Fraud Risk Management

Introduction

Roger Darvall-Stevens, CFE

RSM Bird Cameron
(Australian member firm of RSM International)
© 2015 Association of Certified Fraud Examiners, Inc.
 Discussion Questions
1. On a scale of 1 to 10 (1 being lowest and 10
being highest), how much emphasis does your
organization place on preventing fraud?
Detecting fraud? Investigating known instances
of fraud?

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 Discussion Questions
2. Think of an instance of fraud that was
perpetrated at your organization (or another
organization, if necessary). What were the
indirect costs and effects of the fraud?

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 Discussion Questions
3. Which departments or business activities in
your organization present the highest risk of
employee theft?
4. What business activities at your organization
are most prone to fraudulent misstatements?

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 Learning Objectives—Introduction
 Define fraud and its components.
 Identify different types of fraud.
 Examine the impact of fraud on organizations.
 Understand why people commit fraud.
 Examine the relationship between anti-fraud
initiatives and risk management.

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 What Is Fraud?
 Any intentional or
deliberate act to deprive
another of property or
money by guile,
deception, or other unfair
means

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 Elements of Fraud
 A material false statement
 Knowledge that the statement was false when it
was uttered
 Reliance on the false statement by the victim
 Damages resulting from the victim’s reliance on
the false statement

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 Components of Fraud

 The act
 The concealment
 The conversion

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 Types of Fraud
 Internal/occupational fraud
• Asset misappropriation (embezzlement)
• Corruption
• Financial statement fraud
 External fraud
• Dishonest vendors
• Dishonest customers
• Unrelated third parties

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 The Impact of Fraud

 All organizations are

susceptible to fraud.
 Fraud is a human
problem, not an
accounting problem.

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 ACFE 2014 Report to the Nations
 The typical organization loses 5% of its annual
revenue to fraud.
• Potential total fraud loss of $3.7 trillion worldwide
 Median loss caused by occupational frauds is
$145,000.
 22% of the frauds involved losses of at least $1
million.

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 ACFE 2014 Report to the Nations
 Asset misappropriation schemes
• Most common—85% of cases
• Least costly—median loss of $130,000
 Financial statement frauds
• Least common—9% of cases
• Most costly—median misstatement of $1 million
 Corruption schemes
• 37% of cases
• Median loss of $200,000

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 The Indirect Fallout
 Impact extending well beyond the actual dollar
amount stolen
 Loss of employee confidence
 Loss of productivity
 Decline in company image and reputation

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 Why Do People Commit Fraud?

Opportunity

Pressure Rationalization

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 When Does the Fraud
Triangle Not Apply?
 Predatory employees
 The need for
rationalization often
dissipates after the
first offense.

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Why Sanctions Alone Don’t Deter Fraud
 Perpetrators do not anticipate getting caught.
 Perpetrators rationalize their conduct so that it
seems legal or justified and thus should not be
sanctioned.
 The greatest threat perpetrators face is that their
crime will be detected.

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 Fraud and Risk Management

 Risk is the effect

(positive or negative) of
uncertainty on an
organization’s
objectives.

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 Fraud and Risk Management
 Risks are normally grouped into categories to
facilitate risk mitigation.
• Strategic
• Operational
• Reporting
• Compliance
 Fraud might be considered a compliance,
financial, or operational risk.

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 Fraud and Risk Management
 What is risk management?
• COSO: “A process ... designed to identify potential
events that may affect the entity, and manage risk to
be within its risk appetite, to provide reasonable
assurance regarding the achievement of entity
objectives”
• ISO 31000:2009: “Coordinated activities to direct and
control an organization with regard to risk”

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 Fraud and Risk Management
 Many risk management professionals
underestimate the role of fraud in—or even
exclude fraud risks from—the scope of their
professional duties.

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 Fraud and Risk Management
 This course explains how to integrate anti-fraud
and risk management initiatives to:
• Identify, assess, and manage fraud risks.
• Support fraud risk management by establishing an
anti-fraud culture and promoting fraud awareness.
• Develop a system of internal controls to address fraud
risks.
• Address and respond to identified fraud.

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