Fraud Examination

by Albrecht,W. Steve

• ISBN13: 9780324301601
• ISBN10: 032430160X
• Edition: 2nd
• Format: Hardcover
• Copyright: 2005-01-28
• Publisher: Cengage Learning

Summary

Updated and enhanced to help readers better understand the significance of fraud in the modern accounting world, this provocative text prepares readers to identify, detect, investigate, and prevent financial fraud. It outlines the nature of fraud and the different types of fraud, including the unique e-business fraud that is now possible in today's technological world. Chapter 6 offers expansive, cutting-edge instruction on the role of data analysis in fraud detection as well as two entire chapters on investigating theft and concealment This edition includes an all new chapter on consumer fraud, and Chapter 16 contains new material on tax fraud-providing students with unique insight into fraudulent tax reporting activities. End-of-chapter materials have been enhanced, and the Financial Statement Fraud Standards Appendix at the end of the text has been updated to include information about SAS 99 and Sarbanes-Oxley.

Table of Contents

The Nature of Fraud	3	(26)
Seriousness of the Fraud Problem	4	(2)
What Is Fraud?	6	(4)
Types of Fraud	10	(5)
Employee Embezzlement	11	(1)
Management Fraud	12	(1)
Investment Scams	13	(1)
Vendor Fraud	14	(1)
Customer Fraud	15	(1)
Criminal and Civil Prosecution of Fraud	15	(2)
Criminal Law	15	(1)
Civil Law	16	(1)
How to Prepare to Be a Fraud-Fighting Professional	17	(1)
Fraud-Fighting Careers	18	(2)
Key Terms	20	(1)
Questions and Cases	20	(8)
Discussion Questions	21	(1)
True/False	21	(1)
Multiple Choice	21	(2)
Short Cases	23	(1)
Extensive Cases	24	(3)
Internet Assignment	27	(1)
Debate	27	(1)
End Notes	28	(1)
Who Commits Fraud and Why	29	(36)
Who Commits Fraud	30	(1)
Why People Commit Fraud	31	(2)
The First Element of the Fraud Triangle: Pressure	33	(3)
Financial Pressures	33	(1)
Vice Pressures	34	(1)
Work-Related Pressures	35	(1)
Other Pressures	36	(1)
The Second Element of the Fraud Triangle: Opportunity	36	(13)
Control Factor: Controls That Prevent or Detect Fraudulent Behavior	37	(7)
Summary of the Controls That Prevent or Detect Fraud	44	(1)
Noncontrol Factor: Inability to Judge the Quality of Performance	44	(1)
Noncontrol Factor: Failure to Discipline Fraud Perpetrators	45	(1)
Noncontrol Factor: Lack of Access to Information	46	(1)
Noncontrol Factor: Ignorance, Apathy, and Incapacity	47	(1)
Noncontrol Factor: Lack of an Audit Trail	48	(1)
The Third Element of the Fraud Triangle: Rationalization	49	(3)
Summary of the Fraud Triangle	52	(2)
Key Terms	54	(1)
Questions and Cases	54	(9)
Discussion Questions	54	(1)
True/False	54	(1)
Multiple Choice	55	(1)
Short Cases	56	(4)
Extensive Cases	60	(2)
Internet Assignments	62	(1)
End Notes	63	(2)
Fighting Fraud: An Overview	65	(24)
Fraud Prevention	66	(6)
Creating a Culture of Honesty and High Ethics	66	(5)
Assessing and Mitigating the Risk of Fraud	71	(1)
Fraud Detection	72	(2)
Fraud Investigation	74	(3)
Approaches to Fraud Investigation	75	(1)
Conducting a Fraud Investigation	76	(1)
Legal Action	77	(1)
Civil Action	77	(1)
Criminal Action	78	(1)
Summary of Fraud-Fighting Activities	78	(1)
Key Terms	78	(1)
Questions and Cases	79	(6)
Discussion Questions	79	(1)
True/False	79	(1)
Multiple Choice	80	(1)
Short Cases	81	(1)
Extensive Cases	82	(3)
Internet Assignments	85	(1)
Debate	85	(1)
End Notes	85	(4)
Preventing Fraud	89	(34)
Just About Everyone Can Be Dishonest	90	(1)
Creating a Culture of Honesty, Openness, and Assistance	90	(9)
Hiring Honest People and Providing Fraud Awareness Training	91	(2)
Creating a Positive Work Environment	93	(5)
Implementing Employee Assistance Programs	98	(1)
Eliminating Opportunities for Fraud	99	(9)
Having a Good System of Internal Controls	100	(3)
Discouraging Collusion Between Employees and Others	103	(1)
Alerting Vendors and Contractors to Company Policies	104	(1)
Monitoring Employees	104	(1)
Providing Whistle-Blowing Mechanisms	105	(1)
Creating an Expectation of Punishment	106	(1)
Conducting Proactive Fraud Auditing	107	(1)
Preventing Fraud---A Summary	108	(1)
A Comprehensive Approach to Fighting Fraud	109	(1)
Organizations and Fraud---The Current Model	110	(3)
Key Term	113	(1)
Questions and Cases	113	(6)
Discussion Questions	113	(1)
True/False	113	(1)
Multiple Choice	114	(1)
Short Cases	114	(2)
Extensive Cases	116	(2)
Internet Assignments	118	(1)
Debate	119	(1)
End Notes	119	(4)
Recognizing the Symptoms of Fraud	123	(34)
Symptoms of Fraud	124	(2)
Accounting Anomalies	126	(5)
Irregularities in Source Documents	126	(1)
Faulty Journal Entries	127	(2)
Inaccuracies in Ledgers	129	(2)
Internal Control Weaknesses	131	(1)
Analytical Fraud Symptoms	132	(5)
Extravagant Lifestyles	137	(1)
Unusual Behaviors	138	(3)
Tips and Complaints	141	(8)
Key Terms	149	(1)
Questions and Cases	149	(6)
Discussion Questions	149	(1)
True/False	149	(1)
Multiple Choice	150	(1)
Short Cases	151	(1)
Extensive Cases	152	(2)
Internet Assignments	154	(1)
End Notes	155	(2)
Proactive Approaches to Detecting Fraud	157	(46)
Proactive Fraud Detection	158	(1)
Inductive Method #1: Commercial Data-Mining Software	158	(1)
Inductive Method #2: Digital Analysis of Company Databases	159	(3)
Deductive Fraud Detection	162	(7)
Step 1: Understand the Business	162	(1)
Step 2: Identify What Kinds of Fraud Could Occur	163	(1)
Step 3: Determine Generated Symptoms	163	(1)
Step 4: Search for Symptoms	164	(1)
Step 5: Follow Up on Symptoms	165	(4)
Which Transaction-Based Approach Is Best?	169	(1)
Analyzing Financial Statements Reports	169	(6)
Detecting or Identifying Fraud Perpetrators	175	(2)
Summary	177	(1)
Key Terms	177	(1)
Questions and Cases	178	(9)
Discussion Questions	178	(1)
True/False	178	(1)
Multiple Choice	179	(1)
Short Cases	180	(2)
Extensive Cases	182	(4)
Internet Assignments	186	(1)
Debate	186	(1)
Appendix: Data Analysis Basics	187	(13)
End Notes	200	(3)
Investigating Theft Acts	203	(22)
Theft Act Investigative Methods	205	(13)
Coordinating an Investigation	206	(2)
Surveillance and Covert Operations	208	(2)
Invigilation	210	(2)
Physical Evidence	212	(6)
Key Terms	218	(1)
Questions and Cases	218	(5)
Discussion Questions	218	(1)
True/False	218	(1)
Multiple Choice	219	(1)
Short Cases	220	(1)
Extensive Cases	221	(1)
Internet Assignment	222	(1)
Debate	223	(1)
End Notes	223	(2)
Investigating Concealment	225	(20)
Concealment Investigative Methods	226	(14)
Aspects of Documentary Evidence	226	(3)
Obtaining Documentary Evidence	229	(7)
Document Experts	236	(4)
Summary of Investigative Techniques	240	(1)
Key Terms	240	(1)
Questions and Cases	240	(3)
Discussion Questions	240	(1)
True/False	240	(1)
Multiple Choice	241	(1)
Short Cases	242	(1)
Internet Assignment	243	(1)
Debate	243	(1)
End Notes	243	(2)
Conversion Investigation Methods	245	(22)
Conversion Searches	246	(1)
Government Sources of Information	247	(4)
Federal Sources of Information	247	(2)
State Sources of Information	249	(1)
County and Local Records	250	(1)
Private Sources of Information	251	(1)
Online Databases	252	(2)
Internet Search	254	(1)
The Net Worth Method	255	(2)
Summary	257	(1)
Key Terms	257	(1)
Questions and Cases	258	(8)
Discussion Questions	258	(1)
True/False	258	(1)
Multiple Choice	259	(1)
Short Cases	260	(3)
Extensive Cases	263	(2)
Internet Assignments	265	(1)
Debate	266	(1)
End Notes	266	(1)
Inquiry Methods and Fraud Reports	267	(92)
Honesty Testing	268	(1)
Pencil-and-Paper Test	268	(1)
Graphology	268	(1)
Voice Stress Analysis and Polygraphs	268	(1)
Interviewing---An Overview	269	(1)
Characteristics of a Good Interview	269	(1)
Characteristics of a Good Interviewer	269	(1)
Understanding Reaction to Crisis	270	(3)
Stage 1. Denial	271	(1)
Stage 2. Anger	272	(1)
Stage 3. Rationalization and Bargaining	272	(1)
Stage 4. Depression	272	(1)
Stage 5. Acceptance	273	(1)
Planning an Interview	273	(5)
The Interviewer's Demeanor	274	(1)
The Language of Interviews	274	(1)
Question Typology	274	(1)
Elements of Conversation	275	(1)
Inhibitors of Communication	276	(1)
Facilitators of Communication	277	(1)
Mechanics of the Interview	278	(30)
Introductory Questions	278	(1)
Methodology	279	(2)
Informational Questions	281	(2)
Question Sequence	283	(1)
Informational Question Techniques	284	(1)
Note-Taking	284	(1)
Observing Respondent Reactions	284	(1)
Theme Development	285	(1)
Transition Methodology	285	(2)
Dealing with Resistance	287	(1)
Difficult People	288	(1)
Volatile Interviews	288	(1)
Assessment Questions	289	(1)
The Physiology of Deception	290	(2)
Methodology of Assessment Questions	292	(2)
Closing Questions	294	(1)
Admission-Seeking Questions	295	(2)
Steps in the Admission-Seeking Interview	297	(5)
Refute Alibis	302	(2)
Motive for the Fraud	304	(1)
Others Involved	305	(1)
Physical Evidence	305	(1)
Specifics of Each Offense	306	(1)
Signed Statements	307	(1)
Key Points in Signed Statements	308	(1)
The Fraud Report	308	(2)
Summary	310	(1)
Questions and Cases	310	(7)
Discussion Questions	310	(1)
True/False	310	(1)
Multiple Choice	311	(1)
Short Cases	312	(2)
Extensive Cases	314	(2)
Internet Assignments	316	(1)
Debate	317	(1)
End Notes	317	(2)
Appendix A	319	(2)
Appendix B	321	(38)
Financial Statement Fraud	359	(46)
The Problem of Financial Statement Fraud	361	(10)
Financial Statement Problems in Recent Years	362	(1)
Why These Problems Occurred	362	(5)
Nature of Financial Statement Fraud	367	(4)
Motivations for Financial Statement Fraud	371	(1)
A Framework for Detecting Financial Statement Fraud	371	(11)
Management and the Board of Directors	372	(3)
Relationships with Others	375	(4)
Organization and Industry	379	(1)
Financial Results and Operating Characteristics	380	(2)
Summary	382	(1)
Key Terms	382	(1)
Questions and Cases	382	(8)
Discussion Questions	382	(1)
True/False	383	(1)
Multiple Choice	383	(1)
Short Cases	384	(2)
Extensive Cases	386	(3)
Internet Assignments	389	(1)
Debate	389	(1)
End Notes	390	(1)
Appendix	391	(14)
Revenue- and Inventory-Related Financial Statement Frauds	405	(34)
Revenue-Related Fraud	406	(12)
Identifying Revenue-Related Exposures	408	(1)
Identifying Revenue-Related Fraud Symptoms	409	(2)
Actively Looking for Revenue-Related Fraud Symptoms	411	(1)
Actively Searching for Revenue-Related Analytical Symptoms	412	(3)
Actively Searching for Control Symptoms	415	(1)
Actively Searching for Behavioral or Verbal and Lifestyle Symptoms	416	(1)
Actively Searching for Tips and Complaints Symptoms	417	(1)
Following Up on Revenue-Related Fraud Symptoms as an Investigator	418	(1)
Inventory and Cost of Goods Sold Frauds	418	(10)
Identifying Inventory and Cost of Goods Sold Exposures	419	(2)
Identifying Symptoms of Inventory and Cost of Goods Sold Fraud	421	(1)
Actively Searching for Inventory-Related Control Symptoms	422	(1)
Actively Searching for Behavioral or Verbal and Lifestyle Symptoms	423	(1)
Actively Searching for Tips and Complaints Symptoms	423	(1)
Proactively Looking for Inventory and Cost of Goods Sold-Related Fraud Symptoms	424	(1)
Searching for Inventory and Cost of Goods Sold Analytical Symptoms	425	(3)
Summary	428	(1)
Key Terms	428	(1)
Questions and Cases	429	(8)
Discussion Questions	429	(1)
True/False	429	(1)
Multiple Choice	429	(2)
Short Cases	431	(3)
Extensive Cases	434	(2)
Internet Assignments	436	(1)
Debate	437	(1)
End Notes	437	(2)
Liability, Asset, and Inadequate Disclosure Frauds	439	(46)
Understatement of Liabilities Fraud	440	(11)
Identifying Understatement of Liability Fraud Exposures	442	(2)
Not Recording or Underrecording Various Types of Debt	444	(1)
Detecting Understatement of Liability Fraud Symptoms	445	(2)
Proactively Searching for Symptoms Related to the Underreporting of Liabilities	447	(4)
Overstatement of Asset Fraud	451	(13)
Identifying Asset Overstatement Fraud	451	(7)
Identifying and Actively Searching for Asset Overstatement Fraud Symptoms	458	(6)
Inadequate Disclosure Fraud	464	(6)
Kinds of Disclosure Fraud	465	(3)
Detecting Inadequate Disclosure Fraud	468	(1)
Symptoms Related to Overall Misrepresentation About the Company or Its Assets	468	(1)
Disclosure Fraud Related to Financial Reports and Financial Statement Footnotes	469	(1)
Other Types of Financial Statement Fraud	470	(3)
Inappropriate Accounting for Nonmonetary Transactions	470	(1)
Inappropriate Accounting for Roundtrip Transactions	470	(1)
Improper Accounting for Foreign Payments in Violation of the Foreign Corrupt Practices Act (FCPA)	470	(1)
Improper Use of Non-GAAP Financial Measures	471	(1)
Improper Use of Off-Balance Sheet Arrangements	471	(2)
Summary	473	(1)
Key Terms	473	(1)
Questions and Cases	474	(8)
Discussion Questions	474	(1)
True/False	474	(1)
Multiple Choice	474	(2)
Short Cases	476	(3)
Extensive Cases	479	(2)
Internet Assignments	481	(1)
Debate	482	(1)
End Notes	482	(3)
Consumer Fraud	485	(32)
Frauds Against Individuals	486	(1)
Identity Theft	486	(9)
How Fraudsters Convert Personal Information to Financial Gain	486	(1)
The Process of Identity Theft	487	(2)
Stealing a Victim's Identity	489	(1)
Minimizing the Risk	490	(3)
Prosecution of Identity Theft	493	(1)
After Identity Theft Occurs	494	(1)
Other Forms of Consumer Fraud	495	(13)
Foreign Advance-Fee Scams	495	(3)
Work at Home Schemes	498	(3)
Bogus Mystery Shopping Scams	501	(3)
Telemarketing Fraud	504	(2)
Investment Scams	506	(2)
Summary	508	(1)
Additional Note to Students and Instructors	508	(1)
Key Terms	508	(2)
Questions and Cases	510	(5)
Discussion Questions	510	(1)
True/False	510	(1)
Multiple Choice	510	(2)
Short Cases	512	(1)
Extensive Case	513	(1)
Internet Assignment	514	(1)
Debate	515	(1)
End Notes	515	(2)
Fraud Against Organizations	517	(20)
Fraud Statistics	518	(1)
Asset Misappropriations	519	(7)
Theft of Cash Through Larceny	520	(1)
Theft of Cash Through Skimming	520	(1)
Cash Theft Through Fraudulent Disbursements	521	(4)
Theft of Inventory and Other Assets	525	(1)
Corruption	526	(3)
Bribery	526	(1)
Conflicts of Interest	527	(2)
Economic Extortion and Illegal Gratuities	529	(1)
Summary	529	(1)
Key Terms	530	(1)
Questions and Cases	530	(6)
Discussion Questions	530	(1)
True/False	530	(1)
Multiple Choice	531	(1)
Short Cases	532	(3)
Extensive Cases	535	(1)
Internet Assignments	536	(1)
Debate	536	(1)
End Notes	536	(1)
Bankruptcy, Divorce, and Tax Fraud	537	(36)
Tax Fraud	539	(4)
Fraud and the Criminal Investigation Division	539	(4)
CI Investigative Careers	543	(1)
Divorce Fraud	543	(1)
Bankruptcy Fraud	544	(8)
The Bankruptcy Code	545	(1)
Civil and Criminal Bankruptcy Fraud Statutes	546	(1)
Civil Bankruptcy Statutes	547	(1)
Participants in the Bankruptcy Process	548	(2)
Participants in Divorce Cases	550	(1)
Fraud Investigator's Relationship to Participants in Bankruptcy Proceedings	551	(1)
Bankruptcy and Divorce Fraud Schemes---The Planned Bankruptcy (Bust-Out)	552	(1)
Fraudulent Concealment of Assets or Income in Bankruptcies or Divorces	553	(1)
The Debtor's or Divorcee's Estate	553	(1)
Bankruptcy Statutes Concerning Concealment of Assets	553	(1)
Means of Concealing Assets or Income	553	(1)
Indicators of Possible Asset or Income Concealment	554	(1)
Fraudulent Transfers	554	(1)
Civil Liability for False Accusations	555	(1)
Key Terms	555	(7)
Questions and Cases	555	(1)
Discussion Questions	555	(1)
True/False	556	(1)
Multiple Choice	556	(1)
Short Cases	557	(4)
Extensive Cases	561	(1)
Internet Assignments	562	(1)
End Notes	562	(1)
Appendix A Affidavit of Proposed Investigator	563	(6)
Appendix B Application for Retention of Investigator	569	(4)
Fraud in E-Commerce	573	(16)
Fraud Risks in E-Commerce	574	(4)
E-Commerce Risks Inside Organizations	575	(1)
E-Commerce Risks Outside Organizations	576	(2)
Preventing Fraud in E-Commerce	578	(3)
The Control Environment	578	(1)
Risk Assessment	579	(1)
Preventing Fraud Through Control Activities	579	(2)
Detecting E-Business Fraud	581	(1)
Summary	582	(1)
Key Terms	582	(1)
Questions and Cases	583	(3)
Discussion Questions	583	(1)
True/False	583	(1)
Multiple Choice	583	(1)
Short Cases	584	(2)
End Notes	586	(3)
Legal Follow-Up	589	(19)
The Court System	590	(3)
State Courts	590	(1)
Federal Courts	591	(1)
Civil and Criminal Fraud Trials	592	(1)
Overview of the Civil Litigation Process	593	(3)
Investigation and Pleadings	593	(1)
Discovery	593	(2)
Settlement Negotiations	595	(1)
Trial and Appeal	595	(1)
Overview of the Criminal Litigation Process	596	(3)
Filing Criminal Charges	596	(1)
Arresting and Charging the Defendant	596	(1)
Preliminary Hearings	597	(1)
Grand Jury	597	(1)
Arraignment	598	(1)
Discovery	598	(1)
Pretrial Motions	598	(1)
Trial and Appeal	598	(1)
Being an Expert Witness	599	(2)
Key Terms	601	(1)
Questions and Cases	602	(6)
Discussion Questions	602	(1)
True/False	602	(1)
Multiple Choice	602	(1)
Short Cases	603	(2)
Extensive Case	605	(2)
Internet Assignment	607	(1)
Debate	607	(1)
End Notes	608