reporting are most important • Controls to prevent embezzlement also help prevent vendor fraud and customer fraud • Customer fraud and vendor fraud are of particular importance in an e-commerce environment

  8. Some Fraud FactsSource: 2003 KPMG Survey of Public Companies and State and Federal Agencieshttp://www.kpmg.com/aci/docs/surveys/Fraud%20Survey_040855_R5.pdf • Most common type of fraud • Theft of assets • Most costly frauds • Financial reporting fraud • Medical / insurance fraud • Most common methods for uncovering fraud • Internal control • Internal audit • Notification by employee • Least common method for uncovering fraud • External audit

  9. Fraud Trends(also from KPMG survey—compared to 1998 and 1994) • Internal control and internal audit are catching significantly more frauds • Collusion between employees and 3rd parties is increasing as a cause of fraud • More companies are taking legal actions or notifying law enforcement

  10. Some Other Fraud Trends • Sarbanes-Oxley internal control requirements • Intended to address fraudulent financial reporting for public companies • Has also increased controls over employee fraud in many cases • Some non-public companies have adopted • Use of “in-house” resources for fraud investigation and prevention • “Proactive” as opposed to “reactive” fraud policies

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