Chapter 1

Introduction to Fraud Examination

Learning Objectives
Understand the fraud theory approach. Define occupational fraud. Define fraud. Define abuse. Know the difference between fraud and abuse. Describe the criminological contributions of Edwin H. Sutherland. Understand Donald Cresseys hypothesis. Give examples of non-shareable problems that contribute to fraud. Understand how perceived opportunity and rationalization contribute to fraud. Explain W. Steve Albrechts fraud scale. Summarize the conclusions of the HollingerClark study. Summarize the results of the 2006 National Fraud Survey.
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Discipline of Fraud Examination

Resolving allegations of fraud from tips, complaints or accounting clues
Documentary evidence Interviewing witnesses Writing investigative reports Testifying Assisting in the detection and prevention of fraud

Forensic accounting vs. fraud examination

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Auditing vs. Fraud Examination

Issue
Timing
Scope Objective

Auditing
Recurring
General Opinion

Fraud Examination
Nonrecurring
Specific Affix blame

Relationship
Methodology

Nonadversarial
Audit techniques

Adversarial
Fraud examination techniques Proof

Presumption

Professional skepticism

Fraud Examination Methodology

Predication
Totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, and/or will occur Fraud examinations must be based on predication.

Fraud Theory Approach

Analyze available data Create a hypothesis Test the hypothesis Refine and amend the hypothesis

Tools Used in Fraud Examination

Observation
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Defining Occupational Fraud and Abuse

The use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets

Elements of Fraud
A material false statement Knowledge that the statement was false when it was uttered Reliance on the false statement by the victim Damages resulting from the victims reliance on the false statement
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Occupational Fraud and Abuse Research

Edward Sutherland Donald Cressey
Cresseys Hypothesis

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Opportunity

Fraud Triangle
Pressure Rationalization
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2006 Report to the Nation on Occupational Fraud & Abuse

Nationwide survey Measuring the costs of occupational fraud
5 percent lost to fraud $650 billion annually in the U.S.

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Position of Perpetrator
Position of Perpetrator
Employee 41.2%

Manager

39.5%

Ow ner/Exec

19.3%

0%

10%

20%

30%

40%

50%

Percent of Cases

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Median Loss by Position

Employee
Position of Perpetrator

$78,000

Manager

$218,000

Ow ner/Exec

$1,000,000

$0

$200,000

$400,000

$600,000 Median Loss

$800,000 $1,000,000 $1,200,000

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Gender of Perpetrator
Gender of Perpetrator
Male 61.0%

Female

39.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Percent of Cases

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Median Loss by Gender

Gender of Perpetrator

Male

$250,000

Female

$102,000

$0

$ 50,000

$1 00,000

$1 50,000

$ 200,000

$ 250,000

$ 300,000

Median Loss

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Median Loss per Number of Employees

Number of Employees

<100

$190,000

100-999

$179,000

1,000-9,999

$120,000

10,000+ $0 $50,000 $100,000 Median Loss

$150,000 $150,000 $200,000

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Initial Detection of Frauds

Tip By Accident Internal Audit Internal Controls External Audit Notified by Police 0%
3.8% 1 2.0% 20.2% 25.4% 34.2%

Detection Method

1 9.2%

5%

10%

15%

20%

25%

30%

35%

40%

Percent of Cases

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Occupational Fraud and Abuse

Corruption
Conflicts of Interest

Asset Misappropriations

Fraudulent Statements

Cash

Financial

Bribery

Inventory & All Other Assets

Nonfinancial

Illegal Gratuities
Economic Extortion
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