Chapter 1: The Nature of Fraud

1. Chapter 1: The Nature of Fraud © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. Learning Objectives • Understand the seriousness of fraud and how fraud affects individuals, consumers, organizations, and society. • Define fraud. • Understand the different types of fraud. • Understand the difference between fraud committed against an organization on behalf of an organization. • Understand the difference between criminal and civil fraud laws.

3. Learning Objectives • Understand the types of fraud-fighting careers available today. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Introduction to Fraud © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Sources of Fraud Statistics • Four Basic Sources • Government Agencies • Researchers • Insurance Companies • Victims of Fraud

6. The Seriousness of Fraud • U.S. organizations lose seven percent of annual revenues to fraud • Applied to the estimated 2008 U.S. GDP, this seven percent translates to approximately $994 billion in losses • Fraud affects how much we pay for goods and services, each of us pays not only a portion of the fraud bill but also for the detection and investigation of fraud • Losses incurred from fraud reduce a firm’s income on a dollar-for-dollar basis

7. For every $1 of fraud, net income is reduced by $1 It takes more revenue to recover the effects of the fraud, since fraud reduces the net income The Seriousness of Fraud

8. What is Fraud?

9. What is Fraud? • Seven Specific Parts 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

10. Fraud is… intentional to trick or deceive someone out of his/her assets theft a crime Fraud is not… taken by physical force a mistake or error victimless insignificant because no one is hurt acceptable or justifiable What is Fraud?

11. The Two General Classifications Committed againstan organization Committed on behalf of an organization The Various Classifications of Fraud

12. The Various Classifications of Fraud • Occupational Fraud Occupational fraud is the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

13. The Various Classifications of Fraud • With occupational fraud, the activity… • is clandestine • violates the employee’s obligations to the organization • is for direct or indirect financial benefit • costs the organization assets, revenues, or reserves

14. Asset misappropriations Corruption Fraudulent statements Classifications of Occupational Fraud

15. The Various Classifications of Fraud • Fraud classification according to victims: • Company or Organization as victim • Employee embezzlement • Vendor fraud • Customer fraud • Shareholders or debt-holders as victims • Management fraud • Unwary individuals as victims • Investment and other consumer fraud • Anyone as a victim • Miscellaneous fraud

16. The Various Classifications of Fraud • Employee Embezzlement • Occupational fraud (most common) • Employees steal company assets • Is direct or indirect • Direct: employee directly steals company cash, inventory, tools, supplies, or other assets • Indirect: employee takes bribes or kickbacks from vendors, customers, or others for lower sales prices, higher purchase prices, nondelivery of goods, or the delivery of inferior goods • Example: CVC Construction (direct)

17. The Various Classifications of Fraud • Vendor Fraud • Two main varieties: • through vendors alone • through collusion between buyers and vendors • Usually results in: • overcharge for purchased goods • shipment of inferior goods • Nonshipment of purchased goods • Example: Halliburton

18. The Various Classifications of Fraud • Customer Fraud • When customers • do not pay for goods • get something for nothing • deceive organizations into giving them something they should not have • Example: Chicago bank

19. The Various Classifications of Fraud • Management Fraud • Also known as financial statement fraud • top management deceptively misstates financial statements • Examples: • Enron • WorldCom • Sunbeam

20. The Various Classifications of Fraud • Investment and Other Consumer Fraud • Worthless investments sold to investors • Examples: • Ponzi schemes • Telemarketing fraud • Nigerian letter or money scams • Identity theft • Advance fee scams • Redemption/strawman/bond fraud • Letter of credit fraud • Internet fraud

21. The Various Classifications of Fraud

22. Criminal and Civil Fraud Laws

23. Prepare for a Fraud-fighting Career Skills for Fraud-Fighting Professionals Analytical Skills examine data for symptoms of fraud Communication Skills effectively interview witnesses and suspects communicate findings to witnesses, courts and others Technological Skills search for fraud by effectively using information systems

24. Prepare for a Fraud-fighting Career • More Skills for a Fraud-Fighting Professional • Some understanding of accounting and business • A knowledge of civil and criminal laws, criminology, privacy issues, employee rights, fraud statutes, and other legal fraud-related issues • The ability to speak and write in a foreign language • A knowledge of human behavior

25. Become a Certified Fraud Examiner • Be an associate member of the ACFE in good standing • Meet minimum academic and professional requirements: • Bachelor’s Degree • Two years of professional experience directly or indirectly related to fraud examination • Be of high moral character • Agree to abide by the Bylaws and Code of Professional Ethics of the ACFE

26. Fraud-fighting Careers