Identifying & Preventing Fraud Flashcards
In a corporate context, fraud falls into 1 of 2 main categories:
- Removal of funds or assets
2. Intentional misrepresentation of financial position
Fraud is…
…deprivation by deceit; a false representation of fact made with the knowledge of its falsity, or without belief in its truth, or recklessly careless, whether true or false
Removal of funds: Common frauds: (12)
- Payroll fraud
- Conspiracy with other parties
- Stealing assets
- Teeming & lading
- Fictitious customers
- Collusion with customers
- Bogus supply of goods or services
- Paying for goods not received
- Meeting budgets / target performance measures
- Manipulation of bank reconciliations & cash books
- Misuse of pension funds or other assets
- Disposal of assets to employees
Theft of cash:
Petty cash
Theft of inventory:
Office stationary (insignificant!)
Payroll fraud:
- Falsify time sheets
- Miscalculate payslips
- Fictitious member of staff
Teeming and lading is…
…the theft of cash or cheque receipts and offsetting subsequent receipts (not necessarily from the same customer!)
Fictitious customers:
Responsibility for taking goods orders as well as the authority to approve new customers for credit
Collusion with customers:
- Reduce the price charged in return for a cut of the saving
- Suppress invoices or under-record quantities of dispatched goods on delivery notes
Bogus supply of goods or services:
Falsely invoice the firm for goods or services that were never supplied (Consultancy; Joseph!)
Paying for goods not received:
Issue invoice for larger quantities than were actually delivered
Meeting budgets or target performance measures:
Siphon off and pocket any profits in excess of the target
Manipulation of bank recons & cash books:
Incorrect descriptions of items and use of compensating debits and credits to make recons work
Misuse of pension funds and other assets:
Use as collateral in obtaining loan finance; Assets transferred to the fund at significant over-valuations
Disposal of assets to employees:
Manipulate book value so the employee pays below market value for it
Intentional misrepresentation of financial position:
- Over-valuation of inventory
- Irrecoverable debt policy not enforced
- Fictitious sales (Selling goods to friends with a promise to buy them back at a later date
- Manipulation of year end events
- Understating expenses
- Manipulation of depreciation figures
Over-valuation of inventory: (4)
- Miscounting
- Deliveries omitted
- Returns not recorded
- Obsolete inventory held at cost instead of being written off
Fictitious sales:
Selling goods to friends with a promise to buy them back at a later date
There are 3 preconditions that must exist to make fraud possible (‘The fraud triangle’): (3)
- Dishonesty
- Motivation
- Opportunity
Assessing the risk of fraud: Sins of high fraud include: (5)
- Lack of integrity
- Excessive pressures
- Poor control systems
- Unusual transactions
- Lack of audit evidence
General external factors that influence the degree of risk a company is exposed to: (5)
- Technological changes
- New legislation or regulations
- Economic or political changes
- Increased competition
- Changing customer needs
Circumstances that might increase the risk profile of a company:
- Changed operating environment
- New personnel
- New or upgraded management information systems
- New overseas operations
- Rapid growth
- New technology
- New products
- Corporate restructuring
Business Risks: (3)
- Profit levels / margins deviating significantly from industry norm
- Market opinion
- Complex structures
Personnel Risks (6):
- Secretive behaviour
- Expensive lifestyles
- Long hours or un-taken holidays
- Autocratic management style
- Lack of segregation of duties
- Low staff morale
Computer Fraud (4):
- Computer hackers
- Lack of training within management
- Identifying risks (Staying up to date)
- Need for ease of access and flexible systems
Reasons for fraud: (4)
- Factors specific to the industry
- Factors specific to the business
- Changes in circumstances
- Certain areas - Cash sales
Factors specific to the business: (3)
- Personnel (Authority to dominant managers)
- Organisation (Unclear structure; lack of supervision)
- Strategy (Great emphasis on reward by results)
Reasons for poor controls: (4)
- Lack of emphasis on compliance / lack of understanding why controls are required
- Staff problems (Under-staffing, poor quality or poorly motivated)
- Changes in senior personnel (Lack of supervision)
- Emphasis on autonomy of operational management
General prevention policies: (3)
- Emphasising ethics
- Personnel controls (Interviewing, recruitment, appraisal)
- Training & raising awareness
Prevention is specific, high-risk business areas: (5)
- Segregation of duties
- Appropriate documentation
- Limitation controls
- Prohibited actions
- Internal audit concentration
Controls to combat fraud: (18)
- Physical controls (Security)
- Segregation of duties
- Authorisation policies (Written)
- Customer signatures
- Using words rather than numbers
- Documentation
- Sequential numbering
- Dates
- Standard procedures
- Holidays
- Recruitment policies
- Computer security
- Manager & staff responsibilities
- Fraud officer
- Availability of information
- Whistle-blowing
- Investigation of fraud (Fraud response plan)
- Evolving control systems
Controls to combat fraud: Manager and staff responsibilities: (6)
- Operational managers - alert!
- Finance staff - alert!
- Personnel staff - alert!
- Internal audit staff - review controls
- External audit staff - report
- Non-Executive directors - act
Money laundering is…
…any financial transactions whose purpose is to conceal the origins of the proceeds of criminal activity;
also used to avoid paying tax & distort accounting information
Categories of criminal offence: (3)
- Laundering
- Failure to report
- Tipping off
Money laundering process: (3)
- Placement: ‘Smurfing’
- Layering: Gambling
- Integration: Banking a cheque
Guidance to avoid money laundering: (4)
- Control systems
- Money laundering reporting officer (MLRO)
- Internal reporting procedures
- Adequate records
