HON 322C Fraud Seminar

1
HON 322C Fraud Seminar

• Prof Bill Dilla
• Jan. 14, 2003

2
Elements of Fraud

• A representation
• About a material point
• Which is false
• And intentionally or recklessly so,
• Which is believed
• And acted upon by the victim
• To the victims damage

3
Relationship between fraud and illegal /
unethical acts
Unethical Acts
Illegal Acts
Fraud
4
Types of fraud The big picture

• Occupational fraud (Asset theft)
• Fraud committed against an organization
• Usually by employees or managers
• BUT recent cases by executives exist (e.g., Tyco,
  Adelphia)called corporate looting
• Management fraud
• Fraud committed on behalf of an organization
• Fraudulent financial reporting most common type
• Generating most of the current concern about fraud

5
A more complete fraud list

• Employee embezzlement
• Management fraud
• Investment scams
• Vendor fraud
• Customer fraud

6
Fraud can be of more than one type

• Employees collude with a vendor to overcharge and
  take kickbacks
• Both embezzlement and vendor fraud
• Stock option backdating
• Corporate looting
• Fraudulent financial reporting to cover up
  expense

7
From an audit and control perspective

• Preventing employee embezzlement and fraudulent
  financial reporting are most important
• Controls to prevent embezzlement also help
  prevent vendor fraud and customer fraud
• Customer fraud and vendor fraud are of particular
  importance in an e-commerce environment

8
Some Fraud FactsSource 2003 KPMG Survey of
Public Companies and State and Federal
Agencieshttp//www.kpmg.com/aci/docs/surveys/Frau
d20Survey_040855_R5.pdf

• Most common type of fraud
• Theft of assets
• Most costly frauds
• Financial reporting fraud
• Medical / insurance fraud
• Most common methods for uncovering fraud
• Internal control
• Internal audit
• Notification by employee
• Least common method for uncovering fraud
• External audit

9
Fraud Trends(also from KPMG surveycompared to
1998 and 1994)

• Internal control and internal audit are catching
  significantly more frauds
• Collusion between employees and 3rd parties is
  increasing as a cause of fraud
• More companies are taking legal actions or
  notifying law enforcement

10
Some Other Fraud Trends

• Sarbanes-Oxley internal control requirements
• Intended to address fraudulent financial
  reporting for public companies
• Has also increased controls over employee fraud
  in many cases
• Some non-public companies have adopted
• Use of in-house resources for fraud
  investigation and prevention
• Proactive as opposed to reactive fraud
  policies