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Fraud 101: Building Awareness

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What is Fraud/White Collar Crime? Black's Law Dictionary defines fraud as: ... 'My employer didn't compensate me well enough, so I took what was due to me. ... – PowerPoint PPT presentation

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Title: Fraud 101: Building Awareness


1
Fraud 101 Building Awareness
  • CIMA - 2007 Spring Educational Conference
  • May 18, 2007

2
The Start of a Fraud Career . . .
We All Have Our Own Story!!!
3
Why Have This Presentation?
  • Fraud is a growth industry
  • Regulatory requirements
  • Auditors can make a significant contribution to
    fraud prevention and detection
  • Reduce the expectation gap

4
Words of Wisdom
If your outgo exceeds your income, then your
upkeep will be your downfall. Bill Earle
It's strange that men should take up crime when
there are so many legal ways to be dishonest.
Al Capone
5
Creation of a Forensic Accountant
  • Skills and Knowledge
  • Personality Traits

6
Creation of a Forensic Accountant
  • Skills and Knowledge
  • Accounting and audit knowledge
  • Fraud knowledge
  • Knowledge of law and rules of evidence
  • Understanding of psychology and motivational
    factors
  • Communication skills
  • Computer skills

7
Creation of a Forensic Accountant
  • Personality Traits
  • Aggressive personalities
  • Intuition
  • Self-confidence
  • A high degree of judgment
  • Skeptical by nature
  • Patience
  • Listening skills
  • Integrity
  • Unbiased

8
What is Forensic Accounting?
  • Using accounting and auditing expertise to prove
    a point in a civil or criminal controversy1
  • Also called Fraud Examination or Investigative
    Accounting
  • 1The Accountant's Handbook of Fraud and Crime, by
    Bologna, Lindquist, and Wells

9
Words of Wisdom
Why is there so much month left at the end of
the money? John Barrymore
It is impossible to make anything foolproof
because fools are so ingenious. Ralph Waldo
Emerson
10
Thinking Like a Forensic Accountant . . .
  • The Brainteasers

11
Thinking Like a Forensic Accountant . . .
  • Whats your name?
  • Mr. Jones one day got off a train in Chicago and
    while passing through the station met a friend he
    had not seen in years. With his friend was a
    little girl.
  • Well, I certainly am glad to see you, said Mr.
    Jones.
  • Same here, said his friend. Since I last saw
    you Ive been marriedto someone you never knew.
    This is my little girl.
  • Im glad to meet you, said Mr. Jones. Whats
    your name?
  • Its the same as my mothers, answered the
    little girl.
  • Oh, then your name is Anne, said Mr. Jones.
  • How did he know?

12
Playing Tricks . . .
  • Word Color Test
  • In this test DO NOT READ the words, say aloud the
    COLOR of each word.

YELLOW BLUE ORANGE BLACK RED GREEN PURPLE YELLOW
RED ORANGE GREEN BLACK BLUE RED PURPLE GREEN BLUE
ORANGE
13
Playing Tricks . . .
14
What is Fraud/White Collar Crime?
  • 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 truth. It includes all surprise, trick,
    cunning or dissembling, and any unfair way by
    which another is cheated.

15
What is Fraud/White Collar Crime?
  • or Simply
  • Fraud includes any intentional or
  • deliberate act to deprive another of
  • property or money by guile, deception,
  • or other unfair means.

16
Six Elements of Fraud
  • A representation
  • About a material point
  • Which is false
  • And intentionally or recklessly made
  • Which is believed
  • Victim suffers damage

17
FraudBurden of Proof
  • Establishing wrongful intentHow???
  • Altered documents
  • Concealed or destroyed evidence
  • Obstructing the investigation
  • Making false statements
  • Pattern of unacceptable transactions
  • Obtained benefits

18
Abuse
  • Extravagant travel and entertainment
  • Expenditure is not hidden and often approved
  • Was it justifiable?
  • Was it within company policy?
  • Questionable but not fraud
  • Precursor to fraudulent transactions
  • Management sets the tone at the top

19
Words of Wisdom
Every man is a damn fool for at least five
minutes every day wisdom consists of not
exceeding the limit. P.T. Barnum
A man always has two reasons for doing
anythinga good reason and the real reason. J.
P. Morgan
20
Deception . . . Can You Detect It?
  • In 1984 I was offered and turned down a full-ride
    football scholarship to Colorado State University
    due to Love. This action promptly forced my
    father to reply, If you cant appreciate a
    college giving you a free education, then you
    would not appreciate one from me, either.
  • In 1985 as a member of the automotive group of a
    large department store chain in California, I was
    caught and prosecuted for embezzlement due to
    phony invoicing schemes. I rationalized this
    action because of my pending nuptials and the
    costs involved with it. I served no sentence,
    was put on probation, and paid restitution.
  • In 1987 I was involved in a disfiguring
    motorcycle accident that left me bedridden for
    eight weeks caused me to incur ten surgeries,
    including bone, muscle, and skin grafts and
    forced me to utilize crutches for a period of
    three years as I healed, thus ending my sports
    career.
  • In 1988 as a walk-on Junior quarterback at Cal
    State University, Fullerton, I threw for 2,315
    yards, 18 touchdowns, and had a passing
    efficiency rating of 112.16.

21
General Types of White Collar Crime/Fraud
Source Association of Certified Fraud Examiners,
2006 RTTN Note Percentages exceed 100
22
General Types of White Collar Crime/Fraud
Misappropriation of Assets Five-Finger Fraud
23
General Types of White Collar Crime/Fraud
Source Association of Certified Fraud Examiners,
2006 RTTN Note Percentages exceed 100
24
General Types of White Collar Crime/Fraud
  • Fraudulent Statements
  • Usually perpetrated by top management
  • Make companys financial position look better
    than it is
  • Achieved through various schemes

25
General Types of White Collar Crime/Fraud
  • Corruption
  • Generally Off-Book
  • Influence
  • Purchasing Dept.
  • Payment Cash and Non-Cash

26
General Profile of White Collar Criminals
  • Look to your left and to your right . . .

27
General Profile of White Collar Criminals
  • Older (30 years)
  • 61 male, 39 female
  • Stable family situation (72 Married)
  • Above-average education
  • Less likely to have criminal record
  • Good psychological health
  • Position of trust
  • Detailed knowledge of accounting systems and
    their weaknesses

28
Common Myths
  • What are some common myths
  • surrounding fraud that allow company executives
    to sleep at night?

29
Common Myth 1
  • We hire honest people
  • Chronic Criminal Predators
  • Embezzler/Management Perpetrators

30
Chronic Criminal Predators
  • Professional criminal
  • History of malfeasance
  • Looking for the next scam
  • Hit and run situations
  • Purchasing fraud/kickbacks
  • Advance fee scams
  • Ponzi schemes
  • Telemarketing and internet fraud
  • Desktop publishing check fraud
  • Stolen credit card numbers and fictitious
    collateral

31
Embezzler/Management Perpetrators
  • Trusted employee or manager
  • Understands system weaknesses
  • Motivation usually the result of change in
    personal circumstances

32
Common Myth 2
  • Fraud wont happen in my organization.
  • Fraud Triangle

33
Fraud Triangle
  • Needs or Situational "Red Flags
  • High personal debts
  • Lives beyond means
  • Excessive investment speculation
  • Excessive gambling
  • Substance abuse
  • Extra-marital affairs
  • Job frustration
  • Resentment of superiors

34
Fraud Triangle
  • Opportunity "Red Flags
  • Inadequate internal controls
  • Too cozy with suppliers
  • Annual vacations or sick days not taken
  • Weak management or excessive turnover
  • Ineffective or no internal audit unit
  • No rotation of job duties among employees
  • Procedures not well understood/always in a
    crisis mode

35
Fraud Triangle
  • Additional OpportunitySusceptibility of Assets
  • Poor physical safeguards over cash, investments,
    inventory, or fixed assets
  • Large amounts of cash on hand or processed
  • Inventory that is small, high-value, or in high
    demand
  • Easily convertible assets (e.g. computer chips)
  • Fixed asset characteristics such as small size,
    marketability, or lack of ownership identification

36
Fraud Triangle
  • Rationalization
  • My employer didnt compensate me well enough, so
    I took what was due to me.
  • Everyone else was doing it.
  • I intended to pay it back.
  • I needed the money.
  • I felt cheated and wanted revenge.
  • The bribe or kickback was too tempting.

37
Common Myth 3
  • The Auditors Will Find the Fraud.
  • Why Auditors Cant Find Fraud!

38
GAAS Audit v. Fraud Examination
39
Why Auditors Cant Find Fraud
  • Audits are too predictable
  • Auditing relies on scope and materiality
  • Auditors are not trained (book smart)
  • Auditors have limited to no experience (street
    smart)
  • Auditors are not authenticators

40
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41
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42
Fraud 101 Building Awareness
  • The End . . .
  • No, Just the Beginning!

43
Fraud 101 Building Awareness
  • Larry Rosipajla, CPA, CFE
  • Clifton Gunderson LLP
  • Valuation Forensic Services
  • (303) 265-7810 Direct
  • (303) 854-7007 Cell
  • larry.rosipajla_at_cliftoncpa.com
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