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Corporate Fraud

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Corporate Fraud Powered By Docstoc
					   OBJECTIVE OF THE SEMINAR

 To sensitize the participants
  on the various aspects of

          fraud
facilitating timely detection and
   enabling corrective action
 CONTENTS


 White Collar fraud -- An introduction
 Results of Fraud Surveys & Studies
 Profile of Fraud Perpetrators
 Common Fraud Schemes & Red Flags
 About Us
White Collar Fraud
- An Introduction
    DEFINITION OF FRAUD


A Fraud is:

 A representation (usually of fact)
 About a material point (important enough to make a
  difference)
 Is False
 Intentionally and knowingly so (some cases recklessly)
 Which is believed
 Acted upon by the victim
 Caused Damage
   ELEMENTS OF FRAUD EXAMINATION


Fraud Examination involves:

   Assisting in Detection & Prevention of Fraud

   Obtaining evidence & taking statements

   Writing Reports

   Testifying to Findings
FRAUD TRIANGLE - CRESSEY


                  OPPORTUNITY




                   FRAUD
                  TRIANGLE


RATIONALIZATION                 PRESSURE
FRAUD SCALE


  Situational
  Pressures
 Low
                          Fraud               High

                          Scale
  Opportunities
  To Commit
 Low                                          High


                                          Personal
                  High             No     Integrity
 Low                                           High
                  Fraud           Fraud
     MULTIPLIER EFFECT OF FRAUD


FRAUD LOSSES REDUCE NET              Fraud Robs Income
INCOME RS. FOR RS.

   IF PROFIT MARGIN IS 10%,
    REVENUES MUST INCREASE BY
    10 TIMES LOSSES TO RECOVER
    AFFECT ON NET INCOME
      LOSSES……. RS. 1 MILLION
     REVENUE….RS. 10 MILLION



                                 Revenues     Net Income
      MULTIPLIER EFFECT.. ANOTHER 2 EXAMPLES


   A Car Manufacturer         Large Bank
     $436 Million Fraud         $750 million fraud
     Profit Margin = 10%        Profit Margin = 10 %
     $4.36 Billion in           $7.5 Billion in revenues
      revenues needed             needed
     At $20,000 per car,        At $100 per year per
      218,000 cars                checking account, 750
                                  million new accounts
  FOCUSING ON FRAUD -
  THE CORPORATE GOVERNANCE WAY


 Section 217 (2AA) para iii of Companies (Amendment) Act,
  2000 regarding Directors’ Responsibility Statement in Board
  Report



 Codes of Conduct/Values



 Foreign Corrupt Practices Act
    FRAUD SHOULD BE TAKEN SERIOUSLY



   Fraud is increa sing
   Creates significant behavioral issues in an organization
   Disrupts productivity
   Losses have a multiplier effect making them much more
    expensive than the actual amount stolen
   Kills careers of Good Managers
   Responsibility of Directors for prevention and detection
    of fraud has increased
    WHAT AN ORGANIZATION CAN DO



   Tone at the top; create an ethical environment
   Lead by Example
   Corporate Code of Conduct
   Call in Services for reporting unethical practices
   Reliable Internal Controls
    WHAT AN ORGANIZATION CAN DO (CONTD.)


   Training Courses on
     Ethics Training
     Internal Controls
     Fraud Prevention
     Technological and business changes
     Special training for monitors
   Reference Checks on New Employees
   Code of Sanction for Suppliers/Contractors
Results of Surveys and
Studies related to Fraud
    PRICEWATERHOUSECOOPERS ECONOMIC
    CRIME SURVEY 2001 REPORT

   Coverage- More than 3400 large organizations
   42.5 % were victims of Economic Fraud in last two years
   60 % of frauds perpetrated by people within the
    organization
   Cost of Fraud to the victims was Euro 3.6 billion (Rs. 153.7
    billion) in last two years (Average cost Euro 6.7 million
    (Rs.286.09 million))
   Most prevalent being Embezzlement and Breach of Trust
   58 % of frauds detected by accident/chance
   Many organizations did not act on lessons learned
    CII/ PRICEWATERHOUSECOOPERS IT
    SECURITY SURVEY RESULT

   60% of organisations reported security breaches, where :
   Manufacturing and financial sector suffered higher revenue
    losses
   Revenue losses occurred at 21%
   Loss not quantifiable at 58%
   Culprit not identifiable in 48%
   Breached by computer hackers 23%
   Breach detected due to
       alert by colleague 53%
       alert by customer/ supplier 24%
   Average down time 29 hours
    PRICEWATERHOUSECOOPERS OPACITY
    SURVEY RESULT


   The OPACITY survey
       ranked India 14 out of 24 in corruption amongst 35
        countries surveyed
       Countries in South Asian region like Pakistan,
        Singapore, Hong Kong, Japan, Taiwan etc. are better
        poised than India in this regard
   India also ranked amongst the top 25 most corrupt
    countries according to a recent survey (Transparency
    International)
     RESULT OF NATIONAL FRAUD SURVEY 2001
     CONDUCTED BY ACFE, USA

   Fraud and abuse costs U.S. organizations more than $400
    billion annually.
   The average organization looses more than $9 per day per
    employee to fraud and abuse.
   The average organization looses about 6% of its total
    annual revenue to fraud and abuse committed by its own
    employees.
   The median loss caused by males is about $185,000; by
    females about $48,000.
     RESULT OF NATIONAL FRAUD SURVEY 2001
     CONDUCTED BY ACFE, USA

   Median losses caused by men are nearly four times those
    caused by women.
   Losses caused by managers are four times those caused
    by employees.
   Median losses caused by executives are 16 times those of
    their employees.
   The most costly abuses occur in organizations with less
    than 100 employees.
   The education industry experiences the lowest median
    losses.
   A STUDY OF 212 FRAUDS


                   DETECTION
By Accident or
Internal Control
     49%
                                        By Auditors
                                          18%


                       By Information
                            33%
Profile of Fraud Perpetrators
     PROFILE OF FRAUD PERPETRATORS


   Globally:
     Older (30 + years)
     75% male, 25% female
     Stable family situation
     Above-average education
     Less likely to have criminal record
     Good psychological health
     Position of trust
     Detailed knowledge of accounting systems and
      their weaknesses
    PROFILE OF FRAUD PERPETRATORS


   Median losses caused by men were four times those
    of caused by women
   Losses caused by managers were four times those
    caused by employees
   Median losses caused by executives were 16 times
    those of their employees
    PROFILE OF FRAUD PERPETRATORS


   Not driven by principles but by short term advantage
   Seeks instant gratification and over-estimates his
    importance
   Does not conform
   Impeded, he believes, for artificial reasons
   Drug, alcohol and other bad habits
   Excessively secretive
    PROFILE OF FRAUD PERPETRATORS



   Attitude of being above the law
   Deals with windfall areas or third parties
   Takes unreasonable risks
   Three distinct types:

       the opportunist
       the professional, and
       the desperate
     FRAUD PERPETRATORS


   Justifications
     “My   employer didn’t compensate me well enough, so
      I took what was due to me”
     “Everyone else was doing it”
     “I intended to pay it back”
     It does not harm anyone
     To adhere to policy & procedures
    Motives
     “I   needed the money”
     “I   felt cheated and wanted revenge”
     “The    bribe or kickback was too tempting”
Common Fraud Schemes
         &
     Red Flags
COMMON FRAUD SCHEMES



 Fraudulent               Asset
                                                 Corruption
 Statements          Misappropriation




                                         Inventory
              Cash                      and all other
                                           Assets


                     Organisational
                         Praise
  RED FLAGS – DEFINITION & KINDS


What Does “Red Flag” Mean
“RED FLAG” are the signals, signs or symptoms which are
 reflected while certain types of fraud are taking place in an
 organisation.


 Red flags, broadly speaking, are of two types:
     Situational
     Opportunity
    SITUATIONAL "RED FLAGS"



Employee                            Management

   High personal debts            Unfavorable economic conditions
                                    in industry
   Lives beyond means
                                   Insufficient working capital
   Excessive gambling
                                   Credit Problems
   Extra-marital involvement
                                   High Debt
   Job frustration
   OPPORTUNITY "RED FLAGS"



Employee                           Management

 Weakmanagement or                   Management over-ride
 excessive turnover                   Changes auditors frequently/
                                       use of several audit firms
     always in "crisis
 Firm
                                       simultaneously
 mode/training mode"
                                      Many adjusting entries
 Norotation/ segregation of job       required at time of audit
 duties among employees
About Us
   Business Ethics Advisory Services
   Statutory Compliance Review
   Internal Controls & Risk Management
   IT Systems Security
   Fraud Risk Management
   Fraud Investigation
   Procurement Review
   Training - Risk Management and Fraud Prevention

				
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posted:7/22/2011
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