Fraud Examination, 4E

Chapter 4: Preventing Fraud

Albrecht, Albrecht, Albrecht, Zimbelman

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Learning Objectives
Understand how to create a culture of honesty, openness,
and assistance.
Know how to eliminate opportunities for fraud.
Understand how to set up an effective organization to
minimize fraud.
Understand the importance of proactive fraud auditing.
Understand the importance of creating a comprehensive
approach to fighting fraud.
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Create a culture of honesty, openness, and
assistance by
1. Hiring honest people and providing fraud
awareness training
2. Creating a positive work environment
3. Providing an employee assistance program
(EAP) that helps employees deal with personal
pressures
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Studies have indicated that
Nearly 30 percent of Americans are dishonest
40 percent are situationally honest
Only about 30 percent are honest all the time

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Hiring Honest People
Recommendations:
Verify applicants rsum and application
Require applicant endorsement
Train interviewers to conduct thorough and skillful
interviews
Use industry-specific approaches as deemed
necessary

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Fraud Awareness Training
Train on
The costliness of fraud
The effects of fraud on pay and benefits
The nontolerance of fraud
Actions to take if fraudulent activity is suspected
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Positive Work Environment
Create a positive work environment by:
Setting expectations about honesty
Having a code of conduct
Conveying those expectations

Having open-door or easy access policies

Having positive personnel and operating
procedures.
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Positive Work Environment
Setting Expectations
The Pygmalion effect:
People generally perform according to a leaders
expectations
What you expect is what youll get.
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Positive Work Environment
Code of Conduct
Sarbanes-Oxley Act of 2002
SEC Code of Conduct for all employees

Must be visible
Must be communicated frequently
Example:
Hormel Foods Code of Conduct

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Positive Work Environment
Open-Door or Easy Access Policies
Helps prevent fraud by:
Allowing employees share feelings
Allow management to know of employees pressures,
problems, and rationalizations

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Organizational Culture
Positive Work Environment
Personnel and Operating Policies
Related to high- or low-fraud environments
Examples producing high-fraud environments

Inadequate pay
Lack of recognition for job performance
Perceived inequalities in the organization
Inadequate expense accounts
etc.
Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Organizational Culture
Employee Assistance
Programs (EAP)
Help employees reduce
pressure by helping
employees deal with:

Substance abuse
Gambling
Money management
Health, family, and personal
problems

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture
Employee Assistance Programs (EAP)
Provide support systems with programs like:

Wellness
Team building
Coaching
Conflict resolution
Critical incident response
Assessment
Counseling
Referral
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2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Organizational Culture

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Eliminate Opportunities
For Fraud

Five ways to eliminate fraud opportunities:

1. Have good internal controls
2. Discourage collusion
3. Monitor employees and provide a whistleblowing system
4. Create an expectation of punishment
5. Conduct proactive auditing

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Internal Controls

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Internal Controls
COSOs Internal Control Framework
1.
2.
3.
4.
5.

A good control environment

A good accounting system
Good control activities
Monitoring
Good communication and information

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Internal Controls

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Discourage Collusion
Collusive frauds have increased probably
because of
Increased complexity of business
Increased frequency of supplier alliances

Suggested method of discouraging collusion:

Have a right-to-audit clause on the back of all
purchase invoices

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Monitoring Employees
Section 307 of the Sarbanes-Oxley Act of 2002
requires all public companies to have a whistleblower system
33 percent of all frauds are detected through tips
A good whistle-blowing program is one of the
most effective fraud prevention tools
Not only companies in the US have whistleblowing systems but also government agencies
and foreign companies in majorAlbrecht,
countries
Albrecht, Albrecht, Zimbelman
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Whistle-Blower System
Effective systems have
the following:
1.
2.
3.
4.

Anonymity
Independence
Accessibility
Follow-up

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2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Expectation of Punishment
One of the greatest deterrents to dishonesty is
fear of punishment.
Real punishment involves having to tell family
members and friends about the dishonest
behavior.
A strong prosecution policy that is well publicized
lets employees know that dishonest acts will be
harshly punished.
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Proactive Fraud Auditing

Good fraud auditing involves four steps:
1. Identify fraud risk exposures
2. Identify the fraud symptoms of each exposure
3. Build audit programs to proactively look for
symptoms and exposures
4. Investigate fraud symptoms identified
Albrecht, Albrecht, Albrecht, Zimbelman
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Proactive Fraud Auditing

Statement on Auditing Standards No. 99
Consideration of Fraud in a Financial Statement
Audit

Brainstorming the risks of fraud

Discussing with management about awareness of
fraud
Using unpredictable audit tests
Requiring on every audit procedures responsive to
detecting management override
Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
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Preventing Fraud A Summary

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Preventing Fraud
Current Model

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for

Preventing Fraud
Suggested Model

Albrecht, Albrecht, Albrecht, Zimbelman

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for