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Chapter 13

Corruption and the Human Factor

Forensic Accounting and Fraud Examination


by Mary-Jo Kranacher, Richard Riley, Joseph T. Wells

Prepared by Richard J. Campbell

Copyright 2011, Wiley and Sons

Learning Objectives
13-1 Identify and explain the different types of corruption schemes.
13-2 Compare and contrast bribery and illegal gratuities.
13-3 Explain what is meant by a conflict of interest.
13-4 Describe the notion of something of value.
13-5 Discuss how to prevent and detect conflicts of interest.
13-6 Describe kickback schemes and how they are committed.
13-7 Discuss the types of abuses that are committed at each stage
of the bidding process.
13-8 Explain what is meant by the human factor.
13-9 Discuss the significance of the perception of detection.
13-10 Compare and contrast fraud prevention and fraud
deterrence.

13-1

CORRUPTION SCHEMES
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Corruption schemes are broken down into


four classifications:
1. Bribery
2. Illegal gratuities
3. Economic extortion
4. Conflicts of interest

13-2

Bribery
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Bribery schemes generally fall into two broad


categories: kickbacks and bid-rigging
schemes
Kickback Schemes - involve the
submission of invoices for goods and
services that are either overpriced or
completely fictitious
Diverting Business to Vendors
Overbilling Schemes
Slush Funds
13-3

Preventing and Detecting Kickback


Schemes
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The key component to most kickback


schemes is price inflation
Organizations should routinely monitor the
prices paid for goods and services, and
should compare them to market rates
Unusually high-volume purchases from a
vendor that do not appear to be justified
by business need are frequently a sign of
fraud.

13-4

Kickbacks/Overbilling
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Figure 13-1

13-5

Bid-Rigging Schemes
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In the competitive bidding process, all bidders


are legally supposed to be placed on the same
plane of equality, bidding on the same terms and
conditions
Employees involved in bid-rigging schemes, like
those in kickback schemes, tend to have a good
measure of influence or access to the
competitive bidding process

13-6

Bid Rigging (Bribery)


Figure 13-2
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13-7

Preventing and Detecting Bid-Rigging


Schemes
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Perhaps the most common indicator of


collusive bidding practices is an unusually
high contract price.
Another red flag sometimes arises in bidrigging cases when low-bid awards are
frequently followed by change orders or
amendments that significantly increase
payments to the contractor.
Very large, unexplained price differences
among bidders can also indicate fraud
13-8

Something of Value
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A corrupt employee helps the briber


obtain something of value, and in return
the employee gives something of value
Illegal Gratuities
Economic Extortion - the employee
extorts money from a potential purchaser
or supplier.

13-9

Conflicts of Interest
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Figure 13-3

13-10

Conflicts of Interest
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Purchasing Schemes - In order for the


scheme to be classified as a conflict of
interest, the employee (or a friend or relative
of the employee) must have some kind of
ownership or employment interest in the
vendor that submits the invoice
Turnaround Sales
Sales Schemes
Underbillings
Writing-Off Sales
13-11

Other Conflict of Interest Schemes


13

Business Diversions An example- an


employee started his own business that would
compete directly with his employer.
Resource Diversions - some employees divert
the funds and other resources of their employers
to the development of their own businesses
Financial Disclosures - Management has an
obligation to disclose to the shareholders fraud
committed by officers, executives, and others in
positions of trust

13-12

Preventing and Detecting Conflicts of Interest


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The primary resource for heading off this


complex act is a company ethics policy
that specifically addresses the problems
and illegalities associated with conflicts
of interest and related offenses
A policy requiring employees to complete
an annual financial disclosure statement
is also an excellent proactive approach to
preventing conflicts of interest

13-13

THE HUMAN FACTOR

Greed - greed is certainly a factor in


occupational fraud
Wages in Kind - There are three basics
that are absolutely necessary to
minimizing (not eliminating)
occupational fraud and abuse. First, hire
the right people. Second, treat them
well. Third, dont subject them to
unreasonable expectations
13-14

Unreasonable Expectations
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Employers sometimes have


unreasonable expectations of their
employees that may contribute to
occupational fraud and abuse
Understanding Fraud Deterrence Fraud offenders are much easier to deter
than run-of-the-mill street criminals

13-15

The Impact of Controls


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13-16

Employee Education
Proactive Fraud Policies
A Higher Stance
Increased Use of Analytical Review
Surprise Audits Where Feasible
Adequate Reporting Programs

Copyright
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