Corporate Fraud and Internal Control

A Framework for Prevention

Richard E. Cascarino

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118301562
• eBook ISBN: 9781118421727
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Contabilidad financiera

Essential guidance for companies to examine and improve their fraud programs

Corporate governance legislation has become increasingly concerned with the ongoing resilience of organizations and, particularly, with their ability to resist corporate fraud from the lowest levels to the upper echelons of executive management. It has become unacceptable for those responsible for corporate governance to claim, "I didn't know." Corporate Fraud and Internal Control focuses on the appropriateness of the design of the system of internal controls in fraud risk mitigation, as well as the mechanisms to ensure effective implementation and monitoring on an ongoing basis.

• Applicable for a wide variety of environments, including governmental, financial, manufacturing and e-business sectors
• Includes case studies from the United States, Europe, and Africa
• Follows the standards laid down by the Association of Certified Fraud Examiners, the internationally recognized body governing this activity
• Accompanying interrogation software demo (software demo is not included as part of this book's e-book file, but is available for download after purchase)

Written by a fraud prevention leader, Corporate Fraud and Internal Control addresses the concerns of both management and audit in ensuring a demonstrable level of activity to ensure sustainability of the organization and minimization of the impacts of fraud, upon early detection.

CHAPTER ONE
Nature of Fraud

Fraud is like cancer. Most of us know someone who has it. We know people who will eventually have it. It has become common but we can take steps to protect ourselves through healthy choices and regular checkups using the latest tools and technology. But if people ignore the problem and live dangerously, then there’s a much greater chance of becoming a victim.

—Toby Bishop, CEO, Association of Certified Fraud Examiners

After studying this chapter, you should be able to:

• Briefly outline the definitions and concepts underlying fraud and irregularities
• Describe the basic types of fraud
• Understand the profiles and motivators of fraud
• Define the responsibilities for fraud detection and prevention

More and more incidents of private and public fraud are being reported daily in the media, and increasingly prosecutions for this offense are being conducted in the various courts. This chapter examines the phenomenon in order to obtain a full appreciation of what exactly fraud is.

FRAUD AND IRREGULARITIES: DEFINITIONS AND CONCEPTS

Throughout history, the development of negotiable instruments, from cowrie shells to plastic cards, have led to the creation of a set of rules and conventions for trade and the promotion of smooth and orderly commercial interactions among individuals and countries. The breaking of these rules and conventions helps white-collar criminals make a living—in some cases a fortune—while evading discovery. In many countries, the courts and judicial system do not afford economic crimes the priority of crimes involving violence.

Fraud itself is a legal concept existing within the criminal laws of virtually every civilized country, although slight variations exist. In most countries, fraud may be deemed to occur when these individual elements exist:

• An untrue representation about a material factor event is intentionally made by an individual or organization.
• Such representation may or may not be believed by the person or organization to which the representation was made.
• The victim could suffer the possibility of harm or prejudice as a result of the misrepresentation.

For example, within South African law, fraud may be conveniently defined as being “the unlawful and intentional making of a misrepresentation which causes actual prejudice or which is potentially prejudicial to another.”¹ Actual proprietary prejudice is not necessarily required for fraud. Even nonproprietary or potential prejudice may be sufficient. Thus, fraud is not a crime against property only; it also can be regarded as a crime against the interests of the community in general.

The Arkansas Department of Finance and Administration defines occupational fraud in this way:

Occupational fraud and abuses can be defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of government resources or assets. Occupational fraud and abuses include misappropriation of assets in the form of cash theft, fraudulent disbursements, theft or personal use of inventory or other non-cash assets. Fraud can also take the form of bribery and corruption when kickbacks, gifts, or gratuities are offered to government employees from contractors or vendors to influence decisions of government agents or employees.²

A clear distinction must be drawn between the intention to deceive and an intention to defraud since a causal link is required between the misrepresentation and the actual prejudice.

Courts have traditionally worked on the basis that fraud is punished not because of the actual harm it causes but because of the potential harm or prejudice inherent in the misrepresentation, so that even if the potential victim should not believe the misrepresentation or not have acted on it the intent and possibility of harm means that a fraud has still occurred. Put more simply the intent and possibility of harm means that a fraud had been committed even if no loss occurred.

A crime that is commonly confused with fraud is theft by false pretenses. Fraud is always committed when a theft by false pretenses occurs, but the converse is not necessarily true since, in addition to misrepresentation and actual or potential prejudice, theft by false pretenses requires an appropriation of property capable of being stolen.

The misrepresentation leading to fraud can also be committed by means of an admission whereby the perpetrator fails to disclose a material fact that, unless revealed, could induce the victim to act to his or her prejudice if there was, in fact, a legal duty to disclose.

Once this broader definition of fraud is realized, it can be understood that occurrences of fraud are much more prevalent than we believe based on the large-scale frauds that hit the newspapers. Fraudulent misrepresentation is an everyday occurrence in our lives; it ranges from bending the truth in providing an excuse for an employer to utilizing company assets for personal benefit on the pretext that it was in the company’s interest. Each of these acts falls under the heading of criminal fraud in its most literal sense and potentially could result in a criminal conviction. Due to this broad definition, a level of white noise results, whereby fraudulent acts of a petty nature become tolerated and norms and ethical standards decline. As a result, fraud becomes acceptable if the end justifies the means. The economic stresses in today’s society internationally create pressures and aspirations to attain a standard of living higher than many individuals are capable of achieving on merit. This situation, in turn, increases the likelihood of such persons achieving those aspirations by deceit.

No definitive preventive control can stop all fraud in its tracks since fraud is developed based on the ingenuity of defrauders. Some new, not-yet-anticipated variation on a theme always occurs.

Victims of Fraud

One common misconception is that frauds are carried out only by individuals against organizations. In many cases, when fraud is carried out by an individual acting on behalf of an organization, the fraudulent activity could be looked on as: any business activity in which deceitful practices are resorted to by an organization or representative of an organization with the intent to cause economic injury that would deprive another of property or other entitlements.

Although it is tempting to make the assumption that frauds may be confined to one class of victim—for example, the cost of insurance fraud being borne by the insurance industry—in reality, in most cases, the ultimate bearer of the cost of fraud is the general public. By the same token, government losses to taxation fraud ultimately are passed on to the taxpayers in general. Losses from corporate fraud, either from embezzlement or financial manipulation, are normally ultimately borne by customers.

In the event of fraud covered by government regulation, recourse for losses may be sought from the regulatory body. Nevertheless, ultimately they get passed on once again to the consumer or public.

In complicated cases such as payment card frauds, the ultimate loser may appear to be the cardholder (rarely and only if negligence can be shown), the merchant who accepted the fraudulent card, the merchant-acquiring bank that processes the transaction of the cardholder, and the card issuer. Once again, in reality, costs generally are passed on through higher insurance premiums, higher fees for banking services, higher interest rates, higher credit...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Preface
• CHAPTER ONE: Nature of Fraud
• CHAPTER TWO: Elements of the Crimes of Theft and Fraud
• CHAPTER THREE: Frauds Against the Individual
• CHAPTER FOUR: Frauds Against the Organization
• CHAPTER FIVE: Fighting Corruption
• CHAPTER SIX: Role of Ethics in Fighting Fraud
• CHAPTER SEVEN: Controlling Fraud
• CHAPTER EIGHT: Fraud Risk Management
• CHAPTER NINE: Investigating Fraud
• CHAPTER TEN: Computer Fraud and Countermeasures
• CHAPTER ELEVEN: Legal Issues Surrounding Fraud
• CHAPTER TWELVE: Industry-Related Fraud Opportunities
• APPENDIX A: Audit Committee Charter
• APPENDIX B: Corporate Fraud Policy
• APPENDIX C: Whistleblowing Policy
• APPENDIX D: Fraud Prevention Checklist
• APPENDIX E: Fraud Risk Questionnaire Sample
• APPENDIX F: Fraud Risk Analysis
• APPENDIX G: Fraud CAATs
• Glossary
• About the Author
• About the Web Site
• Index
• End User License Agreement