Detecting Fraud in Organizations
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Detecting Fraud in Organizations

Techniques, Tools, and Resources

Joseph R. Petrucelli

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eBook - ePub

Detecting Fraud in Organizations

Techniques, Tools, and Resources

Joseph R. Petrucelli

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About This Book

A savvy examination of where people and value meet, creating the opportunity for fraud

An essential reference for all business professionals, Detecting Fraud in Organizations: Techniques, Tools, and Resources explains the process of how people commit fraud, as well as how to prevent and stop fraud from occurring in your organization. Organized by business processes which succinctly describe how fraud manifests itself on a daily basis, the authors explain ways in which everyone can help guard against fraud by familiarizing themselves with its building blocks and methods used to perpetrate and conceal it. Filled with situational examples the book is accompanied by a website featuring fraud simulations, business process maps, and other useful tools for combating fraud.

  • Focuses on the people who perpetrate fraud and those who are tasked with preventing and detecting it
  • Uniquely organized by business processes for more relevance and easier understanding by those people working within organizations
  • Shows how subtle factors play a large role in identifying and ferreting out fraud in addition to the traditional knowledge of fraud schemes giving people and organizations the edge they need to be successful in prevention and deterrence
  • Companion website includes additional fraud simulations, business process maps, and useful tools

The price of fraud can be devastating to your business. Detecting Fraud in Organizations: Techniques, Tools, and Resources equips you and others in your organization with essential information and tools necessary to proactively catch fraud, reduce losses, improve efficiencies and develop actionable controls.

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Chapter One
Understanding Fraud
What Is Fraud, and Why Does It Continue to Happen?

What kind of society isn’t structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.
Milton Friedman, economist
This chapter introduces you to fraud and helps you to understand why it happens so you can develop a proper foundation on which to learn how to prevent, deter, and detect it. Fraud is first and foremost a people problem, as discussed in the Introduction. Flawed processes may support its continued existence, but processes are only part of the environment in which fraud occurs. Processes do not commit fraud, people do. This chapter does not discuss common or traditional criminological studies but instead focuses on the human element involved in analyzing fraud within an organization so we can determine what fraud is and why it continues to happen in today’s organizations.
This chapter features the following:
  1. Fraud’s many definitions.
  2. The value of informed skepticism.
  3. How to apply critical thinking when reviewing fraud.
  4. Discussions of confusion about responsibility and complexity.
TO BETTER UNDERSTAND THE MANY definitions of fraud, we begin our journey by learning what fraud looks like and why you need to ask many questions to gain a clear picture of the facts. You need to begin looking through a different set of eyes: not your own, but those of the fraudster.


Think about the people in your organization who have access to its financial resources and the value (money or otherwise) that is at risk with informed skepticism. Make sure the facts and findings support the organization’s people in trusted positions. The value of informed skepticism lies in the level of details that support your findings. This will aid you in your fraud analysis. Think divergently and develop as many potential facts as possible. Always remain objective and independent in your thinking and apply sound principles. Remember to think people! People are at the heart of fraud, and critical thinking should be applied to the daily organizational processes from top to bottom.
The people in the organization are the front line of fraud defense. Fraud can begin and end with them. A fraud-conscious organization should have clearly defined roles and responsibilities for all economic activities down to specific individual tasks. People in the organization cannot be allowed to create confusion about responsibility. A fraudster generally creates confusion to deflect attention from the fraud he or she is committing. People who have access to the value of an organization need to understand their trusted responsibility in order to help detect, deter, and prevent fraud. Their responsibilities must be communicated effectively by management so they understand them. The organizational process often requires various skills in order to accomplish the desired results. The lack of a full understanding of the desired results is a breeding ground for potential fraud.
To understand the complexities that exist in an organization, start with the idea that no two people think alike. This in itself requires the development of flexibility within the established principles and rules of an organization. Everything, including people, is constantly changing on a day-to-day basis. Organizations need to monitor and analyze the people in the processes on a daily basis.
This may not be practical, yet it is imperative that the organization create an environment in which its people know that monitoring and analysis is ever present. No one acknowledges the 800-pound friendly gorilla, but everyone feels its presence. The need for daily monitoring and analysis is too big a job for one person. This is why an organization needs to make sure that all of its people have the 800-pound friendly gorilla mind-set to create effective communication through a friendly rather than aggressive approach.
A successful organization needs to be firm and flexible at the same time. It is important for an organization to maintain enough strength to prevent fraud yet maintain enough flexibility to deal with its multiple complexities. The organization will need to confront the gray areas as well as conflicts that may arise on an ongoing basis by paying attention to questions such as the following:
  • Has the organization set reasonable expectations and goals for the responsibilities of its people?
  • Do the incentives communicated to the people in the organization maintain ethical behavior, or do they promote greed?
  • Is there an opportunity for conflicts of interest to exist in the organizational process?
Management needs to maintain effective communication with its people and its processes to ensure that gray areas are addressed before they become fraud. It is important that the people in an organization understand the incentives and potential conflicts of interest in a proper context and act in accordance with the established organizational rules and principles—not their own rules and principles.


This one-minute fraud mystery is designed to help you begin thinking divergently (“outside the box”) so you learn how to develop solutions under less than ideal circumstances. Think about the situation presented here as you read the rest of the chapter.
You are the owner of Trust Us Inc. Betty Favor, one of the organization’s most trusted employees, has worked there for 15 years. She socializes with you on a regular basis. Recently, you hired a young new accountant who just graduated from college with honors in accounting. This new employee, John Asset, tells Betty that the bank statement does not reflect the same bank balance as the bank reconciliation that he just prepared.1 Previously, Betty had taken care of all banking matters and prepared the bank reconciliations. Betty comes into your office and says it appears that John does not know what he is doing because there are errors on the bank reconciliation. She states that she redid the bank reconciliation to fix the error.
Do you think Trust Us Inc. is vulnerable to fraud? If so, where is the fraud, and how was it perpetrated? What is your approach to solving this mystery?


In an Associated Press article about the sentencing of former attorney Mather Kluger for insider trading, Assistant U.S. Attorney Judith Germano stated, “He had wealth, intelligence, and family support. He abused it all. Why? Because he could.”2
Exhibit 1.1 illustrates this dynamic.
Exhibit 1.1 The 800-Pound Friendly Gorilla Interview
Gorilla: Please, Mr. Caveman, make yourself comfortable.
Caveman: Wow, you sure look strong! [Reaches for club].
Gorilla: That won’t be necessary.
Caveman: Well, all right. [Pulls hand back].
Gorilla: Just want to have a conversation. I see you brought a club with you. I hope you don’t intend on using it.
Caveman: Of course not.
Gorilla: So . . . how did you commit the fraud?
Caveman: I used my club.
Gorilla: So why did you commit the fraud?
Caveman: Because I could.
Copyright © 2012 James Lee
The theme of the dialogue in Exhibit 1.1 is that the strength of the 800-pound friendly gorilla in the room is not more effective than calm rationale in dealing with the club-wielding caveman. The theme of the dialogue in Exhibit 1.1 is a theme that is maintained throughout the book. The strength of the 800-pound gorilla needs to be friendly rather than imposing. The 800-pound friendly gorilla applies a relaxed, open, and transparent process, creating the necessary communication whether the fraud has already occurred or is in the process of being detected, deterred, and prevented. If the gorilla were to verbally attack the already defensive caveman, he would not get anywhere and would probably get clubbed. In this cartoon, there was no deterence and the 800-pound friendly gorilla was performing a postmortem analysis to understand the fraud. If an organization is to create 800-pound friendly gorillas, the objective is to make people feel comfortable in discussing the facts before the fraud occurs and not after the fact.
Frauds are typically simple. The role of the fraud investigator (I use fraud investigator, detector, or examiner interchangeably throughout the book) is to assist those who are determining the fact...

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