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Fraud Examination, 4E

Chapter 2: Why People Commit 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 as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives

Know the types of people who commit fraud.


Explain why people commit fraud.
Describe the fraud triangle.
Explain the fraud scale.
Understand how pressure contributes to fraud.
Understand why opportunity must be present for
fraud to occur.
Understand why people rationalize.
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 classroom use.
Learning Objectives

 Understand how people are recruited to


participate in fraud schemes.

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 classroom use.
Type of People That
Commit Fraud
 What type of people
commit fraud?
 Anyone!

 Not demographically or
psychologically
differentiated

 Have the profile of other


honest people

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 classroom use.
Reasons to Commit Fraud

A combination of the following (Fraud Triangle):


 Pressure
 Opportunity
 Rationalization

Immediate financial need


The fraud gets larger and larger as confidence in
the fraud gets higher and higher

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 classroom use.
The Fraud Triangle

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 classroom use.
The Fire Triangle

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 classroom use.
The Fraud Scale

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 classroom use.
Pressure

Divided into four main groups:


 Financial pressures
 Vices
 Work-related pressures
 Other pressures

Approximately 95 percent of all frauds involve


either financial or vice-related 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 as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Pressure

 Common Financial Pressures:


1. Greed
2. Living beyond one’s means
3. High bills or personal debt
4. Poor credit
5. Personal financial losses
6. Unexpected financial needs

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 classroom use.
Pressure

Vice Pressures
Worse kind of pressures to commit fraud
Examples include:
 Gambling
 Drugs
 Alcohol
 Expensive extramarital relationships

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 classroom use.
Pressure

Vice Pressures
Real-life examples:
 Dad that embezzled his six-year-old son’s allowance
 Women who stole money to fund her children's drug
addiction
 Man that used company money to fund his drug
addiction
 The parents who took their newborn baby from the
hospital with heroin under its tongue

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 classroom use.
Pressure

Work-Related Pressures
“Get even with the employer”
Motivated by these factors:
 Getting little recognition
 Feeling job dissatisfaction
 Fear of losing one’s job
 Being overlooked for a promotion
 Feeling underpaid

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 classroom use.
Pressure

 Work-Related Pressures
 Real-life example:
 The worker that worked 12-
14 hour days, received a
promotion, and accepted
kickbacks to compensate for
her “overworking.”

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 classroom use.
Pressure

Other Pressures
Spouse Pressures
 Spouse’s lifestyle demands

Life Pressures
 Family crisis

Social Pressures
 “Being successful”

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 classroom use.
Opportunity

 Six major factors that increase opportunity:


1. Lack of controls

2. Inability to judge performance quality

3. Failure to discipline fraudsters

4. Lack of access to information

5. Ignorance, apathy and incapacity

6. Lack of audit trail

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 classroom use.
Controls to Prevent/
Detect Fraud
Internal Control Framework
 From Committee of Sponsoring Organizations (COSO)

 Control Environment

 The Accounting System

 Control Activities

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 classroom use.
Controls to Prevent/
Detect Fraud
Control Environment
 Management’s Role and Example

 Management Communication

 Appropriate Hiring

 Clear Organizational Structure

 Effective Internal Audit Department

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 classroom use.
Controls to Prevent/
Detect Fraud
 Accounting System
 Transactions are…
1. Valid
2. Properly authorized
3. Complete
4. Properly classified
5. Reported in the proper period
6. Properly valued
7. Summarized correctly

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 classroom use.
Controls to Prevent/
Detect Fraud
 Control Activities or Procedures:
1. Segregation of duties, or dual custody
2. System of authorizations
3. Independent checks
4. Physical safeguards
5. Documents and records

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 classroom use.
Rationalization

Third element of Fraud triangle.


Common rationalizations by perpetrators
 I deserve more
 I am only borrowing the money and will pay it back
 Nobody will get hurt
 It’s for a good purpose
 I pay more than my fair share of taxes
 The government wastes money

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 classroom use.
Recruitment of Fraudsters

Many frauds are committed by more than one


person
The majority of frauds—especially financial
statement frauds—are collusive
CFO survey results:
 67 percent received requests to misrepresent corporate
results
 55 percent fought off the requests
 12 percent yielded

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 classroom use.
Recruitment of Fraudsters

Types of Power
 Reward Power
 A’s ability to provide benefits to B
 Coercive Power
 A’s ability to punish B if B does not comply with A
 Expert Power
 A’s possession of special knowledge or expertise
 Legitimate Power
 A’s legitimate right to prescribe behavior for B
 Referent Power
 The extent to which B identifies with A
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 classroom use.
Recruitment of Fraudsters

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 classroom use.
Recruitment of Fraudsters

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 classroom use.