INTRODUCTION TO FRAUD Doug Kalesnikoff CA-IFA, CFE Tel # (306) 966 by kmb15358

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									 INTRODUCTION TO FRAUD
   Doug Kalesnikoff CA-IFA, CFE
         Tel # (306) 966-1471
Email: kalesnikoff@commerce.usask.ca




                                       1
       DEFINITION OF FRAUD
   CICA HANDBOOK S. 5135.04

    “The term “fraud” refers to an intentional
    act by one or more individuals among
    management, other employees, those
    charged with governance, or third parties,
    involving the use of deception to obtain an
    unjust or illegal advantage”

                                              2
       DEFINITION OF FRAUD
   ACCOUNTANT’S HANDBOOK OF FRAUD
    AND COMMERCIAL CRIME

    Fraud is criminal deception intended to
    financially benefit the deceiver.




                                              3
       DEFINITION OF FRAUD
   THE CRIMINAL CODE S. 380(1)
    Every one who, by deceit, falsehood or
    other fraudulent means, whether or not it
    is a false pretence with the meaning of
    this Act, defrauds the public or any
    person, whether ascertained or not, of any
    property, money or valuable security or
    any service.

                                             4
       DEFINITION OF FRAUD
   REGINA v. OLAN (1978)

    “Dishonest Deprivation”




                              5
THE ELEMENTS OF FRAUD
                  DISHONEST

active             passive          indirect

                  DEPRIVATION

   risk of loss              actual loss

                                               6
                 Fraud v. Theft
         Fraud
                                      Theft
   hidden
                             overt
   willingly part with
    property based on        unwillingly part with
    representation            property

   time lag
                             immediate

                                                  7
WHO COMMITS FRAUD?




                     8
Who Commits Fraud Externally?

   Suppliers     false invoicing,
                  short shipments

   Competitors   espionage, price
                  fixing

   Con Men       false advertising

   Customers     planned bankruptcy,
                  false credit information
                                      9
      Who Commits Fraud Internally?
   Employees    theft of assets,
                 lapping schemes

   Managers     manipulate system,
                 kickbacks, expenses
   Officers     false financial
                 reporting

   Directors    manipulate share price,
                 related party transactions
                                        10
           Opportunity




             Fraud
            Triangle


Pressure          Rationalization
                                    11
                    Pressure
 What motivates the crime in the first place
 Examples:
    – Inability to pay one’s bills
    – Gambling or drug addiction
    – Meeting of earnings’ targets for investors
    – Meeting of productivity targets at work
    – Desire of status symbols, houses, cars etc
    – Family problems including marital and
      sickness

                                                   12
              Opportunity
 Must see a way to abuse the position of
  trust with low perceived risk of getting
  caught
 Place $500 in a coffee room with note that
  says “please do not steal”. How long
  would the money remain untouched?
 Internal controls
 Honesty Scale

                                           13
   Why People Commit Fraud

THE HONESTY SCALE

                             20%
                            honest

               60% honest
               depending       20%
                  upon      dishonest
                situation




                                        14
    Rationalizations for Fraud

•   I’m just borrowing the funds!
•   I deserve it, I’m underpaid!
•   I should have been promoted by now!
•   It’s only the government!
•   I’m not hurting anyone!
•   Others are doing it!

                                          15
Fraud Behaviour Equations


       B = f (O,E)


        C=P–    A




        C=P-A
                            16
What is a red flag?
             An irregularity that
              may relate to:
             Time
             Frequency
             Place
             Amount




                                 17
        Personal Red Flags
 Living beyond means
 Personal financial losses
 Addiction problems
 Change in personal
  circumstances
 Outside business
  interests
 Rarely takes vacations

                              18
     More Personal Red Flags
 Rationalizes poor performance
 Provides unreliable work
 Dissatisfied with job
 Close association to suppliers or
  competitors
 Likes to “beat the system”




                                      19
    FRAUD IN THE REVENUE CYCLE

   FRONT END FRAUD

   FALSE SALES INVOICES

   LAPPING OF ACCOUNTS RECEIVABLE




                                 20
            Front End Frauds

 cash sales not recorded
  and cash diverted
 customers directed
  elsewhere
 misappropriation of
  purchase rebates
 misappropriation of
  miscellaneous revenue

                               21
False Sales Invoices

             invoices altered to
              reflect lower sale
              amount

             invoices altered to
              reflect higher sale
              amount


                                    22
Lapping of Accounts Receivable

   robbing Peter to pay
    Paul

   subsequent receipts
    used to cover earlier
    misappropriations




                             23
    FRAUD IN THE COST CYCLE

   FALSE INFORMATION
   FALSE SUPPLIER INVOICES
   FALSE EXPENSE REPORTS
   SECRET COMMISSIONS & KICKBACKS
   PAYROLL
   OTHER
                                 24
        False Information

 false financial statements
 overstated accounts and loans receivable
 over or understated accounts payable
 fictitious suppliers
 false asset valuations
 false journal entries
 altered internal company records

                                         25
       False Supplier Invoices

   goods not received

   inferior quality goods received

   service not rendered

   invoice for higher value than received

   invoice for higher quantity than received
                                                26
Example – Garry’s Construction
Identify the suspicious characteristics of
  these two invoices.




                                             27
          False Expense Reports
   non-business items

   inflated items

   fictitious items

   duplicate items



                                  28
    Secret Commissions & Kickbacks
   gifts

   cash

   travel

   entertainment

   consulting fees

   future benefits
                                29
Payroll

       fictitious employees

       inflated hours

       inflated rates

       manipulated
        deductions

       lump sum payments

                               30
        Other Cost Cycle Fraud

   Procurement Fraud

   Bid-rigging

   Employees in collusion with vendors

   Vendor fraud

                                          31
               FRAUD POLICY

   increases probability of
    discovery
   decreases probability of
    occurrence
   defines acceptable
    conduct and dealings
   defines responsibilities for
    prevention & detection
   states consequences
                                   32
CODE OF CONDUCT

        Relates to all aspects of
        employee:

           honesty

           integrity

           actions


                               33
Deterrents to Internal Fraud
             SYSTEM DETERRENTS
              hiring practices
              supervision and control
              adequate books & records
              proper authorization
              segregation of duties
              employee programs
              internal audit
              red flag program
                                    34
  Deterrents to Internal Fraud (5)
PHYSICAL
DETERRENTS

combination   locks
cardaccess
security
password controls




                                     35
    Deterrents to External Fraud (1)
USE HONEST
SUPPLIERS

 background checks
 due diligence
  reviews
 feasibility studies




                                       36
    Deterrents to External Fraud (2)
DEAL WITH HONEST
CUSTOMERS

 background checks
 credit ratings
 prior lawsuits




                                       37
ASSESSING YOUR
     RISK
What is your organization’s
       risk of fraud?
          Fraud Risk Matrix

Likelihood of Occurrence

Impact on the Organization




                              39
            Risk Assessment

   management
    characteristics
   industry conditions
   operating characteristics
   susceptibility of assets to
    misappropriation
   employee relationships
    and pressures
   controls
                                  40
     Management Characteristics

 failure to display, communicate
  and support appropriate attitude
  regarding internal control and
  financial reporting
 high management turnover
 domination by an individual or
  small group
 compensation related to the
  achievement of unduly
  aggressive operating targets
                                     41
    Susceptibility of Assets to Misappropriation

•   large amounts of cash on
    hand
•   small size, high demand,
    high value inventory
•   easily convertible assets
•   fixed assets marketable or
    lack ownership
    identification
                                            42
        Control Risk Factors

•   lack of appropriate segregation of duties
•   lack of independent checks
•   lack of appropriate management oversight
•   lack of job application screening
•   lack of mandatory vacations
•   poor physical safeguarding of assets
•   lack of timely and appropriate transaction
    documentation
                                           43

								
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