InsightsintoOccupationalFraud

SIAAB 2019 Fall Government Auditing Conference

Carol M. Jessup, Ph.D., CPA, CFE

October 22, 2019

Abridged version

OverviewofOccupationalFraud• What it is, how much, & how perpetrated

• Use ACFE data to understand

• Include some data for government only• Frameworks used to understand fraud

• Actors and actions

• Anti­fraud measures – preventive & detective• Illinois cases and examples

AssociationofCertifiedFraudExaminers

2018ReporttotheNations(RTTN)onOccupationalFraudandAbuse

Examined almost 2,700 cases

in 125 countries

Cumulative losses for those

cases were more than

$7 billion

Anecdotal evidence

55% of cases reported

less the 200,000 loss,

with median loss of

$130,000

22% losses =

$1 million or more

OccupationalFraud:WhatitisandHow

30% of the reported cases involve 2 or more schemes

FinancialStatementFraud▪10% of the cases

▪$800,000 median

loss

Corruption:38%ofthecasesMedian loss = $250,000

Corruption

AssetMisappropriation

AssetMisappropriation

Risk– that4letterword

$

Department

BehavioralRedFlags(overtime)

Fraudwithingovernment

All data taken from 2018 RTTN – Government edition

CompareACFE DataoftheU.S.withGovernmentAgencies

2018 Report to the Nations

Government

▪

Whatframeworkshelpmakesenseofthis?

DonaldCressey inthe1950s

The explanation embraced by the external audit literature (AU­C 240, ISA 240)

In2004,DavidT.Wolfe&DanaR.Hermansonpublished

▪Position/function

▪Brains

▪Confidence/ego

▪Coercion skills

▪Effective lying

▪Immunity to stress

Distinguishthe“actor”fromthe“action”

Crowe Horwath Fraud Pentagon Triangle of Fraud Action

Albrecht, et.al. Fraud Examination 2006, 2012

ABCModel▪Bad Apple

–Personality characteristics

▪Bad Bushel–Group dynamics of collusive behavior

▪Bad Crop–Cultural or societal factors

Ramamoorti, Morrison, Koletar, 2009

ReversalTheoryofMotivation

Psychologists Ken. Smith and Michael Apter – 1970s

ReversalTheoryofMotivation

Rand Gambrell (May 3, 2017). BKD Forensics Institute Webinar – Psychology of Fraud

Sparkingadebate▪2 articles that year

▪When Reckless Executives Become

Dangerous Fraudsters: Reward Structures and

Auditing Procedures Need to Be Reformed to

Deter ‘Dark Triad’ Personalities

2016 Max Block Award Winner: Outstanding

Article in the Area of News & Views/Opinion

Begtodisagree▪There Is No Financial Fraud Personality

Type by Jeffrey Borenstein, MD,

Psychiatrist, and Arthur J. Radin, CPA

▪“Until the brain is better understood, we believe that trying to define dark triad individuals is another step in the failed attempt to define criminals based on non­experiential information.”

▪May 2017

InternalControls▪Widely used model

from COSO

–Contains 5 components

▪C­R­I­M­E

▪Committee of Sponsoring Organizations 1985, 1992, 2013

FraudRiskManagementProcess

COSO/ACFE, September 2016

MoreDataAnalyticTools▪Moving beyond the Corruption example for Purchasing....

▪Kickbacks: Analyze the free­text payment descriptions for high­risk keywords such as "expedite fee," "facilitation payment," or government liaison names.

▪Asset Misappropriation ­ Billing scheme: Extract vendors with incomplete profiles, especially those with missing telephone numbers or tax ID numbers.

▪Financial statement fraud­ Revenue Identify revenue recognized at period­end and subsequently reversed or partially reversed.

http://www.acfe.com/fraudrisktools­tests.aspx

FraudRiskAssessmentScorecard

RiskAssessmentTemplateswithFollow-uptools

http://www.ephemeraha.com/ritaif interested in self-study of Dixon fraud

DispositionofSeizedHorsesInU.S.A. vs.RitaA.Crundwell

The Trophy Room “Before” “Good I Will Be”

Trophy Room “After”

An example of

misappropriated assets

– fictitious vendor

scheme

References▪ACFE (Association of Certified Fraud Examiners) Report to the Nations: 2018 Global Study on

Occupational Fraud and Abuse. www.acfe.com

▪ACFE (Association of Certified Fraud Examiners) Report to the Nations: 2018 Global Study on

Occupational Fraud and Abuse – Government Edition. www.acfe.com

▪W. Steve Albrecht, Chad O. Albrecht, Conan C. Albrecht, and Mark F. Zimbelman, (Summary

of Triangle of Fraud Action) Fraud Examination (2012) Cengage Learning.

▪Jonathon T. Marks (2019) Crowe Horwath Fraud Pentagon

https://boardandfraud.com/2018/09/21/the­fraud­pentagon­an­enhancement­to­the­fraud­

triangle/

▪Jonathan T. Marks (June 27, 2018) Meta­Model of Fraud – Two Triangles combine for better

fraud case comprehension https://boardandfraud.com/2018/06/27/meta­model­of­fraud­

two­triangles­combine­for­better­fraud­case­comprehension/

References(continued)▪Rand Gambrell (May 3, 2017) Psychology of Fraud. BKD Forensics Institute Webinar.

https://www.bkd.com/sites/default/files/2018­07/the_psychology_of_fraud.pdf

▪Barry J. Epstein and Sridhar Ramamoorti (2019) When a triangle becomes a singularity: assessing

and responding to “dark triad” fraud risk. 2019 Williamburg Advanced Fraud Academy

https://www.eiseverywhere.com/file_uploads/7185785e8dc7d7b6d4c70632a0f6c29a_FINALEpstein

andRamamoortimaterialforAdvFraudConf.pdf

▪David T. Wolfe and Dana R. Hermanson (2004) The Fraud Diamond: Considering the Four Elements

of Fraud https://pdfs.semanticscholar.org/c9c8/32fa299f648464cbd0172ff293f5c35684b6.pdf

▪Jack Dominey, A. Scott Fleming, Mary­Jo Kranacher and Richard A. Riley Jr. (May 2012) “Issues in

Accounting Education,” Volume 27, Issue 2.

▪Ramamoorti, Morrison, Koletar (2009) Bringing Freud to Fraud: Understanding the State of Mind of

the C­Level Suite/White Collar Offender through “A­B­C” Analysis

https://ecommons.udayton.edu/acc_fac_pub/71