fraud examination

Fraud ExaminationFraud Examination

[Mas Sugeng]

Chapter 1: IntroductionChapter 1: Introduction

What is OccupationalWhat is Occupational/hub/hub Fraud and Abuse? Fraud and Abuse?

Use of occupation / hubFor personal enrichment/memperkayaThrough deliberate misuse or

misapplication / sengaja meneruskanOf employer’s resources/assets

Defining FraudDefining Fraud / penipuan / penipuan

Four elements:Material false statementKnowledge that the statement was falseReliance (percaya) on the statement by

victimDamages/perusakan

Defining AbuseDefining Abuse / salah guna / salah guna

A deceitful act / tindakan bohongA corrupt practice or custom / praktek,

kebiasaan korupExamples:

– “Borrow” company equipment– Use sick leave when not sick– Slow or sloppy work / pelan dan lemah kerja– Surf the Net at work / jaringan lbh batas– Work under influence of drugs/alcohol

Research in Occupational Research in Occupational Fraud and AbuseFraud and Abuse

Edwin H. SutherlandEdwin H. Sutherland

First defined “white-collar crime”– Criminal acts of corporations– Individuals in corporate capacity

Theory of differential association– Crime is learned– Not genetic– Learned from intimate personal groups

Donald R. CresseyDonald R. Cressey

Studied embezzlers Why people become “trust violators”Developed the Fraud Triangle

The Fraud TriangleThe Fraud TrianglePRESSURE

PERCEIVEDOPPORTUNITY

RATIONALIZATION

Nonsharable ProblemsNonsharable Problems

Violation/pelangaran of ascribed obligations

Personal failuresBusiness reversals /rugiPhysical isolationStatus gainingEmployer-employee relations

Cressey’s OffenderCressey’s Offender/pelanggar/pelanggar TypesTypes

Independent businessmen – “Borrowing”– Funds really theirs

Long-term violators– “Borrowing”– Protect family– Company cheating them– Company generally dishonest

Cressey’s Offender TypesCressey’s Offender Types

Absconders / menghindarTake the money and runUsually unmarried, lonersBlame “outside influences” or “personal

defects”

W. Steve AlbrechtW. Steve Albrecht

Nine motivators of fraud1. Living beyond means

2. Overwhelming desire for personal gain

3. High personal debt

4. Close association with customers

5. Pay not commensurate with job

W. Steve AlbrechtW. Steve Albrecht

Nine motivators of fraud6. Wheeler-dealer

7. Strong challenge to beat system

8. Excessive gambling

9. Family/peer pressure

The Fraud ScaleThe Fraud Scale

Situational pressures– Immediate problems with environment– Usually debts/losses

Perceived opportunities– Poor controls

Personal integrity– Individual code of behavior

The Fraud ScaleThe Fraud Scale

Richard C. HollingerRichard C. Hollinger

Hollinger-Clark study (1983)Surveyed 10,000 workersTheft caused by job dissatisfactionTrue costs vastly understated

Employee DevianceEmployee Deviance

Two categories:– Acts against property– Production violations (goldbricking)

Strong relationship: theft and concern over financial situation

Age and TheftAge and Theft

Direct correlationYounger employees less committedBut, higher position = bigger theftOpportunity is only a secondary factor

Job Satisfaction and DevianceJob Satisfaction and Deviance

Dissatisfied employees– More likely to break rules– Regardless of age/position– Trying to right perceived inequities

Wages in kind

Organizational ControlsOrganizational Controls

Some impact, but limitedHollinger studied five aspects:

– Company policy– Selection of personnel– Inventory control– Security– Punishment

Hollinger’s ConclusionsHollinger’s Conclusions

Employee perception of controls is important Increased security may hurt, not help Employee-thieves exhibit other deviance

– Sloppy work, sick leave abuses, etc. “Hydraulic effect” Management should be sensitive to

employees Pay special attention to young employees

Hollinger’s ConclusionsHollinger’s Conclusions

Four key aspects of policy development1. Understand theft behavior

2. Spread positive info on company policies

3. Enforce sanctions

4. Publicize sanctions

The Report to the Nation on The Report to the Nation on Occupational Fraud and AbuseOccupational Fraud and AbuseLargest fraud study everStudy of 2,608 fraud casesReported by CFEsTotal: $15 billion in losses$22 to $2.5 billion

CostsCosts

How to measure? Orgs don’t know what they loseOpinions of CFEsSix percent of gross revenues$400 billion per yearTwice the U.S. defense budget

Position in the Organization - Position in the Organization - CasesCases

12%

30%

58%

0% 10% 20% 30% 40% 50% 60%

Owners

Management

Employees

Position in the Organization – Position in the Organization – Median LossMedian Loss

$1,000,000

$250,000

$60,000

$0 $200,000 $400,000 $600,000 $800,000 $1,000,000

Owners

Management

Employees

Median Loss by GenderMedian Loss by Gender

$48,000

$185,000

$0 $50,000 $100,000 $150,000 $200,000

Female

Male

Median Loss by AgeMedian Loss by Age

Direct and linear correlation between age and median loss

Older tend to occupy higher ranking positions

Greater access to revenues, assets, resources

5

Median Loss by AgeMedian Loss by Age

$346,000

$280,000

$196,000

$100,000

$54,000

$50,000

$12,000

$0 $100,000 $200,000 $300,000 $400,000

60+

51-60

41-50

36-40

31-35

26-30

<25

Median Loss by Marital StatusMedian Loss by Marital Status

$50,000

$54,000

$80,000

$150,000

$0 $50,000 $100,000 $150,000

Separated

Single

Divorced

Married

Median Loss by EducationMedian Loss by Education

$275,000

$200,000

$50,000

$0 $100,000 $200,000 $300,000

Post-Graduate(13%)

College (45%)

High School(42%)

Median Loss Per Median Loss Per Number of EmployeesNumber of Employees

$126,000

$80,000

$100,000

$120,000

$0 $40,000 $80,000 $120,000 $160,000

10,000+

1,000-10,000

100-1,000

1-100

Classifying Occupational Classifying Occupational Fraud and AbuseFraud and Abuse

B rib ery

C on flic ts o f In te res t

I lleg a l G ra tu it ies

E xto rt ion

CORRUPTION

Larcen y

Skim m in g

F rau d u len t D isb u rsem en ts

C ash In ven to ry

ASSET M ISAPPROPRIAT ION

F in an c ia l

N on -F in an c ia l

FRAUDULENT STATEM ENTS

OCCUPATIONAL FRAUD AND ABUSE

Number of CasesNumber of Casesby Scheme Typeby Scheme Type

Asset Mis80.4%

Corruption14.6%

Other1.0%

Fraud Stmts4.0%

*Represents size of misstatement rather than actual cash loss

Median Loss by Scheme TypeMedian Loss by Scheme Type

$107, 230

$4,000,000*

$440,000

$65,000

0 1,000 2,000 3,000 4,000

Thousands

Other

Fraud Stmts

Corruption

Asset Mis