The Perpetrators of Fraud

THE PERPETRATORS OF
FRAUD
o Fraud Losses by Position
o Fraud Losses and the Collusion Effect
o Fraud Losses by Gender
o Fraud Losses by Age
o Fraud Losses by Education
o Conclusions to Be Drawn
TABLE 3-3: LOSSES FROM FRAUD BY POSITION
Position Percent of Frauds Loss ($)
Owner/Executive 18.9 703,000
Manager 36.8 173,000
Employee 40.9 65,000
Other 3.4 104,000
TABLE 3-4: LOSSES FROM FRAUD BY COLLUSION

Perpatrators Loss ($)
Two or more (47%) 1,297,000
One (53%) 85,000
TABLE 3-5: LOSSES FROM FRAUD BY GENDER

Gender Loss($)
Male (69%) 187,000
Female (31%) 100,000
TABLE 3-6: LOSSES FROM FRAUD BY AGE
Age Range Loss($)
<26 15,000
26-30 50,000
31-35 100,000
36-40 100,000
41-45 250,000
46-50 250,000
51-55 280,000
56-60 258,000
>60 630,000
TABLE 3-7: LOSSES FROM FRAUD BY EDUCATIONAL LEVEL

Educational Level Loss($)
High School 90,000
College 200,000
Postgraduate 300,000
it involves direct access
to assets and/or information
that controls assets
Opportunity
FRAUD
TRIANGLE
Situational
Ethics
pressure
Conclusions to Be Drawn
Position higher position
Collusion with collusion
Gender males greater financial loss
Age older
Education more education
FRAUD SCHEMES
o Fraudulent Statements
o Corruption
o Asset Misappropriation
Fraudulent Statements
• the financial statement misrepresentation must
itself bring direct/indirect financial benefit to
the perpetrator
TABLE 3-8: LOSSES FROM FRAUD BY SCHEME TYPE

Scheme Type Percentage of Frauds Loss ($)
Fraudulent statements 9.6 975,000
Corruption 35.4 200,000
Asset misappropriation 83.5 125,000
THE UNDERLYING PROBLEMS
1. Lack of Auditor Independence
2. Lack of Director Independence
3. Questionable Executive Compensation Schemes
4. Inappropriate Accounting Practices

SARBANES-OXLEY ACT AND FRAUD
• Congress enacted SOX into law in July 2002
• SOX - this was written to deal w/ problems related to

capital markets, corporate governance, & the
auditing profession.
SOX - Principal reforms:
1. Accounting Oversight Board
- Public Company Accounting Oversight Board (PCAOB)
2. Auditor Independence
3. Corporate Governance & Responsibility
4. Issuer & Management Disclosure
5. Fraud & Criminal Penalties

Bribery
Economic CORRUPTION Illegal

Extortion (principal types) Gratuities
Conflicts
of Interest
Asset Misappropriation
Subcategories:
1. Skimming
- mail room fraud
2. Cash Larceny
- lapping
3. Billing Schemes (or vendor fraud)
examples:
- shell company
- pass-through fraud
- pay-and-return
4. Check Tampering
5. Payroll Fraud
6. Expense Reimbursements
7. Thefts of Cash
8. Noncash Misappropriations
9. Computer Fraud
INTERNAL CONTROL
CONCEPTS & TECHNIQUES
oModifying Assumptions
oControl Weaknesses and Risks
oThe Preventive-Detective-Corrective
Internal Control Model
oSarbanes-Oxley & Internal Control
Internal Control System – broad objectives:
1. To safeguard assets of the firm.
2. To ensure the accuracy and reliability of accounting records
and information.
3. To promote efficiency in the firm’s operations.
4. To measure compliance with management’s prescribed
policies and procedures.
Modifying Assumptions
METHODS OF
MANAGEMENT REASONABLE
DATA LIMITATIONS
RESPONSIBILITY ASSURANCE
PROCESSING
Control Weaknesses & Risks
Access Risks
Fraud
Errors
Mischief
Risks: Control Weakness

•Destruction of assets
•Theft of assets
•Corruption of information or
the information system
•Disruption of the information
system
The Preventive-Detective-Corrective
Internal Control Model
The internal control shield is composed of
three layers of control:
1
• PREVENTIVE CONTROLS
2
• DETECTIVE CONTROLS
3
• CORRECTIVE CONTROLS
Sarbanes-Oxley & Internal Control
• Management’s responsibilities for this are codified in
Sections 302 & 404 of SOX.
certify assess
(quarterly & (annual
annual basis report)
• Committee of Sponsoring Organizations of the

Treadway Commission (COSO) framework
- endorsed by PCAOB & SEC
the current authoritative
- basis for SAS 109 document for specifying
internal control objectives
and techniques
COSO INTERNAL
CONTROL
FRAMEWORK
(key elements)
Information
Control Risk Control
and Monitoring
Environment Assessment Activities
Communication
Thank You
Thank You
Thank You

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THE PERPETRATORS OF

TABLE 3-4: LOSSES FROM FRAUD BY COLLUSION

TABLE 3-5: LOSSES FROM FRAUD BY GENDER

TABLE 3-7: LOSSES FROM FRAUD BY EDUCATIONAL LEVEL

TABLE 3-8: LOSSES FROM FRAUD BY SCHEME TYPE

1. Lack of Auditor Independence

2. Lack of Director Independence

3. Questionable Executive Compensation Schemes

4. Inappropriate Accounting Practices

• Congress enacted SOX into law in July 2002

• SOX - this was written to deal w/ problems related to

3. Corporate Governance & Responsibility

4. Issuer & Management Disclosure

5. Fraud & Criminal Penalties

Economic CORRUPTION Illegal

Risks: Control Weakness

• Committee of Sponsoring Organizations of the

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