Introduction to Forensic Accounting

Part 2
[2016/2017] 1st Semester
Tunku Puteri Intan Safinaz School of Accountancy,
College of Business, Universiti Utara Malaysia
Dr. Oluwatoyin Muse Johnson Popoola, PhD, MBA,
FCTI, FCA, CFA,RPA
Coordinator & Lecturer: A161 BKAB 3013 Forensic
Accounting
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Topics to Be Covered

Milestone 1
Who
commits
fraud and
why
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Milestone 3
Fighting
Milestone 2
fraud
Fighting
fraud: An
overview

Milestone 4
Tutorial

Basic Principles of Fraud

Description of the types of people who
perpetrate fraud
Discussion on the reasons adduced by
people to commit fraud
Examination of the recruitment of
honest people to participate in fraud
schemes.

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Who commits fraud?

Anyone can commit fraud fraudsters cannot be
distinguished from other people based on
demographic or psychological qualities.
Note: Individuals involved in fraud are people
like you and me, but have compromised their
integrity and become entangled in fraud. When
doing business in the future, remember fraud
perpetrators will unfortunately often be those
colleagues, friends, associates, elders, in whom
you place a great amount of trust.
Source: Albrecht et al. (2012)
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Characteristics and traits of fraud perpetrators?

Not different but similar to the traits that organizations

look for in hiring employees, seeking out customers and
clients, and selecting vendors. Therefore:
Most employees, customers, vendors, and business
associates and partners fit the profile of fraud perpetrators
and are capable of committing fraud
It is impossible to predict in advance which employees,
customers, vendors, clients, and others will become
dishonest.
Remember: Victims cannot believe that trusted colleagues
or friends have behaved dishonestly.
Denial is the most common reaction by those around the
fraud.
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The Fraud Triangle

Is your operating
environment ripe for
fraud?
Every perpetrator faces
some kind of perceived
pressure, and perceived
opportunity. Also, a
perpetrator needs a way to
rationalize the actions as
acceptable.

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Source: Cressey, D (1953, 1950);

AICPA (2002); Albrecht et al.
(2012)
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The Elements of Fraud a.k.a. Fraud Triangle

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The three elements of

fraud opportunity,
pressure and
rationalization are
known as the Fraud
Triangle.

Source: Cressey, D (1953,

1950); AICPA (2002)
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The Fraud Scale

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With regard to fraud, the

greater the perceived
opportunity or the more
intense the pressure, the less
rationalization it takes to
motivate someone to commit
fraud. In like manner, the
more dishonest a perpetrator
is, the less opportunity
and/or pressure it takes to
motivate fraud.
Source: Popoola et al. (2014);
Albrecht et al. (2012)

The Element of Pressure

There are four main groups of

fraud by pressure:
Financial pressures
Vice pressures
Work related pressures
Other pressures
Financial Pressures associated
with fraud that benefits perpetrators
directly include:
Greed
Living beyond ones means
High bills or personal debt
Poor credit
Personal financial losses
Unexpected financial needs

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Vice Pressures rely on motivations to

commit fraud, and include:
Gambling
Drugs
Alcohol
Expensive extra-marital relationships.
Work related pressures represent
factors that enhance people to commit
fraud by means of getting even with
their employer or others.
Getting little recognition for job
performance
Having a feeling of job dissatisfaction
Fearing losing ones job
Being over-looked for a promotion
Feeling underpaid.

Source: Albrecht et al. (2012)

The Element of Pressure & Opportunity

Other pressures motivate people

to commit fraud and include
Spouse insistence on an improved
lifestyle
A challenge to beat the system
The Element of Opportunity
represents factors to commit fraud,
conceal it or avoid being punished:
Lack of controls that prevent and/or
detect fraudulent behaviour
Inability to judge quality of
performance
Failure to discipline fraud
perpetrators
Lack of access to information

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Ignorance, apathy, and incapacity

Lack of an audit trail

Controls that prevent and or detect

fraudulent behaviour include:
Control Environment
Accounting System
Control Activities or Procedures

Source: Albrecht et al. (2012)

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Summary of Controls that prevent or detect fraud

Control Environment

Management philosophy and operating style, modeling

Effective hiring procedures
Clear organizational structure of proper modeling and labeling
Effective internal audit department

Accounting System

Valid transactions
Properly authorized
Completeness
Proper classification
Proper timing
Proper valuation
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Correct summarization

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Summary of Other Controls

Inability to judge the quality of Performance

Construction work
Easy to observe and determine the quality of work in respect of work specifications
and consistent with agreed contract.
Service related
Hiring a lawyer, dentist, accountant, engineer, auto mechanic difficult to assess the
quality of work and the amount paid.

Failure to Discipline Fraud Perpetrators

Criminologists agree that rapists possess the highest rate of repeat offenses
(recidivism) of all criminals
Unprosecuted fraud perpetrators most often resume the fraudulent behaviour.

Ignorance, Apathy, and Incapacity

Older people, individuals with language difficulty, and other vulnerable citizens are
mostly victims because they lack
capacity or the knowledge to detect illegal acts.

Lack of Access to Information

Non-availability of information by the victim, e.g. management fraud

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The Element of Rationalisation

Nearly every fraud involves the

element of rationalization.
Common rationalization used by
fraud perpetrators include:
I am only borrowing the money and
will pay it back
The organisation owes it to me
Nobody will get hurt
I deserve more
It is for a good purpose
We will fix the books as soon as we
get over the financial difficulty
Something has to be sacrificed my
integrity or my reputation (If I do
not embezzle to cover my inability to
pay, people will know I cannot meet
my obligations and that will be
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embarrassing because I am a
professional).
An illustration: Rationalisation of
Income tax evasion:
I pay more than my share of taxes
The rich do not pay enough taxes
The government wastes money
I work for my money
Remember that by decreasing the
opportunity for fraud to occur does not
only reduce fraud, but by implementing
programmes that focus on eliminating
employee pressure and decreasing the
likelihood of employee rationalization,
organisations will have an effective tool
to deter fraud
Source: Albrecht et al. (2012)

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Fighting fraud An overview

Fraud
Prevention

Fraud
Detection

Fighting
Fraud

Fraud
Investigation

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Fraud
Response

You are to assume of your appointment

as the fraud fighting consultant to XYZ
Sdn Bhd. What advice would you give
this organization in respect to fraud
prevention, detection and investigation
programs to be implemented? What
kind of ethics program would you
institute? What kind of prosecution
policies would you establish?
As a consultant, you would possibly tell
the management of the organization the
activities on which money can be spent
to deter fraud. These activities include:
Fraud prevention
Fraud detection (early)
Fraud investigation
Fraud response (i.e. follow up legal
action and/or resolution
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Fraud Prevention

Fraud
Prevention

Culture of Honesty
and High Ethics

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Assess risk,
develop concrete
response to
mitigate risk and
eliminate
opportunities for
fraud

Fraud prevention is commonly the

most cost effective way to reduce
losses from fraud.
Effective fraud prevention involves
two fundamental activities:
a. Taking steps to create and
maintain a culture of honesty
and high ethics; and
b. Assessing the risks for fraud
and
developing
concrete
responses to mitigate the risks
and
eliminate
the
opportunities for fraud.

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Fraud Prevention
Create and Maintain a
Culture of Honesty and
High Ethics
Tone at the Top
(Proper Modelling)

Communicating
Expectations of
Honesty & Integrity

Hiring the Right kind

of Employees

Creating a Positive
Work Environment

Proper Handling of Fraud

and Fraud Perpetrators
When Fraud Occurs

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Assess the risks and develop

concrete responses to
mitigate the risks and
eliminate the opportunities
for fraud
Accurately identifying
sources and
measuring risks

Having internal and

external auditors who
provide independent
checks on
performance

Implementing
appropriate
preventive and
detective controls to
mitigate the risks

Creating widespread
monitoring by
employees

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Fraud Detection

Detection of
fraud starts by
identifying the
red flags,
symptoms, or
indicators that
tend to
associate with
fraud

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By chance

By providing ways for people

to report suspicious of fraud

By examining transaction records

and documents for anomalies
that could represent fraud

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Fraud Investigation
Predication of fraud
Approaches to fraud investigation
Conducting a fraud investigation

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Fraud Investigation
Predication of fraud
Predication refers to the
circumstances that, taken as a
whole, would lead a reasonable,
prudent professional to believe a
fraud has occurred, is occurring, or
will occur. The practitioner is illadvised to begin an investigation
without predication. In essence,
predication precedes fraud
investigation or fraud examination

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Fraud Investigation
Evidence Square

Approaches to fraud
investigation

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Investigation of fraud
symptoms must have
managements approval
Approaches to fraud
investigation vary but most
investigators rely heavily on
interview. Other testimonial
evidence include interrogation,
and honesty tests.
There are four types of
evidence available in fraud
investigation

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Fraud Investigation
Approaches to fraud
investigation

Focus on the theory of fraud,

which are:
The fraud triangle
Triangle of Fraud Action

Theft Act

Conversion

Concealment

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Fraud Investigation
Conducting a fraud investigation
Maintain high ethics in conducting
investigations is also very
important.
7 Steps in fraud investigation

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Fraud Investigation

Steps

Only to establish the truth of a matter under question

People charged with the responsibility of conducting
investigation must be experienced and objective
Protect Confidentiality of investigation

Only those who have a need to know are kept informed of

investigation activities
Ensure all information collected is independently corroborated
and determined to be factually correct.

Investigators must exercise care to avoid questionable

investigative techniques.
Investigators must report all facts fairly and objectively.
Communications throughout the term of investigation should
be controlled, information obtained must not only point to
guilt but include facts that may exonerate.

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Follow up Legal Action

Most organisations and other fraud
victims usually make one of three
choices:
Take no legal action
Pursue civil remedies, and/or
Pursue criminal action against the
perpetrators, i.e. sometimes done
for them by law enforcement
agencies.

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Differences between Criminal and Civil Cases

Purpose

Criminal Case
To fight a wrong

Consequen
ces

Jail and/or fines

Burden of
Proof

Beyond a
reasonable
doubt
Jury must have
12 people

Jury

Initiation

Verdict

Source: Albrecht et al. (2012, p.

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Claims

Civil Case
To obtain a
remedy
Restitution and
damage
payments
Preponderance
of evidence

May consist of
fewer than 12
persons
Determination by Filing of a claim
a grand jury that by a plaintif
sufficient
evidence exists
to indict
Unanimous
Parties may
verdict
stipulate to a less
15)
than unanimous
verdict
Only one claim at Various claims

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Question & Answer

Invite questions from students

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Summary
Discuss topics covered in Part 2
Who commits fraud and why?
Fighting fraud An overview
Reiterate welcome
Wrap-up

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End of Class
Should you require further clarifications,
please feel free to see me on
CONSULTATION DAY at TISSA-UUM
Room 3.58, 04289 7303; or Email:
popoola@uum.edu.my; or WhatsApps
016 435 4987.
Thank you. Terima Kasih.
Dr. Oluwatoyin M J Popoola, PhD

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