[Music] A person under pressure will do things that he or she might not do under normal circumstances. If a person is threatened with losing his home or his family, he may turn to fraud as a means to relieve that financial pressure. Often these individuals have been with the organization for many years and occupy positions of extreme trust. These individuals can be called accidental fraudsters. They are seemingly law abiding, honest people, but when faced with extreme financial pressure, they turn to fraud. This segment will begin by defining some of the basic elements of fraud. We will also discuss the cost of fraud and the importance of understanding how it occurs. We will examine some of the leading theories on why people commit fraud and how that information can be used to help us prevent it. Thank you for joining us. In general terms, fraud is an intentional deception, whether by omission or commission, because of the victim to suffer economic loss and the perpetrator to realize a gain. Under common law, fraud includes four essential elements, A material false statement Knowledge that the statement was false when it was spoken Reliance on the false statement by the victim Damages resulting from the victim's reliance on the false statement. In the broadest sense, fraud can encompass any fraud for gain that uses deception as its principle technique. This deception is implemented through fraud schemes, specific methodologies used to commit and conceal the fraudulent act. The legal definition of fraud is the same, whether the incidence is criminal or civil. The difference is that criminal cases must meet a higher burden of proof. For example, an employee steals $100,000 from his employer by setting up a phony company and submitting false invoices for services that are not performed. That conduct is criminal because he's stealing funds through deception, but the company has also been injured the employee's actions and can sue in civil court to get its money back. One of the largest causes of fraud involves asset misappropriations. Asset misappropriation is simply the theft or misuse of an organization's assets. Common examples include skimming revenues, stealing inventory, obtaining fraudulent payments, and payroll fraud. Corruption entails the wrongful or unlawful misuse of influence in a business transaction to procure a personal benefit contrary to an individual's duty to their employer or the rights of another. Common examples include accepting kickbacks, demanding extortion or engaging in conflicts of interest. Financial statement fraud involves the intentional misrepresentation of financial or nonfinancial information to mislead others who are relying on it to make economic decisions. Common examples include overstating revenues, or understating liabilities or expenses. A common thread in all of these types of fraud are that they can occur in any organization regardless of what industry they are in. But there are a number of other schemes that are industry specific. For example, financial institutions suffer from schemes involving mortgage loans and new accounts just to name a few. Healthcare insurers see numerous schemes related to false billing and misrepresentations of diagnoses. The securities industry is subject to Ponzi schemes, insider trading, and misrepresentations by brokers. Therefore, each industry is subject to its own particular forms of fraud. Unfortunately, there is no area of any organization or any type of commerce where there is not the potential for fraud. Dr. Richard Riley, PhD: So far, we have developed the definition of fraud and we have examine the major categories of fraud. One of the questions asked is how does fraud examination differ from auditing? Aren't they the same? What about the term "forensic accounting?" How is it different from auditing and fraud examination? This circle presents a Venn diagram developed by the NIJ's task force to develop a model curriculum for FAFI education. As noted in the circle, auditing is a term many are familiar with. Auditing includes steps to plan the audit, conduct risk assessment, identify and test internal controls for both design and implementation and then develop the necessary audit evidence and finally report on the findings of the audit. In some audits, the auditor may discover symptoms suggestive of fraud. In those circumstances, the audit intersects with fraud examination using the techniques developed to define the who, what, when, where, and how the fraud took place, but also notice that fraud examination includes prevention and deterrence efforts as well as detection and investigation. Finally, fraud investigation also includes remediation, which is cleaning up the mess. Remediation can include addressing internal controls issues, helping the victim to file insurance claims when appropriate and even testifying in court. Testifying in court - that's where fraud investigation intersects with forensic accounting. The term "forensic" generally suggests that the issue will end up being resolved in court. Thus, forensic chemistry, for example, is an issue related to chemistry where the chemist will be testifying to evidence in a court of law. Forensic accounting, then, implies that we have an accounting issue where accounting provides evidence that may shed light on a legal matter. So, in short, forensic accounting is the intersection between accounting and the law. As you can see, some fraud examination efforts might end up in court, but others, like prevention and deterrence will not. Further, now that you understand the differences, it also becomes easier to see those differences as well as how these three terms overlap. According to the ACFE, average losses from fraud total about 5% of gross domestic produce or GDP. When that 5% is applied to actual economic production, total losses from fraud may be as high as 3.5 trillion worldwide. In the United States alone, losses may total a trillion dollars. Now this number is currently the best available estimate and most likely includes all losses from stealing paper clips and copy paper from the office to the most expensive frauds, financial statement fraud, which in the case of Enron, cost in the neighborhood of 60 billion of market capitalization. What is more disturbing, at least to me, is the frequency of large dollar fraud to a single organization. According to the ACFE data, 21% of the cases include in the most recent report, cost the victims more than one million dollars. In 32% of the cases, the losses were at least $400,000. Those dollar figures are large enough to wipe out a small business. The information brings out a very important point. Don't let your organization become a victim because it could be a fatal event. Small businesses, and particularly small charities and not for profits, in many cases cannot afford to become victims of fraud. The financial losses to organizations do not begin to reflect the entire cost. The day after Enron filed for bankruptcy, 5000 employees were fired, and many more of the 21 thousand employees were expected to lose their jobs as the bankruptcy process continued. Enron employees lost two billion, averaging 95 thousand per person in their pension plans. Many persons losing their entire life savings. The highly publicized Bernard Madoff scam cost investors 17.3 billion. According to the COSO analysis of public companies, of the 347 publicly traded companies that were victimized by financial statement fraudsters, 28% of the firms filed for bankruptcy within two years and 47% were delisted from a national stock exchange. Employees lost their jobs. Communities lost tax collections and stockholders lost their investment savings. Madoff's scheme literally wiped out his clients' life savings Some of Madoff's victims, who may have planned a productive, fun filled retirement, may end up working til the day they take 167
their final breath.