A person under pressure will do things that he or she might not

do under normal circumstances.

If a person is threatened with losing his home or his family,

he may turn to fraud as a means to relieve that financial

pressure.

Often these individuals have been with the organization for

many years and occupy positions of extreme trust.

These individuals can be called accidental fraudsters.

They are seemingly law abiding, honest people, but when faced

with extreme financial pressure, they turn to fraud.

This segment will begin by defining some of the basic

elements of fraud.

We will also discuss the cost of fraud and the importance of

understanding how it occurs.

We will examine some of the leading theories on why people

commit fraud and how that information can be used to help

us prevent it.

Thank you for joining us.

In general terms, fraud is an intentional deception, whether

by omission or commission, because of the victim to suffer

economic loss and the perpetrator to realize a gain.

Under common law, fraud includes four essential elements,

A material false statement

Knowledge that the statement was false when it was spoken

Reliance on the false statement by the victim

Damages resulting from the victim's reliance on the false

statement.
In the broadest sense, fraud can encompass any fraud for gain

that uses deception as its principle technique.

This deception is implemented through fraud schemes, specific

methodologies used to commit and conceal the fraudulent act.

The legal definition of fraud is the same, whether the incidence

is criminal or civil.

The difference is that criminal cases must meet a higher burden

of proof.

For example, an employee steals $100,000 from his employer by

setting up a phony company and submitting false invoices for

services that are not performed.

That conduct is criminal because he's stealing funds through

deception, but the company has also been injured the employee's

actions and can sue in civil court to get its money back.

One of the largest causes of fraud involves asset

misappropriations.

Asset misappropriation is simply the theft or misuse of an

organization's assets.

Common examples include skimming revenues, stealing inventory,

obtaining fraudulent payments, and payroll fraud.

Corruption entails the wrongful or unlawful misuse of influence

in a business transaction to procure a personal benefit

contrary to an individual's duty to their employer or the rights

of another.

Common examples include accepting kickbacks, demanding

extortion or engaging in conflicts of interest.

Financial statement fraud involves the intentional

misrepresentation of financial or nonfinancial information to

mislead others who are relying on it to make economic

decisions.

Common examples include overstating revenues, or

understating liabilities or expenses.

A common thread in all of these types of fraud are that they can

occur in any organization regardless of what industry they

are in.

But there are a number of other schemes that are industry

specific.

For example, financial institutions suffer from schemes

involving mortgage loans and new accounts just to name a few.

Healthcare insurers see numerous schemes related to false billing

and misrepresentations of diagnoses.

The securities industry is subject to Ponzi schemes,

insider trading, and misrepresentations by brokers.

Therefore, each industry is subject to its own particular

forms of fraud.

Unfortunately, there is no area of any organization or any type

of commerce where there is not the potential for fraud.

3:59
Dr. Richard Riley, PhD: So far, we have developed the definition

of fraud and we have examine the major categories of fraud.

One of the questions asked is how does fraud examination

differ from auditing?

Aren't they the same?

What about the term "forensic accounting?"

How is it different from auditing and fraud examination?

This circle presents a Venn diagram developed by the NIJ's

task force to develop a model curriculum for FAFI education.

As noted in the circle, auditing is a term many are familiar

with.

Auditing includes steps to plan the audit, conduct risk

assessment, identify and test internal controls for both

design and implementation and then develop the necessary audit

evidence and finally report on the findings of the audit.

In some audits, the auditor may discover symptoms suggestive of

fraud.

In those circumstances, the audit intersects with fraud

examination using the techniques developed to define the who,

what, when, where, and how the fraud took place, but also

notice that fraud examination includes prevention and

deterrence efforts as well as detection and investigation.

Finally, fraud investigation also includes remediation, which

is cleaning up the mess.

Remediation can include addressing internal controls

issues, helping the victim to file insurance claims when

appropriate and even testifying in court.

Testifying in court - that's where fraud investigation

intersects with forensic accounting.

The term "forensic" generally suggests that the issue will end

up being resolved in court.

Thus, forensic chemistry, for example, is an issue related to

chemistry where the chemist will be testifying to evidence in a

court of law.

Forensic accounting, then, implies that we have an

accounting issue where accounting provides evidence

that may shed light on a legal matter.

So, in short, forensic accounting is the intersection

between accounting and the law.

As you can see, some fraud examination efforts might end up

in court, but others, like prevention and deterrence will

not.

Further, now that you understand the differences, it also becomes

easier to see those differences as well as how these three terms

overlap.

6:33
According to the ACFE, average losses from fraud total about 5%

of gross domestic produce or GDP.

When that 5% is applied to actual economic production,

total losses from fraud may be as high as 3.5 trillion

worldwide.

In the United States alone, losses may total a trillion

dollars.

Now this number is currently the best available estimate and most

likely includes all losses from stealing paper clips and copy

paper from the office to the most expensive frauds, financial

statement fraud, which in the case of Enron, cost in the

neighborhood of 60 billion of market capitalization.

What is more disturbing, at least to me, is the frequency of

large dollar fraud to a single organization.

According to the ACFE data, 21% of the cases include in the most

recent report, cost the victims more than one million dollars.

In 32% of the cases, the losses were at least $400,000.

Those dollar figures are large enough to wipe out a small

business.

The information brings out a very important point.

Don't let your organization become a victim because it could

be a fatal event.

Small businesses, and particularly small charities and

not for profits, in many cases cannot afford to become victims

of fraud.

The financial losses to organizations do not begin to

reflect the entire cost.

The day after Enron filed for bankruptcy, 5000 employees were

fired, and many more of the 21 thousand employees were expected

to lose their jobs as the bankruptcy process continued.

Enron employees lost two billion, averaging 95 thousand

per person in their pension plans.

Many persons losing their entire life savings.

8:30
The highly publicized Bernard Madoff scam cost investors 17.3

billion.

According to the COSO analysis of public companies, of the 347

publicly traded companies that were victimized by financial

statement fraudsters, 28% of the firms filed for bankruptcy

within two years and 47% were delisted from a national stock

exchange.

Employees lost their jobs.

Communities lost tax collections and stockholders lost their

investment savings.

Madoff's scheme literally wiped out his clients' life savings

Some of Madoff's victims, who may have planned a productive,

fun filled retirement, may end up working til the day they take 167 00:09:13,834 their final breath.

0:00
[MUSIC]

To better understand why people commit fraud, consider the fraud triangle.

A model developed by Donald Cressy, a Sociologist and

Criminologist that studied the behavior of white colour criminals.

0:20
The Fraud Triangle is based on the premise that for

an ordinary individual to commit fraud, three components must exist.

There must be a perceived pressure, a perceived opportunity, and

a rationalization.

0:34
Let's spend a few minutes looking at each of these components,

0:38
the first leg of the triangle represents pressure.

This pressure does not need to actually exist.

A perceived pressure is real to the individual committing fraud.

0:48
A potential fraudster must feel that the pressure is non-sharable,
that it must be dealt with alone.

The individual usually believes that the problem is impossible to resolve legally.

And if the problem continues, the ultimate result will be financial collapse.

Frequently, the current issue is related to a personal or

external problem such as excessive debt or loss of employment.

1:12
Many of the problems originate with vices such as drug or alcohol abuse,

gambling, extramarital affairs or living beyond ones means.

Perceived pressures are a challenge for the forensic auditors to deal with.

Because the auditors have limited contact with the individuals, and

therefore have no baseline for the symptoms of the problem for

which the fraudster is dealing.

The second leg of the fraud triangle related to opportunity.

Before an individual commits fraud, there must be the perception of an opportunity

to take advantage of the system without being caught.

Allowing removing the pressure in secret.

The primary source of opportunity relates to poor or

inadequate internal controls within the organizations financial system.

We'll talk about internal controls in detail next week.

But basically, internal controls only allow an individual

to access the specific task required for that individual's job.

Separation of duties are a set of controls that split

accounting functions among various people to prevent problems.

Collusion exists when two or more people cooperate or

collude to get access to each other's parts of the system.

Combined they have the opportunity to commit fraud,

where individually neither had that opportunity.

For example, when someone that has the authority to order an item, but

not approve payment the item, teams up with or

colludes with an individual that has the authority to approve payment.

But not to order the items, together through collusion, they can order and

pay for items that are not related to the organization’s mission.

You can see why collusion is difficult to detect,

everyone is doing their individual job.

3:00
Another difficult to address issue

is management's opportunity to override internal controls.

Management with full authority within the system can override or

ignore controls that are in place.

This is a difficult issue because employees that see what’s going on may not

have a framework to report the problem other than to their manager.

And we know that if the manager is the problem, that reporting will not happen.

Other items that relate to the fraudster's perception to opportunity include poor or

inadequate training.

Which often leads to the defense, I did not know any better.

3:39
Another is lack of supervision.

People are less likely to identify a situation as an opportunity

if they're adequately supervised.

Unfortunately, opportunities are identified and taken advantage of when

organizations do not prosecute fraudsters or have otherwise weak ethical cultures.

3:59
If the tone of the organization is to look the other way when a problem occurs

someone with a perceived pressure will likely find opportunities to commit fraud.
The last leg of the fraud triangle is rationalization.

People are generally honest, fraud involves theft.

To prevent fraudsters from perceiving themselves as criminals,

there is rationalization.

4:22
Rationalization helps justify the crime in a way

that makes in acceptable in the mind of a fraudster.

One of the most common rationalizations is I deserved it, or they owe it to me.

4:35
Employees that believe that they're underplayed or otherwise financially taken

advantage of, frequently use this form of rationalization.

They treat me bad is a non-financial variation of the I deserve it

rationalization.

Another rationalization is I'm just borrowing the money,

mainly it's much easier to justify borrowing than stealing.

4:57
The problem is that the pressure to take the money is usually not gone

when repayment needs to be made so the borrower never repays the debt.

5:07
Another problem with this excuse is that when one borrows it's only reasonable for

the lender to know about the transaction.

5:15
The final rationalization where mention is,

it's not my fault, which is used to transfer blame to someone else.

This can be used in many circumstances, those prevalent

when the individual has access to something that should be protected.

For example, a computer is found logged on in the company's pay maintenance screen.
The rationalization is not my fault,

someone left the computer unattended, enabling me to change my pay rate.

5:43
The fundamental premise of the fraud triangle suggests

that when an ordinary person or accidental fraudster commits fraud,

all three of the legs of the triangle must be present.

There must be a perceived problem that cannot be shared or pressure.

5:58
Additionally, there must be an opportunity available

that the fraudster believes can be used to solve the problem.

And finally, the person will rationalize the fraud,

to help in the denial that the action is wrong.

6:12
Understanding the fraud triangle, helps us understand the person behind the fraud

as well as helping us in the detection of the fraud.

Now that you understand the fraud triangle,

it may be obvious to you that the easiest leg to address is opportunity.

6:29
>> When trying to provide an understanding of fraudsters,

this example from the Wall Street Journal was perfect.

While the article appeared in 2005, the lessons learned are timeless.

The alleged perpetrator pictured is a man by the name of Thomas Coughlin.

Before his alleged fraud came to light, Mr.

Coughlin was the Vice Chairman of Walmart.

So there's the chairman of the board, vice chair and then the executive management.

Mr. Coughlin is basically second in command.

According to the article, he needed some alligator boots, a dog pen, and
a hunting vacation.

Now a question, is it appropriate to ask Walmart to pay for this?

7:10
As fraud examiners and forensic accountants, we need to be careful.

Depending upon Mr. Coughlin's terms of employment,

his contract Walmart Travel and Entertainment policies.

It is possible that he was entitled to reimbursement for the cost.

However, the Wall Street Journal article would suggest that reimbursements were not

in compliance with Walmart policies.

Because Mr. Coughlin used false documentation and fake invoices so

the expenses would qualify.

7:41
As a side note, it's the deception, the act of concealment, that convinces

fraud examiners that the perpetrator knew his or her actions were wrong.

If they were not wrong, why attempt to hide the act?

Back to Mr. Coughlin, according to the article, estimates suggest that Mr.

Coughlin may have defrauded Walmart by as much as $500,000 over three years.

Mr. Coughlin never admitted any wrongdoing, so

the actual amounts may never be known.

8:11
If we assume $500,000 over three years

that works out to be about 150 to 175,000 per year.

Where this story gets interesting is the following.

In your mind, guess how much Mr. Coughlin made in salary and bonus in a single year,

before he resigned in disgrace and was tried in court for his act.

How much salary and bonus?

$6 million dollars, yes, $6 million, at some level,

it appears that Mr. Coughlin was willing to sacrifice everything.

His income, his employment, and his reputation, for

an extra 150 to 175,000 per year.

Does that make sense to you?

8:55
There are couple of important lessons.

8:58
One, do not inflict your values system when trying to understand what others

might do, often times fraud in related financial crime do not make sense.

When examining the facts and

circumstances and evidence of a fraud, always keep an open mind.

Follow the evidence, document the evidence, and do not make assumptions.

Use the evidence to determine who, what, when, where, and how.

Mr. Coughlin is a great example of the accidental fraudster.

The typical fraudster is often depicted as the first time offender,

who is doing something seemingly out of character.

The Fraud Triangle suggest that the perpetrator

has a non-sharable problem that is grounded in financial short comings.

And when align with opportunities in rationalization, and

otherwise good citizen succumbs to committing fraud.

This person might be characterized as the accidental fraudster.

9:58
Not withstanding the fraud act, the accidental fraudster is considered to be

a good, law abiding person who under normal circumstances would

never consider theft, breaking felonious laws or harm others.

When discovered, family members, fellow employees, and others in the community

are surprised or even shocked by the perpetrator's alleged behavior.

10:22
Cressey's fraud triangle hypothesis helps the anti-fraud community understand

the accidental of fraudster.

John Gill: Is there a profile of the common fraudster?

Not really, but there are common demographics that can be

analyzed to give us some insight into fraud perpetrators.

Every two years, the Association of Certified Fraud Examiners

conducts a global survey of its members about cases they had

experienced.

By looking at this data, we can develop a list of the most

common factors.

As you can see from the ACFE survey, males commuted more

frauds than females.

The perpetrator is typically well educated and a member of

management.

They are a first time offender and occupy trusted positions at

work and in the community.

An important concept in understanding fraud is

organizational opportunity.

This is the concept that how much or how often an individual

commits fraud depends on how much opportunity he has to do so

in the organizational hierarchy.

Think of it this way.

Who has the better opportunity to steal large amounts of money

at a bank?

The teller or the bank president?

If you review the typical demographic, you see that it is

consistent with upper management at most companies.

However, as the population demographics change and

organizational demographics evolve, it is expected that

these characteristics will change as well, but it is

important to understand that fraud happens at all levels and

the higher an individual is within an organization, the

greater the opportunity to commit fraud.

1:39
Although the fraud triangle is important in understanding some

of the motivations to commit fraud, it is not meant to cover

every situation.

You should also consider some of the other motivations that cause

people to do dishonest things.

It can be summarized in the acronym MICE, M-I-C-E.

A desire for money is a motivating factor for many types

of crimes.

The individual may have large debts or gambling losses or just

an overwhelming desire for expensive things.

Fraud can be seen as a convenient way to fund an

extravagant lifestyle.

2:15
For some people, the path to fraud may be based on a certain

ideology.

They may feel that they are not treated fairly.

For example, an individual may resent the CEO who makes tens of

millions in bonuses when she hasn't had a decent raise in

years.

She may feel that fraud is a way to even the balance of wealth.

2:37
It is not unusual to be coerced into committing a fraud.

A supervisor may coerce employees into inflating sales

or numbers, or paying bribes to obtain contracts so that the

department will meet its goals.

The employee feels threatened or pressured to commit wrongdoing

or lose his job.

And finally, some fraudsters have enormous egos.

They feel that they are smarter than those around them and that

they are entitled to positions of power and wealth.

These individuals see fraud as just a means to obtaining what

they feel they are entitled to.

3:13
Of course, there may be several motivations that play in any one

case.

The key is to understand that there are many factors that can

motivate people to commit fraud.

3:26
In addition to understanding the motivations to commit fraud, the

fraud examiner and management should be alert to some of the

behovely red flags related to fraud.

This chart shows some of the most common behavioral

characteristics that were present in fraud cases in the

ACV's report of the nation survey.

As you can see, the two most common characteristics were the
individual living beyond his means and experiencing financial

difficulties.

This is consistent with the desire for money related to

financial pressure, one of the legs of the fraud triangle.

The presence of family problems or drug addiction were also

common red flags, but notice some of the other factors; an

unusually close association with a vendor can be a red flag of a

bribery or kickback scheme.

Unwillingness to share duties or take vacations can be signs a

person is working to keep the fraud hidden and can't risk

anyone else getting involved with his or her business.

Pressure from within the organization or coercion is

sometimes present as well.

As you would expect, people that have a large ego or feel

entitled to wealth would have many of the characteristics on

this list, including complaints about adequate pay, complaints

about lack of lack of authority, instability in life

circumstances, and past employment or legal problems.

To be sure, the presence of any of these red flags does not mean

that fraud is occurring, but they do occur in a number of

cases, therefore it is certainly prudent to be observant.

Use these characteristics along with other factors to determine

if fraud may exist.

5:11
Dr. Richard Dull, PhD: Financial forensics is the intersection of

financial principles and the law.

It applies the technical skills of accounting, auditing,

quantitative methods, law, and research.

Investigative skills are required for the collection,

analysis and evaluation of evidence.

Critical thinking is required to interpret and communicate the

results of an investigation.

Critical thinking, sometimes is referred to as lateral thinking

or thinking outside the box and is a disciplined approach to

problem solving.

It's used as a foundation to guide our thought process and

related actions.

Let's consider the following case as an example.

Everything needed to answer the question "how did they die?"

is contained in the following passage.

[Reading words on screen]

6:12
With this information, determine how they died.

Here's a clue.

List all of your assumptions from the example.

This exercise requires you to guard against jumping to

conclusions while the fraud examiner or forensic accountant

needs to think critically.

The direction of the investigation is often guided by

assumptions.

The difficult challenge is not the questioning of the

assumptions that the investigators identified, but

the assumptions the investigator is subconsciously making without

even realizing it.

That's why it's important that the investigator must

continually challenge the investigative approach and

outcomes to assure that the investigation is moving toward a

resolution, a resolution that stands up to the scrutiny of

others.

Back to the example.

Most students assume that Anthony and Cleopatra are people

when in the scenario they are actually fish.

Once the assumption of people is eliminated, the solution comes

much more easily.

Let's review the reasons for critical thinking.

People who commit fraud do not think like us.

We need to be flexible in how we approach other people's worlds.

We have to consider each little piece of data individually

because one fact may put everything into perspective.

Keep digging and gathering information until you have

adequate explanations.

Our first class has covered a wide range of interrelated

topics, beginning with the working definition of fraud.

From there, we looked at the financial impact of fraud on

organizations in society and then some nonfinancial problems

caused by fraud.

We then discussed the fraud triangle and the accidental

fraudster, both helping you better understand the thought

process of an individual that commits fraud.

We finished the day with a discussion of the skills needed

to be a forensic professional.

You can find more information on this week's topics on the West

Virginia University and Association of Certified Fraud

Examiner websites.

Thank you for your participation today.

We look forward to working with you again next week and helping

with your understanding of forensic accounting and fraud 159 00:08:28,800 examination.

0:05
So my expectation through the couple years was that I would be steadily increasing

salary-wise, and it just wasn't increasing at the rate I expected,

and I'm not normally that type of person anyway.

I really feel like my boss is always gonna take care of me.

If I do a good job, which I try my best to do,

that I should never have to worry about it.

In most cases, I haven't had to.

In this case, it was just frustration, so

I get this in the mail from the IRS.

This probably started in 95.

A huge delinquency of 15,000, $14,000, something like that.

The normal control of checks and balances that a company puts in place,

Power just didn't do that, and it was rampant across the board.

It wasn't just accounting.

It was inventory.

It was sales.

It was so wide open, it was pretty scary,

and, quite frankly, I've told them and my staff had told them many,
many times that we're doing things we shouldn't be doing.

I've been here over a year and kept the company afloat basically,

me and my staff, and really felt like we did a good job, and

I made sure all of my employees were rewarded well, so

my expectation was a lot higher of what I thought would happen to me.

I had a terrible review, terrible raise, and so I was really upset.

I finally get some notices in the mail, that their fixing to garnish wages and

levy liens against the house and stuff like that.

So I'm in one of these scared modes where I don't know where to turn.

I can't turn to my family.

My family doesn't have that kind of money, so

I can't turn to them nor would I probably want to turn to them,

just not that way, so I called a friend of mine up.

Larry and I have been friends for years.

I said, hey, can you loan me some money?

He said, yeah, I can loan you some money.

After I got the money, it's like, okay, I need my money back.

2:24
Well, I don't have the money.

He said, well, maybe you can find something within the company that we can

work on, some scrap parts or some obsolete materials or some stuff like that.

I said I don't deal in that stuff anymore.

I can turn you on to the person that does, and you can call and talk to them,

but I can't do any of that.

We battered back and forth.

Well, I can't do that.

Then you get another threatening letter from the IRS.

You get this two percent raise that you expected and eight percent.

All that compounds everything clouds your judgment, and you finally just say,

the hell with it.

Okay, I'll send you some stuff.

Then you send them something, and it's like, well, now I've got some.

Now I need more.

So you just do it, create an order, put it in there, saved it, press the button.

Everything started, I just let everything go, flow.

I didn't do anything else unique to make it happen.

I was just the guy down in the warehouse,

printed out something that said this on it, and he went and executed to it.

Shipped them off, and things were done.

Nobody else in the world wants these but Power Computing, so

they're built specifically for power.

3:45
All that, so, if you try to sell anything back to Power, it's gonna be pretty

obvious that you got them from some source that you shouldn't have gotten them from.

He said, well, I don't care to do that,

all I wanna do is take the memory chips off and I'll sell the DRAMS.

Or the memory chips by themselves.

It didn't sound like there was any reason anyone needed to go do any

investigation without someone calling saying, here, I got some parts,

I wanna sell them to you cheap.

4:15
>> Literally just called Randy Pierce out of the blue.

Hi, I'm [BLEEP] with the Austin Police Department, and

we got a problem Power Computing.

He said he was aware of it, and what I often tell people, and

I think this is really the truth, I just think they've made a mistake.

I'm not gonna come out and tell someone you're a bad person, you're a crook,

you're a thief, you're a liar, because why would they want to speak to me much longer

after I've spoken to them in that manner?

>> He told me who he was and he said, would you like to talk about this thing?

And, of course, I said, I don't know what you're talking about.

[LAUGHS] So he just said,

it might make you feel better if you could get things off your chest.

I said, well, I don't have anything to get off my chest,

of course, and it was just shakes.

It was like, I didn't know what to do,

didn't know what to say, so I just pleaded stupid for a while.

Then, of course, gave me a couple of days to think about it, called me back and

told me, he said, yeah, you're right.

It's going to make me feel a hell of a lot better to just get this off my chest

because it's just been killing me anyway.

So then, a lot of normal check and balances you have in a company, whether it

be accounting checks and balances, whether it be inventory checks and balances,

a lot of those just did not exist, but they were real sloppy so,

in reality, anybody could enter an order.

I've offered to pay back everything.

5:45
Whatever they want,

I have already told them whatever you come up with is what I deserve.

State on the camera that it's Power Computing's fault, or it's the IRS's
fault, or it's Larry Reid's fault, or any of that stuff, it's not, it's my fault.

What I did, I did by myself, and I take responsibility for my actions.

After finally dealing with them,

I finally got it resolved with IRS in 98.

It's an error on their part.

They owed me $2,000.