MOS 1023 Chapter 5 Notes.docx

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 1023A/B
Professor
Maria Ferraro
Semester
Fall

Description
Custom Select Introduction: Fraud Examination Fraud Examination: resolving allegations of fraud from tips, complaints, or accounting clues. Involves obtaining documentary evidence, interviewing witnesses and potential suspects, writing investigative reports, testifying to findings, and assisting in the general detection and prevention of fraud (similar to forensic accounting). Typically performed by accountants, but can be performed by law enforcement officials, corporate security specialists, or private investigators. err Forensic Accounting: use of any accounting knowledge or skill for courtroom purposes. Involves not only fraud, but also bankruptcy, business valuations and disputes, divorce, and a host of other litigation support services. Fraud Examination Methodology Predication: The totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, and or will occur  Anonymous tip or complaint considered sufficient predication  Mere suspicion without underlying circumstantial evidence is not predication Fraud Theory Approach: begins with the assumption, based on known facts, of what might have occurred. Assumption is then tested to determine whether it is provable. Fraud theory approach follows these steps: 1) Analyze available data  Analyze to see if allegation is legitimate  If someone suspects company of taking bribes from suppliers to do business with them, look at how contracts are awarded and distribution of contracts 2) Create a hypothesis  Based on accusations, you develop a hypothesis to focus efforts (worst case scenario: with info you possess, what is worst possible outcome?)  Hypothesis can be created for any specific allegation (bribery or kickback scheme, embezzlement, conflict of interest, or financial statement fraud) 3) Test the hypothesis  Gather evidence to either prove or disprove hypothesis  View records to see if one vendor is receiving a larger portion of shares than other vendors, see if manager is living outside their means (big spender = red flag of fraud) 4) Refine and amend the hypothesis  If after testing, a fraud examiner finds that facts don’t fit scenario, they revise hypothesis and retest  Work toward most likely and supportable scenario  Goal is not to “pin the crime” on someone, but to determine whether a crime is being committed, and if so, how Tools Used in Fraud Examinations 1) Fraud examiner must be skilled in the examination of financial statements, books and records, and supporting documents. Must know the legal ramification of evidence and hot to maintain chain of custody over documents. 2) The interview: the process of obtaining relevant information about the matter from those with knowledge of it.  Evidence if usually gathered from general to specific, same with taking witness statements  Start with neutral 3 parties, witnesses who have some knowledge but not involved. Next, interview corroborative witnesses, those who are not directly involved but may be able to corroborate specific facts related to offense. Next suspected co-conspirators, proceeding to those who are most culpable. Only after co- conspirators are interviewed is the prime suspect confronted. 3) Observation: fraud examiners must observe behavior, search for displays of wealth, and observe specific offenses  Video cameras Internal Fraud: Those committed by people who work for the organization: they are the most costly and common frauds External Fraud: Offenses committed by individuals against other individuals (con schemes), by individuals against organizations (insurance fraud), or by organizations against individuals (consumer frauds) Defining Occupational Fraud and Abuse Occupational Fraud and Abuse: The use of ones occupation for personal enrichment trough the deliberate misuse or misapplication of the employing organizations resources or assets.  Common violations: asset misappropriation, fraudulent statements, corruption, pilferage, petty theft, false overtime, using company property for personal benefit, payroll and sick time abuse  Employee: Any person who receives regular and periodic compensation from an organization for his or her labor Defining Fraud  Fraud: Any crime for gain that uses deception as its principal modus operandi. (must be deceit for fraud to occur)  Three ways to illegally relieve a victim of money: force, trickery, or larceny  Four general elements for a fraud to exist 1) A material false statement 2) Knowledge that the statement was false when it was uttered 3) Reliance on the false statement by the victim 4) Damages resulting from the victims reliance on the false statement  Larceny: The legal term for stealing. To prove someone has committed larceny, we have to prove 1) there was a taking or carrying away; 2) of the money or property of another; 3) without the consent of the owner; and 4) with the intent to deprive the owner of its use or possession  Conversion: An unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the alteration of their condition or the exclusion of the owners rights. A person commits conversion when he takes possession of property that does not belong to him and thereby deprives the true owner of the property for any length o time (by selling, you deprive owner of the property)  Embezzlement: To willfully take, or convert to ones own use, another’s money or property of which the wrongdoer acquired possession lawfully, by reason of some office or employment or position of trust. o For embezzlement to occur, people who stole money must have been entitled to possession of the property at the time of theft o Possession is not the same thing as ownership  Fiduciary: A person is said to act in a fiduciary capacity when the business which he transacts, or the money or property which he handles, is not for his own benefit, but for another person, as to whom he stands in a relation implying and necessitating great confidence and trust on the one part and a high degree of good faith on the other part. o In short: a fiduciary is someone who act for the benefit of another o When they violate this duty, can be liable under the tort of breach of fiduciary duty. o Fiduciary relationship: when an employee is highly trusted and enjoys a confidential or special relationship with the employer o Law only recognizes for officers and directors of companies, not for ordinary employees Defining Abuse Abuse: Petty crimes committed against organizations, such as excessive lunch hours or breaks, coming to work late, or leaving early, using sick time when not sick, and pilfering supplies or products.  If someone worked for the government, sick leave could be a fraud against the government because misuse of public money in any form ends up being a serious matter Research in Occupational Fraud and Abuse Edwin H. Sutherland (1883-1950)  Criminologist at Indiana University  Coined the term “white collar crime” in 1939. o Intended to mean: Criminal acts of corporations and individuals acting in their corporate capacity o Term has come to mean: Almost any financial or economic crime, from the mailroom to the boardroom  “Theory of Differential Association”: Crime is learned and cannot be without the assistance of other people usually occurring within intimate personal groups (dysfunctional parent more likely to produce dysfunctional offspring) o The learning process included 1) the techniques to commit the crime; and 2) the attitudes, drivers, rationalizations, and motives of the criminal mind. o Now the most widely accepted theory of criminal behavior (until this, most people thought crime was genetically based) Donald R. Cressey (1919-1987)  Criminologist at Indiana University (one of Sutherlands students)  Studied embezzlers while working on Ph.D. in criminology  “Trust Violators”: what he called embezzlers  He studied what led them to temptation (excluded those who got job for purpose of stealing)  Developed what still remains as the classic model for the occupational offender. His final hypothesis has become better known as the “fraud triangle” o Consists of a perceived non-shareable financial problem, perceived opportunity, and rationalization 1) Non-Sharable Financial Problem  A problem is non sharable when the person feels he cant share it with others who may have been able to help him, and is described as financial because these are the types of problems that can be solved by theft of cash or other assets  Non-sharable problems arise form situations in 6 categories: 1) Violation of Ascribed Obligations  People think that having a trusted position carries with it the implied duty to act in a manner becoming his status.  People in trusted positions may feel they’re expect to avoid gambling, drinking, drug use, etc  When people fall into debt because of conduct that is “beneath them” they feel they cant share it because that would admit to engaging in dishonorable conduct (they are unworthy to hold their position) 2) Problems Resulting from Personal Failure  These are problems the trusted person feels he caused through bad judgment and feels personally responsible for  Pride goeth before the fall (would rather cover losses by embezzling secretly than admitting he’s an unsophisticated investor) 3) Business Reversals  Trust violators tend to see their problems as arising from conditions beyond their control: inflation, high interest rates, economic downturns etc.  Instead of walking away from failing business, do anything to keep it going  The desire to maintain the appearance of succsess 4) Physical Isolation  The trusted person has no one to turn to (not that he’s afraid to share his problem)  No friends or associated to help 5) Status Gaining  In categories above, people were concerned with maintaining status. Here, offenders are motivated by desire to improve status  Motive for this is referred to this as “living beyond ones means” or “lavish spending”  Problem appears when person realizes they don’t have financial means to continue in the same social circle (status level)  Not the desire for better lifestyle that creates non sharable problem (we all want better lifestyle), it’s the inability to obtain finer things through legitimate means and an unwillingness to settle for a lower status 6) Employer-Employee Relations  Most common: employed person with trusted status resents his status within the organization in which he is trusted, and feels he has no choice but to keep working there  Resentment can come from perceived inequities (pay, feeling of being overworked or underappreciated)  Is non-sharable because individual believes making suggestions to alleviate perceived mistreatment will threaten status in organization.  Strong motivator: employee to get even 2) Perceived Opportunity  Non-sharable problem creates motive, but person must perceive that they have opportunity to commit the crime without being caught (problem on its own will not lead someone to commit fraud)  Two components of perceived opportunity o General Information: the knowledge that the employees position of trust could be violated (hearing of other embezzlements, seeing dishonest behavior, or being aware that he could take advantage of employers faith in him) o Technical Skill: The abilities needed to commit the violation  The perpetrators job will define the type of fraud he commits o Accountants: use check which they are entrusted to dispose of o Sales Clerks: withhold receipts o Bankers: manipulate accounts or withhold deposits o Real Estate men: use deposits entrusted to them 3) Rationalization  Necessary component of the crime before it takes place  After criminal act, rationalization often abandoned (becomes easier to commit crimes the more its done)  Embezzlers rationalize their crimes by viewing them: 1) as essentially non criminal; 2) as justified; 3) as part of a general irresponsibility for which they committed their violations  Subjects of his studies divided into: 1) Independent Businessmen  Persons who were in business for themselves and who converted “deposits” which have been entrusted to them.  Use excuses: 1) they were “borrowing” the money they converted; 2) the funds entrusted to them were really theirs – you cant steal from yourself  Borrowing rationalization most commonly used 2) Long Term Violators  Individuals who converted their employers funds, or funds
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