FRAUD, FRAUDULENT

BEHAVIOR AND THEIR

PREVENTION IN
BUSINESS
Chapter 17
Chapter learning objectives
◦ explain the circumstances under which fraud is likely to arise
◦ identify different types of fraud in the organisation
◦ explain the implications of fraud for the organisation
◦ explain the role and duties of individual managers in the fraud detection and prevention process
◦ define the term money laundering
◦ give examples of recognised offences under typical money laundering regulation
◦ identify methods for detecting and preventing money laundering
◦ explain how suspicions of money laundering should be reported to the appropriate authorities.
The meaning of Fraud
◦ Fraud is an intentional act involving the use of deception to obtain
an unjust or illegal advantage
◦ Error are unintentional mistake.
◦ Irregularity is something contrary to a particular rule or standard.
◦ Misstatement is something stated wrongly.
The prerequisites of Fraud
Dishonesty

Opportunity

Motivation
Factors increasing risk of Fraud
Management
Unnecessarily Personnel who do
domination by one
complex corporate Poor staff morale not take
person or small
structure leave/holidays
group

Inadequate
Lavish lifestyles of Lack of monitoring Unusual
segregation of
employees control systems transactions
duties

Payments for
services
disproportionate to
efforts
Examples of Fraud
Using company’s
Misappropriation of False insurance
asset for personal Sales ledger fraud
assets claim
use

Purchase ledger
Skimming schemes Payroll fraud False billing fraud
fraud

Bank account fraud Advance fee fraud Ponzi Schemes

Fraudulent Financial Reporting
◦ Involves intentional misstatements in financial statements in order to deceived
financial statement users.

◦ Cooking the books, Creative accounting, earning management

Fraudulent Financial Reporting
Window Dressing

Delaying or accelerating a company’s expense

Inaccurate revaluation of company assets

Manipulation of revenue recognition

Off-balance-sheet accounting
Money Laundering
◦ Money laundering is the exchange of ‘dirty’ money and assets that have been
criminally obtained for ‘clean’ money and assets that have no clear link to
criminal activity.

◦ Three main offenses:

◦ Laundering
◦ Failure to report
◦ Tipping off
Three Phases of Money Laundering
◦ Placement (e.g. in legitimate business)
◦ Layering (e.g. transferring money)
◦ Integration
Control and procedures required by law
◦ Identification of large or unusual transactions
◦ Scrutinizing of unusual patterns of transactions
◦ Taking steps to ensure all customers can be identified
◦ Money laundering Reporting Officers
◦ Appropriate customer due diligence
Possible implications of Fraud to
company
◦ Loss of shareholder’s confidence
◦ Loss of assets
◦ Financial difficulties
◦ Collapse of company
◦ Fines by tax and other authorities
Measures to prevent and detect fraud

Internal
Control

Control Risk Information Control Monitoring of

environment Assessment System Activities controls
Duties of Management in preventing and
detecting Fraud
◦ Duties of BOD
◦ Duties of Audit committee
◦ Duties of employees
Bribery and Corruption
◦ One of the world’s greatest challenge.
◦ Careful in accepting gifts, hospitality.
◦ UK Bribery Act (2010)
◦ Bribing person to induce or reward them to perform a relevant function improperly
◦ Requesting, accepting or receiving a bribe as a reward for performing a relevant
function improperly
◦ Using a bribe to influence a foreign official to gain a business advantage
◦ Failing to prevent bribery on behalf of a commercial organization.