10/13/2018

Introduction
Fraud
Principles

Fraud Prevention,
Possibility of
Entity Activities Detection, &
Fraud
Investigation

Fraud Scheme
and Red Flags
Fraud Risk
Assessment

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INTRODUCTION
• Focus of antifraud program is to prevent fraud, not
just detect it.
• Detection & prevention provide the system of
antifraud controls.
• An ounce of prevention is better than a ton of
treatment

Three Lines of Defense

Memiliki dan mengelola Monitor risiko dan Memberikan keyakinan

risiko dan pengendalian pengendalian untuk
(manajemen operasi lini mendukung pengelolaan
depan) (risiko, pengendalian dan
fungsi Ketaatan yang
ditetapkan oleh manajemen).
secara independen kepada
Pimpinan dan Manajer
Senior terkait efektivitas
pengelolaan risiko dan
pengendalian (audit intern).

Sumber: Anderson, Douglas J., Eubanks, Gina, LEVERAGING COSO ACROSS THE
THREE LINES OF DEFENSE, THEIIA, Juli 2015

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ELEMENTS OF PREVENTION
1. Culture of honesty and high ethics
2. Evaluate the risk and implement policies,
procedures, and controls to mitigate the risk
and reduce the opportunity
3. Develop appropriate oversight processes

PREVENTION ENVIRONMENT
• A key to successful fraud prevention: the
entity’s culture and try to change it
• Element:
1. Corporate Governance Structure
2. Tone at the Top
3. Realistic Financial Goals
4. Policies and Procedures

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DEFINITION
• Culture refers to “a set of common ideas, beliefs and
values that shared by the member of a group of
individuals” (Roberts et al., 2002)
• Culture is “the collective programming of the mind
which distinguihes the members of one human
group from another” (Hofstede 1984)
• So what (terus piye jal)? CULTURE:
1. Collective
2. Not directly observable but can be inferred from
behaviour
3. Helps differentiate groups
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LEVEL of CULTURE
• LEVEL OF CULTURE:
1. Symbols—with particular meaning
2. Heroes—characters prized by society
3. Rituals—routine activities
4. Values—general beliefs or social norms
• SUBCULTURE
– Culture exists at many level (ethnic, religious,
areas, organization, etc)
– Each group will have its own culture
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Corporate Governance Structure

• Corporate Governance Weaknesses:
1. Board members who were not independent
2. Board dominated by insiders
3. Board members with significant equity holdings
4. Board members with little board experience
5. Boards and audit committees that did not meet
6. Audit committee members who knew little about
finances or auditing
7. No audit committee
8. Audit committee did not meet
9. Top executives involved in the frauds

Tone At The Top

• Lead by example (words and actions)
• Management has to:
1. Behave Ethically
2. Communicate it’s intolerance for dishonest and
unethical behavior
• Employees must be treated equally with
disregard to position
• Create a code of ethics and implement it

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Realistic Financial Goals

• the over-optimistic goals set for corporate
performance = element of major fraud
• Balancing those goals with any negative
impact they might have is a delicate task

Policies and Procedures

1. Define frauds
2. Describe publication and communication of policy
3. Describe implementation of controls for antifraud
4. Describe training
5. Describe proactive fraud audit measures
6. Describe testing of antifraud controls
7. Define investigation policies and procedures
8. Describe actions taken in fraud audit
9. Describe the analysis of evidence
10. Describe resolutions to frauds
11. Describe incident reporting procedures

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PERCEPTION OF DETECTION
• Perception of detection is at the top of the list
of fraud prevention measures
• to minimize fraud is to find a cost-beneficial
way to increase the perception of detection:
1. Surveillance
2. Anonymous tips
3. Surprise audits
4. Prosecution
5. Enforcement of ethics and fraud policies
6. Catch me if you can!

CLASSIC APPROACHES
• Directive approach.
– The directive approach is confrontational and authoritative.
– It says: ‘‘Don’t steal. If you do, and we catch you, you’ll be
fired.’’
• Preventive approach
– potential fraudsters are screened out using various
means:
1. background checks for criminal records and credit
reports
2. Internal controls (segregation of duties)

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CLASSIC APPROACHES
• Detective approach.
– sets up accounting controls and an internal audit
function to monitor potential frauds.
• Observation approach.
– physical observation of assets and employees
• Investigative approach.
– Based on investigative results (follow up on allegations of
theft)
• Insurance approach
– adequate insurance coverage to cover losses that might
occur due to a fraud

OTHER PREVENTION MEASURES

• Background Checks:
– criminal record (FT: rationalization) or high debt (FT: pressures)
• Regular Audits:
– increase the perception of detection
– Focus: identify, review, and analyze anomalies.
• Internal Controls (FT: Opportunity):
1. Proper authorization procedures
2. Adequate documentation, records, and audit trail
3. Physical control over assets and records
4. Independent checks on performance
5. Monitoring of controls
• Invigilation
– Monitor employees when they are doing their activities
– creates a pristine environment that should be fraud-free
– a high profile, well-staffed fraud audit

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ACCOUNTING CYCLES
• Generalizations
– accounting transactions and cycles are specific to any given (different)
organization
– Prevention: understand the organizational context and the fraud
environment factors at hand
• Sales Cycle:
– Lapping
– Prevention: forced rotation of duties and forced taking of vacation
• Purchases Cycle:
– fraudulent disbursements (shell company)
– Prevention: segregation of duties
• Payroll Cycle:
– ghost employees
– Prevention: cross-check payroll against human resource records
periodically

Trends in the Implementation

of Anti-Fraud Controls

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Anti-Fraud Controls by Region

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Background Checks

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Background Checks

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Internal Control Weaknesses That Contributed to Fraud

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Internal Control Weaknesses That Contributed to Fraud

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Criminal Prosecutions

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Criminal Prosecutions

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Behavioral Red Flags

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THE END

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