Fraud 101

12/7/2012 6:31:00 PM

Definition of Fraud In Legal Dictionary, fraud is false representation of a matter of fact whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed that deceives and is intended to deceive another so that the individual In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual. Corporate world the use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets. Gross negligence may be considered as frauds Elements of Fraud 1. Fraudster 2. Victim 3. Object 4. Intentional misrepresentation or deceit 5. Gain for the fraudster 6. Loss for the victim 7. Applicable laws civil and criminal **only the courts can declare the existence of fraud, before it is declared as fraud by the courts, it is only an allegation Fraud Triangle widely accepted model for why people commit fraud key components: pressure, opportunity (most crucial), rationalization (all 3 need to exist for fraud to flourish) Fraud Dimensions Criminal/Legal o Deceit o Trickery o Breach of Trust o Perpetrated for profit or to gain some unfair or dishonest advantage

o Circumvention of the law (especially if the fraudster is the corporation itself) o Violation of the law Psychological, Social, Behavioral o Greed o Shame o Fear o Thrill o **Fraud thrives on human weaknesses Moral/Ethical o Principles o Values o Culture o **What is legal is not always moral and ethical Financial/Economic o Loss of lifetime savings, investment o Loss of promised future benefits o Loss of employment, livelihood o Impact to economic growth and development

Profiling a Fraudster Male College educated Over the age of 35 Occupies position of authority and trust Often well respected in the organization Often in same role for a long time As women and other minorities move into more positions of authority, this profile is changing. Fraud is an equal opportunity activity Fraud Statistics What is the most common method for detecting fraud? The most common method for detecting fraud is a tip from an employee, customer, vendor, or anonymous source

According to the Association of Certified Fraud Examiners, companies lose value equivalent to 6-7% of sales annually to fraud

Common Types of Fraud Public Fraud o Ponzi Scheme o Internet Fraud o Text Fraud Institutional Fraud o Asset Theft cash, inventory, and other assets, fraudulent disbursements o Financial Statement Fraud includes revenue recognition issues, inappropriate reserves, inappropriate year-end spending o Corruption includes conflicts of interest, bribery, economic extortion Early Warning Signals Purchases and Procurement o Payments to a vendor post office box o Lack of competitive bidding o Single vendor o Delivery location not the office, plant or job site o Invoices with minimal information o Vendors that pick up payments Personnel o Unexplained employee absences o Excessive overtime o Significant life-style changes o Refusal to take vacation o Excessive or unjustified changes in accounting personnel o High rate of employee turnover o Turning down promotions or transfers o Lack of segregation of duties Records o Refusal to produce records, files or documents

o Missing documentation o No original source documents o No exceptions or errors o Premature or excessive destruction of controlled documents Inventory/Assets o Inventory that is slow to turnover Others o Excessive cash transactions o Customer complaints o Cant talk to people (protection) o Consistent cash flow problems o Dramatic changes in key ratios or ratios too good o Failure to reconcile bank statements or a conflict of duties on the part of performing reconciliations o Receivable grows substantially faster than sales

Fraud is a reality of life. If the offer is too good to be true..think and think again If ever you are defrauded, speak up! Print instead of using script Use a permanent marker Write as large as possible Fill in all unused space Enron using hidden subsidiaries, hiding losses Qwest using swap deals to inflate revenues Worldcom treating business costs as assets Bristol-Myers loading the trade, then forced to restate Olympus (Japan)

12/7/2012 6:31:00 PM

12/7/2012 6:31:00 PM