Albrecht Chap 03 Old

CHAPTER
Fighting Fraud:
An Overview
Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
After studying this chapter, you should be able to:
 Become familiar with the different ways in which
organizations fight fraud.
 Understand the importance of fraud prevention.
 Understand how to create a culture of honesty and high
ethics.
 Understand why hiring the right kind of employees can
greatly reduce the risk of fraud.
 Understand how to assess and mitigate the risk of fraud.
 Understand the importance of early fraud detection.
 Understand different approaches to fraud investigation.
 Be familiar with the different options for legal action that
can be taken once fraud has occurred.
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May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
 Fraud prevention
 Early fraud detection
 Fraud investigation
 Follow-up legal action and/or resolution
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 Preventing fraud is generally the most cost-effective
way to reduce losses from fraud.
 Effective fraud prevention involves:
 Taking steps to create and maintain a culture of honesty and
high ethics
 Assessing the risks for fraud and developing concrete
responses to mitigate the risks and eliminate the
opportunities for fraud
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 Tone at the top (proper modeling)
 Hiring the right kind of employees
 Communicating expectations of honesty and integrity
 Creating a positive work environment
 Proper handling of fraud and fraud perpetrators when
fraud occurs
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 Organizations can proactively eliminate most fraud
opportunities.
 Ways to assess and mitigate the risk of fraud:
 Accurately identifying sources and measuring risks
 Implementing appropriate preventive and detective controls
to mitigate those risks
 Creating widespread monitoring by employees
 Having internal and external auditors who provide
independent checks on performance
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 Detection of fraud usually begins by identifying
symptoms, indicators, or red flags that tend to be
associated with fraud.
 Three primary ways to detect fraud
 By chance
 By providing ways for people to report suspicions of fraud
 By proactively examining transaction records and documents
to determine if there are anomalies that could represent fraud
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 Predication refers to the circumstances, taken as a
whole, that would lead a reasonable, prudent
professional to believe a fraud has occurred, is
occurring, or will occur.
 Fraud investigations should not be conducted without
predication.
 A specific allegation of fraud against another party is not
necessary, but there must be some reasonable basis for
concern that fraud may be occurring.
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 Once predication is present, an investigation is usually
undertaken to determine whether or not fraud is actually
occurring.
 The purpose of an investigation is to find the truth.
 Do the symptoms observed actually represent fraud or do they
represent unintentional errors or other factors?
 If investigations are not properly conducted, any or all of
the following might occur:
 Reputations of innocent individuals can be irreparably injured.
 Guilty parties can go undetected and be free to repeat the act.
 Offended entity may not have information to use in preventing and
detecting similar incidents or in recovering damages.
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 The approaches to fraud investigation vary, although
most investigators rely heavily on interviews, computer
searches of e-mails and records, and examination of
accounting records and internal controls.
 Fraud investigation methods can be classified
according to:
 Types of evidence produced
 Elements of fraud
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Types of Evidence Produced
 Testimonial evidence
 Evidence gathered from
individuals
 Documentary evidence
 Evidence gathered from paper,
computers, and other written or
printed sources
 Physical evidence includes
 Tangible evidence that can be
associated with dishonest acts
 Personal observation
 Evidence that is sensed (seen,
heard, felt, etc.) by investigators
themselves
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 Investigations must be undertaken only to “establish the truth of
the matter under question.”
 Investigators must be experienced and objective.
 Hypothesis about whether or not someone committed fraud
should be closely guarded when discussing an investigation with
others.
 Investigators must ensure that only those who have a need to
know are kept apprised of investigation activities.
 Investigators must ensure that all information collected during
an inquiry is independently corroborated.
 Investigators must exercise care to avoid questionable
investigative techniques.
 Investigators must report all facts fairly and objectively.
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 When fraud is discovered, victims (including
organizations and individuals) must make decisions
about legal action.
 Choices:
 Pursue no legal action,
 Pursue civil remedies, and/or
 Pursue criminal action against the perpetrators.
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 Civil action
 Purpose is to recover money or other assets from the fraud
perpetrators and others associated with the fraud
 Criminal action
 Law enforcement or statutory agencies
 Fines, prison terms, or both
 Restitution agreements
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