CSU - ACCT 465 - Study Guide - Midterm

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School: Cleveland State University

Department: Accounting

Course: Fraud Examination

Professor: Richard Molina Jr

Term: Spring 2017

Name: Fraud Examination

Description: Chapters 1-10

Uploaded: 03/23/2017

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Chapter 1 Types of Fraud  Employee embezzlement: employees deceive employers by taking company assets  Vendor Fraud: fraud perpetrated by vendors acting alone; collusion between buyers and
vendors  Customer fraud: customers either do not pay for goods purchased, they pay too little, or
they get something for nothing  Management fraud: “financial statement fraud”; top management’s deceptive
manipulation of financial statements  Investment scams: worthless investments are sold to unsuspecting investors o Ponzi schemes o Telemarketing fraud o Nigerian letter or money scams o Identity theft o Advance fee scams o Redemption/strawman/bond fraud o Letter of credit fraud o Internet fraud Evidential matter: consists of the underlying data and all corroborating information available Criminal Law: that branch of law that deals with offenses of a public nature
Civil Law: the body of law that provides remedies for violations of private rights  How to prepare for a fraudfighting profession o CFE exam o Academic requirements o Professional requirements  Fraud related careers

Chapter 2 The Fraud Triangle (why people commit fraud)  Perceived pressure  Perceived opportunity  Rationalize The elements of pressure  Financial pressures (not mutually exclusive) o Greed o Living beyond one’s means o Inability to pay bills or personal debt o Poor credit o Personal financial losses o Unexpected financial needs  Vice pressures o Motivations created by vices such as gambling, drugs, alcohol, expensive extramarital relationships  Ex: woman embezzled because her child was on drugs & couldn’t stand to
see them going through withdrawal pains  Work related pressures o Getting little recognition for job performance o Having a feeling of job dissatisfaction o Fearing losing one’s job o Being overlooked for a promotion o Feeling underpaid  Other pressures o Spouse who insists on an improved lifestyle o Challenge to beat the system The element of opportunity  Lack of internal controls that prevent and/or detect fraudulent behavior o Control environment: the work atmosphere that an organization establishes for
its employees  Management’s role and example 1. SarbanesOxley legislation (2002) code of ethics  Management communication  Appropriate hiring  Clear organizational structure (who has responsibility for each business
activity)  Effective internal audit department 1. Information and communication o Good accounting system > provides an audit trail

   Valid, properly authorized, complete, properly
classified, reported in the proper period, properly valued, summarized correctly 2.   Control activities (procedures) o  Segregation of duties or dual custody (2 individuals work together at the same task) o  System of authorizations o  Independent checks    Periodic job rotation    Cash counts or certifications    Supervisors reviews    Employee hot line    Use of auditors o  Physical safeguards    Vaults, safes, fences, locks, keys o  Documents and records  Inability to judge quality of performance  Failure to discipline fraud perpetrators o  Many organizations dismiss dishonest employees, hoping to rid themselves of the problem, but this lets other employees think it’s okay and will not suffer significantly  Lack of access to information or asymmetrical information (1 party has info, other
doesn’t)  Ignorance, apathy, or incapacity o  Older people, individuals with language difficulty, other “vulnerable” people  Lack of an audit trail o  Many frauds involve cash payments or manipulation of records that can’t be followed o  Perpetrators almost always manipulate the income statement The element of Rationalization  The organization owes me  I am only borrowing the money and will pay it back  Nobody will get hurt  I deserve more  It’s for a good purpose  We’ll fix the books as soon as we get over this financial difficulty  Something has to be sacrificed my integrity or my reputation Power: the probability that a person can carry out his or her own will despite resistance Reward power: the ability of a fraud perpetrator to convince a potential victim that he or she
will receive a certain benefit through participation in the fraud scheme

Coercive power: the ability of the fraud perpetrator to make an individual perceive punishment
if he/she does not participate in the fraud Expert power: the ability of the fraud perpetrator to influence another person because of the
expertise or knowledge Legitimate power: the ability of the fraud perpetrator to convince a potential perpetrator that he
or she truly has power over him or her
Referent power: the ability of the perpetrator to relate to the potential coconspirator Chapter 3 How do Organizations fight fraud? 1.           Fraud Prevention a.   Create a culture of honesty and high ethics i.   Making sure that top management models appropriate behavior (tone at the top) b.   Hiring the right kind of people i.   Ethical maturity model (EMM) (pg. 7273) 1.   The foundation of ethics, Personal Ethical Understanding
2.   Application of Ethics to Business Situations
3.   Ethical Courage
4.   Ethical Leadership c.   Communicating Expectations of Honesty and Integrity i.   Identifying and codifying appropriate values and ethics ii.   Fraud awareness training that helps employees understand potential fraud problems they may encounter and how to resolve or report them iii.   Communication consistent expectations about punishment of violators 1.   Code of conduct d.   Creating a positive work environment
e.   Proper handling of fraud and fraud perpetrators when fraud occurs i.   SarbanesOxley Act of 2002: system for employees to report wrongdoing 2.           Fraud Detection a.   by chance
b.   providing people ways to report suspicions of fraud i.    Whistleblowing systems: employees can call in using telephones or
submit an anonymous tip of a suspicion of fraud c.   Proactively examining transaction records and documents to determine if there are anomalies that could represent fraud (manually or by technology) 3.           Fraud Investigation (pg. 81) a.   Testimonial evidence i.   Gathered from individuals b.   Documentary evidence i.   Gathered from paper, computers, other written or printed sources ii.   Doc examination, data mining, public record searches, audits

c. Physical evidence i. Fingerprints, tire marks, weapons, stolen property, identification #s d. Personal observation i. Evidence that is senses (seen, heard, felt) by the investigators themselves e. Fraud motivation triangle (perceived pressure, rationalization, perceived opportunity) f. Fraud element triangle i. Theft act 1. Involve efforts to catch the perp in the embezzlement act or gather info about the actual theft acts ii. Concealment 1. Involves focusing on records, documents, computer programs and servers iii. Conversion 1. Involves searching for ways in which perpetrators have spent or used their stolen assets 4. Conducting a Fraud Investigation a. they must be undertaken only to “establish the truth of the matter under question” b. the individual charged with responsibility for conducting the investigation must be experienced and objective; investigator should never jump to conclusion c. any hypothesis investigator has about whether or not someone committed fraud should be closely guarded when discussing the progress of an investigation d. investigators must ensure that only those who have a need to know are kept appraised of investigation activities e. good investigators must ensure that all info collected during inquiry is independently corroborated and determined to be factually correct f. investigator must exercise care to avoid questionable investigative techniques
g. investigators must report all facts fairly and objectively 5. Follow Up Legal Action a. Civil action i. Recover money or other assets from the fraud perp(s) ii. Rare in employee fraud because perps usually spend money for financial needs b. Criminal Action i. Organization must work with local, state, federal agencies to get employees or other perps prosecuted ii. Criminal penalties include fines, prison terms, restitution agreements

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