Fraud

Triangl

Three Factors of
Fraud
Situational Pressure
Opportunity
Ethics

Figure 12.1 Fraud Triangle

nancial Losses from Fraud

Reasons why Fraud is Difficult to quantify according to ACFE
(Association of Certified Fraud Examiners)

1. Not all fraud is

detected
2. Of that detected, not all are
reported.
3.
In
many
fraud
cases,
incomplete
information
is
gathered.
4. Information is not properly distributed to
management or law enforcement authorities.
5. Too often, business organization takes no
civil of criminal action against the perpetrators

Table 12.2 Distribution of Losses

Perpetrators of
Fraud

Fraud Schemes
Three Categories
Schemes

1. Fraudulent
Statements
2. Corruption
3. Asset
Misappropriation

of

Fraud

Fraudulent
Table 12.8 Losses from
fraud by Scheme Type
Statements

UNDERLYING PROBLEMS

1.Lack of Auditor Independence

2.Lack of Director Independence
3.Questionable Executive Compensation Schemes

4.Inappropriate Accounting Practices

SARBANES-OXLEY
Principal Reforms pertain
to:
ACT

1.The creation of an
accounting oversight
board
2.Auditor independence
3.Corporate governance

a. Public companies are prohibited from

making loans to executive officers and
directors.
b. The act requires attorneys to report
evidence of a material violations of
securities law or breaches of fiduciary
4.duty
Disclosure
requirements
to the CEO, CFO, or the PCAOB.

and
5. Penalties for fraud and
other violations

Four principal Corruptio

types

n
Bribery
Illegal Gratuities
Conflicts of interest
Economic extortion

Asset Misappropriation

le 12.9 Losses from fraud by Asset Misappropriation Scheme

Skimming involves stealing cash from an

organization before it is recorded on the
organizations books and records.
Cash Larceny Cash receipts are stolen from
an organization after they have been recorded in
the organizations books and records.

Billing Schemes also known as Vendor

Fraud are perpetrated of employees who
cause their employer to issue a payment to a
false supplier or vendor by submitting invoices
for fictitious goods or services, inflated
invoices, or invoices for personal purchases.

Three examples
Shell Company
Pass through
Pay and Return
Check Tampering involves forging or changing in
some material way check that the organization has
written to a legitimate payee.
Payroll Fraud distribution of fraudulent paychecks to
existent and/or nonexistent employee.

Expense Reimbursement frauds are schemes in

which an employee makes a claim for reimbursement of
fictitious or inflated business expenses.
Theft of Cash involves the direct theft of cash hand
in the organization.
Non-Cash Misappropriation involves the theft or
misuse of the victim organizations non cash asset.

Computer Fraud includes the ff.

The theft, misuse or misappropriation of
asset by altering computer-readable
records and files.
The theft, misuse or misappropriation of
asset by altering the logic of computer
software.
The theft or illegal use of computerreadable information.
The theft, misuse or misappropriation of

Data Collection first operational stage

in the information system. The objective is
to ensure transaction data entering the
system valid, complete and free from
material errors.

Masquerading involves a perpetrator

gaining access to the system from a
remote site by pretending to be an
authorized user.

Piggybacking technique in which

the perpetrator a remote site taps into
the telecommunications lines and
latches onto an authorized user who is
logging into the system.

Data Processing once collected,

data usually required processing to

Program Fraud includes the ff

technique:
1.Creating illegal programs that can
access data files to alter, delete, or
insert values into accounting records.
2.Destroying or corrupting a programs
logic using a computer virus.
3.Altering program logic to cause the
application to process data

Operations Fraud the misuse or theft

of the computer resources.

Database Management includes

altering, deleting, corrupting, destroying,
stealing an organizations data.

Information Generation the process

of compiling, arranging, formatting and
presenting information to users.

Characteristics:
Relevance the contents of the document
must serve a purpose.
Timeliness the age of information is critical
factor in determining its usefulness.
Accuracy information must be free from
material errors.
Completeness no piece of information
essential to a decision or task should be missing.
Summarization information should be
aggregated in accordance with a users needs.

Scavenging involves searching

through the trash cans of the computer
center for discarded output.

Eavesdropping involves listening to

output transmissions over
telecommunication lines.

End
of

Mary Joy Dabu

Ramirez