ACC 525 ch 15

Define fraud

the knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment

What are the four elements of fraud

a false statement

knowledge

reliance

damages

What is a false statement in terms of fraud?

The perpetrator either lies directly or hides the truth

What is knowledge in terms of fraud?

The perpetrator knows the statement is false at the time it is stated

What is reliance in term of fraud?

The victim relies on information when deciding or acting

What are damages in terms of fraud?

The victim suffers damages as a result of relying on this false statement

What are the three components of fraud?

the act

the concealment

the conversion

How can companies manages fraud proactively?

performing fraud risk assessments

creating an anti-fraud culture

promoting fraud awareness through employee training

establishing and maintaining an effective system of internal control

instituting a formal fraud investigation process

Asset misappropriation

theft of corporate assets, including cash, inventory, fixed assets, and information such as customer lists and intellectual property

financial statement fraud

involves materially misrepresenting the financial results and position of a company by manipulating amounts or inappropriately disclosing information in the financial statement to deceive investors, creditors, and other users of the financial statement

Examples of behavioral red flags

financial difficulties

living beyond one’s mean

close association with the vendor or the customer

recent divorce or family problems

control issues or unwillingness to share duties

unscrupulous “big shot” attitude

Define the fraud triangle

a commonlu used framework that identifies three motivational elements generally associated with fraud

What are the three elements of the fraud triangle?

perceived pressure

opportunity

rationalization

Perceived pressure

A motive or incentive that pushes a person toward the decision to commit fraud

Opportunity

A situation that arise when a potential fraudster reasonably expects a fraud to go undetected and to experience no negative consequences

Rationalization

Justification of the act of committing fraud

Examples of pressure

The inability to pay debts

The need to maintain a certain lifestyle

habits such as drugs and gambling

feeling underpaid or under-appreciated at work

a challenge to beat the system

Examples of opportunity

when a company has poor or no internal controls

when there is collusion (people working together to circumvent the internal controls)

when management overrides the internal controls

Examples of rationalization

I’ll pay it back

I’m not paid enough

I deserve a promotion anyways

The company is so large that it won’t even notice

I need this money for a good cause

Some ways to prevent fraud

strong system of internal controls

creating a culture of ethical behavior in an organization

Some ways to detect fraud

identifying non-behaviorial red flags at a process or entity level

Setting up anonymous whistleblower hotlines

Use data analytics specifically designed to continuously monitor processes and systems for fraud trends or anomalies

Conducting independent checks of people’s work

Reviewing adequate documentation that leaves an audit trail