Fraud Examination, 3E

Chapter 1: The Nature of Fraud

COPYRIGHT © 2009 South-Western, a part of Cengage Learning.

Learning Objectives• Recognize the seriousness and effects of

fraud• Define fraud• Classify types of fraud• Distinguish between criminal and civil

fraud laws• Identify fraud-fighting careers

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The Seriousness of FraudSources of Fraud Statistics– Government Agencies– Researchers– Insurance Companies– Fraud Victims– Association of Certified Fraud Examiners

(ACFE)

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The Seriousness of FraudFraud reduces a firm’s net income on a

dollar-for-dollar basis

FRAUD NET INCOME

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The Definition of FraudSeven 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.

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The Definition of Fraud

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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.

The Various Classifications of FraudWith 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

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The Various Classifications of Fraud

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Type of Fraud Victim Perpetrator Explanation

Employee Embezzlement Employers Employees Employees directly or

indirectly steal from employers

Management

Stockholders, lenders, & others relying on financial statements

Top management

Top management‘s misrepresentation of financial information

Investment Scams Investors IndividualsIndividuals trick investors into putting money into fraudulent investments

VendorOrganizations that buy goods & services

Organizations / individuals selling goods & services

Overcharged for goods & services or non-shipment of goods paid for

Customer Organizations selling goods and services Customers

Customers deceive sellers into giving them something they should not have

Criminal and Civil Fraud Laws

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Criminal Law Case Civil Law Case

Purpose To right a wrong To obtain a remedy

Consequences Jail and/or fines Restitution & damage payments

Burden of Proof “Beyond a reasonable doubt” “Preponderance of evidence”

Jury Must have 12 people May be fewer than 12 persons

Organization Determination by a grand jury that sufficient evidence exists to indict Filing of a claim by a plaintiff

Verdict Unanimous verdict Parties may stipulate to a less than unanimous verdict

Claims Only one claim at a time Various claims my be joined in one action

Fraud-fighting Careers

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Type of Career Types of Employers and Career Description

Government and law enforcement

FBI, postal inspectors, Criminal Investigation Division of the IRS, U.S. marshals, inspector generals of various governmental agencies, state investigators, and local law enforcement officials.

CPA firmsConduct investigations, support firms in litigation, do bankruptcy-related accounting work, provide internal audit and internal control consulting work.

CorporationsPrevent, detect, and investigate fraud within a company. Includes internal auditors, corporate security officers, and in-house legal counsels.

ConsultingServe as an independent consultant in litigation fraud work, serve as expert witness, consult in fraud prevention and detection, and provide other fee-based work.

Law firmsLawyers provide litigation and defense work for companies and individuals being sued for fraud and provide special investigation services when fraud is suspected.