INTRODUCTION TO FRAUD Doug Kalesnikoff CAIFA, CFE Tel

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INTRODUCTION TO FRAUDDoug Kalesnikoff CA-IFA,
CFETel [phone]Email
kalesnikoff_at_commerce.usask.ca

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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

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DEFINITION OF FRAUD

• ACCOUNTANTS HANDBOOK OF FRAUD AND COMMERCIAL
  CRIME
• Fraud is criminal deception intended to
  financially benefit the deceiver.

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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.

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DEFINITION OF FRAUD

• REGINA v. OLAN (1978)
• Dishonest Deprivation

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THE ELEMENTS OF FRAUD

• DISHONEST
• active passive indirect
• DEPRIVATION
• risk of loss actual loss

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Fraud v. Theft

• Fraud
• hidden
• willingly part with property based on
  representation
• time lag

• Theft
• overt
• unwillingly part with property
• immediate

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WHO COMMITS FRAUD?
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Who Commits Fraud Externally?

• Suppliers false invoicing,
• short shipments
• Competitors espionage, price fixing
• Con Men false advertising
• Customers planned bankruptcy,
• false credit information

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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

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Fraud Triangle
Opportunity
Pressure
Rationalization
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Pressure

• What motivates the crime in the first place
• Examples
• Inability to pay ones 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

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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

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Why People Commit Fraud
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Rationalizations for Fraud

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

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Fraud Behaviour Equations

• B f (O,E)
• C P A
• C P - A

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What is a red flag?

• An irregularity thatmay relate to
• Time
• Frequency
• Place
• Amount

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Personal Red Flags

• Living beyond means
• Personal financial losses
• Addiction problems
• Change in personal circumstances
• Outside businessinterests
• Rarely takes vacations

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More Personal Red Flags

• Rationalizes poor performance
• Provides unreliable work
• Dissatisfied with job
• Close association to suppliers or competitors
• Likes to beat the system

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FRAUD IN THE REVENUE CYCLE

• FRONT END FRAUD
• FALSE SALES INVOICES
• LAPPING OF ACCOUNTS RECEIVABLE

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Front End Frauds

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

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False Sales Invoices

• invoices altered to reflect lower sale amount
• invoices altered to reflect higher sale amount

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Lapping of Accounts Receivable

• robbing Peter to pay Paul
• subsequent receipts used to cover earlier
  misappropriations

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FRAUD IN THE COST CYCLE

• FALSE INFORMATION
• FALSE SUPPLIER INVOICES
• FALSE EXPENSE REPORTS
• SECRET COMMISSIONS KICKBACKS
• PAYROLL
• OTHER

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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

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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

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Example Garrys Construction

• Identify the suspicious characteristics of these
  two invoices.

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False Expense Reports

• non-business items
• inflated items
• fictitious items
• duplicate items

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Secret Commissions Kickbacks

• gifts
• cash
• travel
• entertainment
• consulting fees
• future benefits

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Payroll

• fictitious employees
• inflated hours
• inflated rates
• manipulated deductions
• lump sum payments

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Other Cost Cycle Fraud

• Procurement Fraud
• Bid-rigging
• Employees in collusion with vendors
• Vendor fraud

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FRAUD POLICY

• increases probability of discovery
• decreases probability of occurrence
• defines acceptable conduct and dealings
• defines responsibilities for prevention
  detection
• states consequences

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CODE OF CONDUCT

• Relates to all aspects of
• employee
• honesty
• integrity
• actions

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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

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Deterrents to Internal Fraud (5)

• PHYSICAL DETERRENTS
• combination locks
• card access
• security
• password controls

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Deterrents to External Fraud (1)

• USE HONEST
• SUPPLIERS
• background checks
• due diligence reviews
• feasibility studies

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Deterrents to External Fraud (2)

• DEAL WITH HONEST
• CUSTOMERS
• background checks
• credit ratings
• prior lawsuits

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ASSESSING YOUR RISK

• What is your organizations risk of fraud?

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Fraud Risk Matrix

• Likelihood of Occurrence
• Impact on the Organization

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Risk Assessment

• management characteristics
• industry conditions
• operating characteristics
• susceptibility of assets to misappropriation
• employee relationships and pressures
• controls

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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

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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

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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