Binary Scam Watch Monitor

Auditing vs. Fraud Examination

Issue Auditing Fraud Examination
Timing Recurring Nonrecurring
Scope General Specific
Objective Opinion Affix blame
Relationship Nonadversarial Adversarial
Methodology Audit techniques Fraud examination
techniques
Presumption Professional Proof
skepticism
Defining Occupational
Fraud and Abuse
The use of ones occupation for
personal enrichment through the
deliberate misuse or misapplication of
the employing organizations resources
or assets
Elements of Fraud
A material false statement
Knowledge that the statement was false
when it was uttered
Reliance on the false statement by the
victim
Damages resulting from the victims
reliance on the false statement
 Opportunity

Fraud
Triangle

Pressure Rationalization
 corruption, which includes conflicts of
interest, bribery (including kickbacks),
illegal gifts, and economic extortion;
misappropriation of assets, which
includes skimming, larceny, and asset
misuse; and
financial statement fraud, which can
include financial (either asset or revenue
over- or understatements) and non-
financial components
 An ounce of prevention is better than a
ton off treatment
In order to prevent fraud there is a need
to make your organization immune
against fraud
 The means to reduce risk
Prevention
Reduce the opportunity for
Deterrence (punishment)
Detection
Detection of fraud is much more costly
 Management has
the responsibility
and means to
implement
measures to reduce
the risk of fraud
Good corporate
governance reduces
the risk
 Create and Maintain a culture of honesty
and high ethics
Evaluate the risk and implement policies,
procedures, and controls to mitigate the
risk and reduce the opportunity
Develop appropriate oversight processes
 Setting the tone at Training
the top
Positive work place Conformation
environment
Hiring & promoting Discipline
appropriate
employees
 Lead by example (words and actions)
Management has to
Behave Ethically
Communicate its intolerance for dishonest
and unethical behavior
Employees must be treated equally with
disregard to position
 Set achievable financial goals (not to
create undue pressure)
Create a code of ethics and implement it

The code of ethics should be clear,

understandable and developed in a
positive participatory manner .
 The code of conduct should reflect the
core values of the entity and guide
employees in
making appropriate decisions during their
workday.
The code of conduct might include such
topics as
ethics, confidentiality, conflicts of interest,
intellectual property, sexual harassment, and
fraud.
 Employees should be given the
opportunity to help in development and
updating of code of conduct to create
ownership
Employees should be encouraged to
report violation of code or wrong doing
A hotline (anonymous is preferred to avoid
fear or retribution )
 wrongdoing occurs less frequently when
employees have positive feelings about
an entity than when they feel abused,
threatened, or ignored
Without a positive workplace
environment, there are more
opportunities for poor employee morale,
which can affect an employees attitude
about committing fraud against an entity
 Top management that does not seem to
care about or reward appropriate
behavior
Negative feedback and lack of
recognition for job performance
Perceived inequities in the organization
Autocratic rather than participative
management
 Low organizational loyalty or feelings of
ownership
Unreasonable budget expectations or other
financial targets
Fear of delivering bad news to supervisors
and/or management
Less-than-competitive compensation
Poor training and promotion opportunities
Lack of clear organizational responsibilities
Poor communication practices or methods within
the organization
 Recognition and reward systems that are in
tandem with goals and
Equal employment opportunities
Team-oriented, collaborative decision-making
policies
Professionally administered compensation
programs
Professionally administered training programs at
all organizational levels
Career development
A good HR Department is instrumental
 Hire the best sited
for the job
with integrity
Equivalence of
effort to reward
When people are under pressure and
Promotion biased there is a perceived opportunity some
people will behave dishonestly rather
on evaluation than face negative consequences of
honest behavior
 Conducting background investigations on individuals
being considered for employment or for promotion to a
position of trust
Thoroughly checking a candidates education,
employment history, and personal references
Periodic training of all employees about the entitys values
and code of conduct, (training is addressed in the
following section)
Incorporating into regular performance reviews an
evaluation of how each individual has contributed to
creating an appropriate workplace environment in line
with the entitys values and code of conduct
Continuous objective evaluation of compliance with the
entitys values and code of conduct, with violations being
addressed immediately
 New employees should be trained at the
time of hiring about the entitys values
and its code of conduct.
This training should explicitly cover
expectations of all employees regarding
Their duty to communicate certain matters;
A list of the types of matters, including actual
or suspected fraud, to be communicated
along with specific examples;
Information on how to communicate those
matters.
 The training should be at the time of
hiring as well as refresher training
periodically
Training should be specific to an
employees level within the organization,
geographic location, and assigned
responsibilities.
Management needs to clearly articulate
that all employees will be held
accountable to act within the entitys
code of conduct. All employees within
senior management and the finance
function, as well as other employees in
areas that might be exposed to unethical
behavior (for example, procurement,
sales and marketing) should be required
to sign a code of conduct statement
annually, at a minimum.
 The way an entity reacts to incidents of
alleged or suspected fraud will send a
strong deterrent message throughout the
entity, helping to reduce the number of
future occurrences.
The consequences of committing fraud
must be clearly communicated
throughout the entity.
 A thorough investigation of the incident
should be conducted.
Appropriate and consistent actions should
be taken against violators.
Relevant controls should be assessed and
improved.
Communication and training should occur
to reinforce the entitys values, code of
conduct, and expectations.
 Fraud can not occur without a perceived
opportunity to commit and conceal the
act.
Organizations should be proactive in
reducing fraud opportunities by
(1) Identifying and measuring fraud risks,
(2) Taking steps to mitigate identified risks, and
(3) Implementing and monitoring appropriate
preventive and detective internal controls and
other deterrent measures.
 Feed back
Feed forward
process
process input output
input C
C output

process

input output
C
 Existence of a
control even if non-
operational can be
a deterrent and act
as a real control
 Audit Committee or Board of
Directors
Management
Internal Auditors
Independent Auditors
Certified Fraud Examiners
 To monitor compliance with laws
Integrity of financials
Asses external auditor qualifications &
independence
Follow up on internal audit