CHAPTER 3 Fighting Fraud An Overview Albrecht Fraud

CHAPTER 3 Fighting Fraud: An Overview Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES After studying this chapter, you should be able to: } Become familiar with the different ways in which organizations fight fraud. } Understand the importance of fraud prevention. } Understand how to create a culture of honesty and high ethics. } Understand why hiring the right kind of employees can greatly reduce the risk of fraud. } Understand how to assess and mitigate the risk of fraud. } Understand the importance of early fraud detection. } Understand different approaches to fraud investigation. } Be familiar with the different options for legal action that can be taken once fraud has occurred. Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 2

Different Ways Organizations Fight Fraud } Fraud prevention } Early fraud detection } Fraud investigation } Follow-up legal action and/or resolution Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 3

Fraud Prevention } Preventing fraud is generally the most cost-effective way to reduce losses from fraud. } Effective fraud prevention involves: } Taking steps to create and maintain a culture of honesty and high ethics } Assessing the risks for fraud and developing concrete responses to mitigate the risks and eliminate the opportunities for fraud Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 4

Creating a Culture of Honesty and High Ethics } Tone at the top (proper modeling) } Hiring the right kind of employees } Communicating expectations of honesty and integrity } Creating a positive work environment } Proper handling of fraud and fraud perpetrators when fraud occurs Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 5

Figure 3. 1 Ethics Development Model Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 6

Figure 3. 2 Honesty of Employees Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 7

Assessing and Mitigating the Risk of Fraud } Organizations can proactively eliminate most fraud opportunities. } Ways to assess and mitigate the risk of fraud: } Accurately identifying sources and measuring risks } Implementing appropriate preventive and detective controls to mitigate those risks } Creating widespread monitoring by employees } Having internal and external auditors who provide independent checks on performance Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 8

Fraud Detection } Detection of fraud usually begins by identifying symptoms, indicators, or red flags that tend to be associated with fraud. } Three primary ways to detect fraud } By chance } By providing ways for people to report suspicions of fraud } By proactively examining transaction records and documents to determine if there anomalies that could represent fraud Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 9

Predication } Predication refers to the circumstances, taken as a whole, that would lead a reasonable, prudent professional to believe a fraud has occurred, is occurring, or will occur. } Fraud investigations should not be conducted without predication. } A specific allegation of fraud against another party is not necessary, but there must be some reasonable basis for concern that fraud may be occurring. Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 10

Fraud Investigation } Once predication is present, an investigation is usually undertaken to determine whether or not fraud is actually occurring. } The purpose of an investigation is to find the truth. } Do the symptoms observed actually represent fraud or do they represent unintentional errors or other factors? } If investigations are not properly conducted, any or all of the following might occur: } Reputations of innocent individuals can be irreparably injured. } Guilty parties can go undetected and be free to repeat the act. } Offended entity may not have information to use in preventing and detecting similar incidents or in recovering damages. Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 11

Approaches to Fraud Investigation } The approaches to fraud investigation vary, although most investigators rely heavily on interviews, computer searches of e-mails and records, and examination of accounting records and internal controls. } Fraud investigation methods can be classified according to: } Types of evidence produced } Elements of fraud Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 12

Figure 3. 3 Evidence Square Types of Evidence Produced } Testimonial evidence } Evidence gathered from individuals } Documentary evidence } Evidence gathered from paper, computers, and other written or printed sources } Physical evidence includes } Tangible evidence that can be associated with dishonest acts } Personal observation } Evidence that is sensed (seen, heard, felt, etc. ) by investigators themselves Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 13

Figure 3. 4 Elements of Fraud Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 14

Conducting a Fraud Investigation } Investigations must be undertaken only to “establish the truth of the matter under question. ” } Investigators must be experienced and objective. } Hypothesis about whether or not someone committed fraud should be closely guarded when discussing an investigation with others. } Investigators must ensure that only those who have a need to know are kept apprised of investigation activities. } Investigators must ensure that all information collected during an inquiry is independently corroborated. } Investigators must exercise care to avoid questionable investigative techniques. } Investigators must report all facts fairly and objectively. Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 15

Follow-Up Legal Action } When fraud is discovered, victims (including organizations and individuals) must make decisions about legal action. } Choices: } Pursue no legal action, } Pursue civil remedies, and/or } Pursue criminal action against the perpetrators. Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 16

Civil Action and Criminal Action } Civil action } Purpose is to recover money or other assets from the fraud perpetrators and others associated with the fraud } Criminal action } Law enforcement or statutory agencies } Fines, prison terms, or both } Restitution agreements Albrecht, Fraud Examination, 6 th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 3 17