Principles of Fraud Examination, 1st Edition

by Joseph T. Wells (Association of Certified Fraud Examiners )

• ISBN13: 9780471517085
• ISBN10: 0471517089
• Format: Hardcover
• Copyright: 2004-08-01
• Publisher: WILEY

Summary

InPrinciples of Fraud Examination, Joseph Wells (founder and Chairman of the Association of Certified Fraud Examiners) provides a wealth of informative and entertaining insights into the complex social factors behind fraudulent behavior. The text also provides a broad overview of the field of Fraud Examination--from what fraud is, to how it is committed, detected, and deterred. Coverage begins with an explanation of fraud examination methodology, followed by detailed examination of the most prevalent fraud schemes used by employees, owners, managers, and executives.

Table of Contents

Introduction	3	(46)
Fraud Examination Methodology	5	(3)
Predication	5	(1)
Fraud Theory Approach	5	(1)
Tools Used in Fraud Examinations	6	(2)
Defining Occupational Fraud and Abuse	8	(4)
Defining Fraud	8	(2)
Defining Abuse	10	(2)
Research in Occupational Fraud and Abuse	12	(31)
Edwin H. Sutherland	12	(1)
Donald R. Cressey	13	(8)
Dr. W. Steve Albrecht	21	(3)
Richard C. Hollinger	24	(6)
The 2004 Report to the Nation on Occupational Fraud and Abuse	30	(13)
Conclusion	43	(1)
Summary	44	(1)
Essential Terms	44	(1)
Review Questions	45	(1)
Discussion Issues	45	(1)
Endnotes	46
Answers to Exercises	1	(48)
Skimming	49	(26)
Learning Objectives	49	(1)
Case Study: Shy Doc Gave Good Face	49	(2)
Overview	51	(5)
Skimming Data from ACFE 2004 National Fraud Survey	52	(4)
Skimming Schemes	56	(1)
Sales Skimming	56	(7)
Receivables Skimming	63	(1)
Case Study: Beverage Man Takes the Plunge	64	(6)
Proactive Computer Audit Tests for Detecting Skimming	70	(2)
Summary	72	(1)
Essential Terms	72	(1)
Review Questions	73	(1)
Discussion Issues	73	(1)
Endnotes	73
Answers to Exercises	4	(71)
Cash Larceny	75	(20)
Case Study: Bank Teller Gets Nabbed for Theft	75	(2)
Overview	77	(4)
Cash Larceny Data from ACFE 2004 National Fraud Survey	77	(4)
Cash Larceny Schemes	81	(1)
Larceny at the Point of Sale	82	(3)
Thefts from Other Registers	83	(1)
Death by a Thousand Cuts	83	(1)
Reversing Transactions	83	(1)
Altering Cash Counts or Cash Register Tapes	84	(1)
Destroying Register Tapes	84	(1)
Preventing and Detecting Cash Larceny at the Point of Sale	84	(1)
Larceny of Receivables	85	(1)
Force Balancing	85	(1)
Reversing Entries	86	(1)
Destruction of Records	86	(1)
Cash Larceny from the Deposit	86	(4)
Deposit Lapping	88	(1)
Deposits in Transit	88	(1)
Preventing and Detecting Cash Larceny from the Deposit	88	(2)
Case Study: The Ol' Fake Surprise Audit Gets 'Em Every Time	90	(1)
Proactive Computer Audit Tests for Detecting Cash Larceny	91	(1)
Summary	92	(1)
Essential Terms	93	(1)
Review Questions	93	(1)
Discussion Issues	93	(1)
Endnote	93
Answers to Exercises	7	(88)
Billing Schemes	95	(30)
Case Study: Medical School Treats Fraud and Abuse	95	(2)
Overview	97	(5)
Billing Schemes Data from ACFE 2004 National Fraud Survey	98	(4)
Billing Schemes	102	(1)
Shell Company Schemes	102	(8)
Forming a Shell Company	102	(2)
Submitting False Invoices	104	(1)
Self-Approval of Fraudulent Invoices	104	(1)
``Rubber Stamp'' Supervisors	105	(1)
Reliance on False Documents	105	(1)
Collusion	105	(1)
Purchase of Services Rather than Goods	106	(1)
Pass-Through Schemes	106	(1)
Preventing and Detecting Shell Company Schemes	106	(4)
Billing Schemes Involving Non-Accomplice Vendors	110	(1)
Pay-and-Return Schemes	110	(1)
Overbilling with a Non-Accomplice Vendor's Invoices	111	(1)
Case Study: For This Magazine, Internal Fraud Proved Hard to Digest	111	(3)
Personal Purchases with Company Funds	114	(5)
Personal Purchases Through False Invoicing	114	(3)
Personal Purchases on Credit Cards or Other Company Accounts	117	(2)
Proactive Computer Audit Tests for Detecting Billing Schemes	119	(2)
Summary	121	(1)
Essential Terms	122	(1)
Review Questions	122	(1)
Discussion Issues	122
Answers to Exercises	10	(115)
Check Tampering	125	(36)
Case Study: A Wolf in Sheep's Clothing	125	(2)
Overview	127	(4)
Check Tampering Data from ACFE 2004 National Fraud Survey	127	(4)
Check Tampering Schemes	131	(1)
Forged Maker Schemes	132	(5)
Obtaining the Check	132	(3)
To Whom Is the Check Made Payable?	135	(1)
Forging the Signature	136	(1)
Miscoding Fraudulent Checks	137	(1)
Converting the Check	137	(1)
Forged Endorsement Schemes	137	(5)
Intercepting Checks Before Delivery	139	(1)
Converting the Stolen Check	140	(1)
Preventing and Detecting the Theft of Outgoing Company Checks	141	(1)
Altered Payee Schemes	142	(3)
Altering Checks Prepared by Others: Inserting a New Payee	142	(1)
Altering Checks Prepared by Others: ``Tacking On''	143	(1)
Altering Checks Prepared by the Fraudster: Erasable Ink	144	(1)
Altering Checks Prepared by the Fraudster: Blank Checks	144	(1)
Converting Altered Checks	145	(1)
Preventing and Detecting the Alteration of Company Checks	145	(1)
Concealed Check Schemes	145	(2)
Authorized Maker Schemes	147	(2)
Overriding Controls Through Intimidation	147	(1)
Poor Controls	148	(1)
Preventing and Detecting Check Tampering by Authorized Makers	149	(1)
Concealing Check Tampering	149	(2)
The Fraudster Reconciling the Bank Statement	150	(1)
Case Study: What Are Friends For?	151	(4)
Re-Alteration of Checks	153	(1)
Falsifying the Disbursements Journal	153	(1)
Reissuing Intercepted Checks	154	(1)
Bogus Supporting Documents	155	(1)
Proactive Computer Audit Tests for Detecting Check Tampering Schemes	155	(2)
Summary	157	(1)
Essential Terms	158	(1)
Review Questions	158	(1)
Discussion Issues	158	(1)
Endnotes	159
Answers to Exercises	13	(148)
Payroll Schemes	161	(26)
Case Study: Say Cheese!	161	(2)
Overview	163	(4)
Payroll Scheme Data from ACFE 2004 National Fraud Survey	163	(4)
Payroll Schemes	167	(1)
Ghost Employees	168	(4)
Adding the Ghost to the Payroll	169	(1)
Collecting Timekeeping Information	169	(1)
Issuing the Ghost's Paycheck	170	(1)
Delivery of the Paycheck	170	(1)
Preventing and Detecting Ghost Employee Schemes	171	(1)
Falsified Hours and Salary	172	(5)
Manually Prepared Timecards	173	(2)
Time Clocks and Other Automated Timekeeping Systems	175	(1)
Rates of Pay	175	(1)
Preventing and Detecting Falsified Hours and Salary Schemes	176	(1)
Commission Schemes	177	(2)
Fictitious Sales	177	(1)
Altered Sales	178	(1)
Detecting Commission Schemes	178	(1)
Case Study: The All-American Girl	179	(1)
Proactive Computer Audit Tests for Detecting Payroll Fraud	180	(4)
Summary	184	(1)
Essential Terms	185	(1)
Review Questions	185	(1)
Discussion Issues	185	(1)
Endnote	185
Answers to Exercises	17	(170)
Expense Reimbursement Schemes	187	(22)
Case Study: Frequent Flier's Fraud Crashes	187	(2)
Overview	189	(4)
Expense Reimbursement Data from ACFE 2004 National Fraud Survey	189	(4)
Expense Reimbursement Schemes	193	(1)
Mischaracterized Expense Reimbursements	194	(2)
Preventing and Detecting Mischaracterized Expense Reimbursements	196	(1)
Overstated Expense Reimbursements	196	(3)
Altered Receipts	197	(1)
Overpurchasing	198	(1)
Overstating Another Employee's Expenses	198	(1)
Orders to Overstate Expenses	198	(1)
Preventing and Detecting Overstated Expense Reimbursement Schemes	198	(1)
Fictitious Expense Reimbursement Schemes	199	(2)
Producing Fictitious Receipts	199	(1)
Obtaining Blank Receipts from Vendors	199	(1)
Claiming the Expenses of Others	199	(2)
Preventing and Detecting Fictitious Expense Reimbursement Schemes	201	(1)
Multiple Reimbursement Schemes	201	(1)
Preventing and Detecting Multiple Reimbursement Schemes	202	(1)
Case Study: The Extravagant Salesman	202	(2)
Proactive Computer Audit Tests for Detecting Expense Reimbursement Schemes	204	(1)
Summary	205	(1)
Essential Terms	205	(1)
Review Questions	205	(1)
Discussion Issues	205	(1)
Endnote	206
Answers to Exercises	20	(189)
Register Disbursement Schemes	209	(18)
Case Study: Demotion Sets Fraud in Motion	209	(2)
Overview	211	(4)
Register Disbursement Data from ACFE 2004 National Fraud Survey	211	(4)
Register Disbursement Schemes	215	(1)
False Refunds	215	(2)
Fictitious Refunds	215	(1)
Overstated Refunds	216	(1)
Credit Card Refunds	217	(1)
Case Study: A Silent Crime	217	(2)
False Voids	219	(2)
Concealing Register Disbursements	221	(1)
Small Disbursements	221	(1)
Destroying Records	221	(1)
Preventing and Detecting Register Disbursement Schemes	222	(1)
Proactive Computer Audit Tests for Detecting Register Disbursement Schemes	222	(2)
Summary	224	(1)
Essential Terms	224	(1)
Review Questions	224	(1)
Discussion Issues	224	(1)
Endnote	225
Answers to Exercises	23	(204)
Non-Cash Assets	227	(26)
Case Study: Chipping Away at High-Tech Theft	227	(2)
Overview	229	(5)
Non-Cash Misappropriation Data from ACFE 2004 National Fraud Survey	229	(4)
Non-Cash Misappropriation Schemes	233	(1)
Misuse of Non-Cash Assets	234	(1)
The Costs of Inventory Misuse	234	(1)
Unconcealed Larceny Schemes	235	(3)
The Fake Sale	237	(1)
Preventing and Detecting Larceny of Non-Cash Assets	238	(1)
Asset Requisitions and Transfers	238	(1)
Purchasing and Receiving Schemes	239	(1)
Falsifying Incoming Shipments	240	(1)
False Shipments of Inventory and Other Assets	240	(2)
Case Study: Hard Drives and Bad Luck	242	(2)
Other Schemes	244	(1)
Concealing Inventory Shrinkage	245	(2)
Altered Inventory Records	245	(1)
Fictitious Sales and Accounts Receivable	246	(1)
Write Off Inventory and Other Assets	246	(1)
Physical Padding	246	(1)
Preventing and Detecting Non-Cash Thefts That Are Concealed by Fraudulent Support	247	(1)
Proactive Computer Audit Tests for Detecting Non-Cash Misappropriations	248	(2)
Summary	250	(1)
Essential Terms	250	(1)
Review Questions	250	(1)
Discussion Issues	251	(1)
Endnote	251
Answers to Exercises	26	(227)
Corruption	253	(34)
Case Study: Why Is This Furniture Falling Apart?	253	(2)
Overview	255	(6)
Corruption Schemes	255	(1)
Corruption Data from ACFE 2004 National Fraud Survey	256	(5)
Bribery	261	(10)
Kickback Schemes	261	(5)
Bid-Rigging Schemes	266	(5)
Something of Value	271	(1)
Economic Extortion	272	(1)
Illegal Gratuities	272	(1)
Conflicts of Interest	273	(1)
Case Study: Working Double Duty	274	(5)
Purchasing Schemes	275	(3)
Sales Schemes	278	(1)
Other Conflict of Interest Schemes	278	(1)
Preventing and Detecting Conflicts of Interest	279	(1)
Proactive Computer Audit Tests for Detecting Corruption	280	(2)
Summary	282	(1)
Essential Terms	283	(1)
Review Questions	284	(1)
Discussion Issues	284	(1)
Endnotes	285
Answers to Exercises	29	(258)
Accounting Principles and Fraud	287	(32)
Fraud in Financial Statements	287	(3)
Who Commits Financial Statement Fraud?	288	(1)
Why Do People Commit Financial Statement Fraud?	288	(1)
How Do People Commit Financial Statement Fraud?	289	(1)
Conceptual Framework for Financial Reporting	290	(4)
Economic Entity	291	(1)
Going Concern	291	(1)
Monetary Unit	292	(1)
Periodicity	292	(1)
Historical Cost	292	(1)
Revenue Recognition	292	(1)
Matching	292	(1)
Full Disclosure	293	(1)
Cost-Benefit	293	(1)
Materiality	293	(1)
Industry Practice	293	(1)
Conservation	294	(1)
Relevance and Reliability	294	(1)
Comparability and Consistency	294	(1)
Responsibility for Financial Statements	294	(1)
Users of Financial Statements	295	(1)
Types of Financial Statements	295	(1)
The Sarbanes-Oxley Act of 2002	296	(14)
Public Company Accounting Oversight Board	297	(6)
Certification Obligations for CEOs and CFOs	303	(1)
New Standards for Audit Committee Independence	304	(1)
New Standards for Auditor Independence	305	(1)
Enhanced Financial Disclosure Requirements	306	(1)
Protections for Corporate Whistleblowers under Sarbanes--Oxley	307	(1)
Enhanced Penalties for White-Collar Crime	308	(2)
Financial Statement Fraud Data from ACFE 2004 National Fraud Survey	310	(5)
Frequency and Cost	310	(1)
Types of Financial Statement Schemes	311	(1)
Detection of Financial Statement Schemes	312	(1)
Perpetrators of Financial Statement Schemes	312	(1)
Victims of Corruption Schemes	313	(2)
Summary	315	(1)
Essential Terms	315	(1)
Review Questions	315	(1)
Discussion Issues	316	(1)
Endnotes	316
Answers to Exercises	32	(287)
Fraudulent Financial Statement Schemes	319	(50)
Case Study: That Way Lies Madness	319	(3)
Overview	322	(2)
Defining Financial Statement Fraud	324	(1)
Costs of Financial Statement Fraud	325	(2)
Methods of Financial Statement Fraud	327	(1)
Fictitious Revenues	327	(3)
Sales with Conditions	329	(1)
Pressures to Boost Revenues	329	(1)
Red Flags Associated with Fictitious Revenues	330	(1)
Timing Differences	330	(5)
Matching Revenues with Expenses	330	(2)
Premature Revenue Recognition	332	(1)
Long-Term Contracts	333	(1)
Channel Stuffing	333	(1)
Recording Expenses in the Wrong Period	334	(1)
Red Flags Associated with Timing Differences	334	(1)
Case Study: The Importance of Timing	335	(1)
Concealed Liabilities and Expenses	335	(4)
Liability/Expense Omissions	336	(1)
Capitalized Expenses	337	(1)
Expensing Capital Expenditures	338	(1)
Returns and Allowances and Warranties	338	(1)
Red Flags Associated with Concealed Liabilities and Expenses	339	(1)
Improper Disclosures	339	(3)
Liability Omissions	339	(1)
Subsequent Events	340	(1)
Management Fraud	340	(1)
Related-Party Transactions	340	(1)
Accounting Changes	341	(1)
Red Flags Associated with Improper Disclosures	341	(1)
Improper Asset Valuation	342	(5)
Inventory Valuation	342	(1)
Accounts Receivable	343	(1)
Business Combinations	344	(1)
Fixed Assets	344	(3)
Red Flags Associated with Improper Asset Valuation	347	(1)
Detection of Fraudulent Financial Statement Schemes	347	(16)
SAS No. 99---Consideration of Fraud in a Financial Statement Audit	347	(8)
SAS No. 96---Audit Documentation	355	(1)
Financial Statement Analysis	356	(6)
Deterrence of Financial Statement Fraud	362	(1)
Case Study: All on the Surface	363	(3)
Summary	366	(1)
Essential Terms	366	(1)
Review Questions	367	(1)
Discussion Issues	367
Answers to Exercises	34	(335)
Interviewing Witnesses	369	(26)
Overview	369	(24)
Introductory Questions	369	(3)
Informational Questions	372	(3)
Closing Questions	375	(1)
Assessment Questions	376	(6)
Admission-Seeking Questions	382	(11)
Summary	393	(1)
Essential Terms	393	(1)
Review Questions	394	(1)
Discussion Issues	394
Answers to Exercises	38	(357)
Occupational Fraud and Abuse: The Big Picture	395	(14)
Defining Abusive Conduct	395	(2)
Measuring the Level of Occupational Fraud and Abuse	397	(2)
The Human Factor	397	(2)
Understanding Fraud Deterrence	399	(3)
The Impact of Controls	399	(1)
The Perception of Detection	399	(3)
The Corporate Sentencing Guidelines	402	(1)
Definition of Corporate Sentencing	402	(1)
Vicarious or Imputed Liability	402	(1)
Requirements	402	(1)
The Ethical Connection	403	(1)
Concluding Thoughts	404	(1)
Summary	405	(1)
Essential Terms	406	(1)
Review Questions	406	(1)
Discussion Issues	406	(1)
Endnotes	407
Answers to Exercises	40	(369)
Appendix	409	(14)
Bibliography	423	(6)
Index	429