Fraud Examination Chapter 1 Summary

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Management Fraud: Also known as financial statement fraud. It usually involves top management’s deceptive manipulation of financial statements.

Examples: Enron, WorldCom, Sunbeam

Investment and Other Consumer Fraud: Investment fraud is closely related to management fraud. Investment fraud is when fraudulent and usually worthless investments are sold to unsuspecting investors. Telemarketing is a form of investment fraud.

Examples of consumer fraud schemes:

- Ponzi schemes: Lure investment funds from victims and then pay those victims a premium or interest from money that is paid by subsequent investors.

- Telemarketing fraud: Victims send money to people they do not know personally or give personal financial information to unknown callers. Callers pressure victims to “Act now”.

- Nigerian letter or money scams: Typically occurs when a potential victim receives an email or other form of communication promising the victim a large financial payout in exchange for help transporting large sums of money from one country to another.

- Identity theft: When someone assumes the identity of another person to purchase goods, engage in criminal activity, or perpetrate fraud. Identities are stole by accesing personal financial information on credit statements, credit cards, bank statements, etc.

- Advance fee scams: A victim paus an up=front cost for a good or service that is never delivered.

- Redemption/strawman/bond fraud: Perpetrators claim that the US government control certain bank accounts that can be accessed by submitting paperwork with government officials. Perpetrators sell expensive “training kits” to learn how to access the funds.

- Letter of credit fraud: A letter of credit is a legitimate document issued by banks. Perpetrators will often create bogus letters of credit and then sell them to unsuspecting victims telling them the letter can be used as investments.

- Internet fraud

Criminal and Civil Fraud Laws

When people commit fraud, they can be prosecuted criminally or civilly. To succeed in a prosecution, it is necessary to show that the perpetrator acted with intent. This is best done gathering “Evidential matter”.

- Criminal Law: branch of law that deals with offenses of a public nature (against society as a whole). When perpetrators are convicted, they usually serve jail time and/or pay fines. Perpetrators must be proven guilty “beyond a reasonable doubt” in order to be convicted. The jury (12 jurors) must rule unanimously on guilt. Perpetrators could plead guilty without a trial in order to seek more lenient sentences.

- Civil Law: body of law that provides remedies for violations of private rights. The purpose of a civil lawsuit is to gain compensation for harm an individual or organization believes has been done to him/her/it. The jury consists of 6 jurors (usually), and the verdict need not be unanimous. To succeed in a prosecution in civil law, the plaintiff must prove “preponderance of the evidence”, meaning, there need only be slightly more evidence supporting the plaintiff than supporting the defendant.

Prepare for a Fraud-fighting Career – The following are skills needed to be a good Fraud-Fighting Professional:

- Analytical Skills - examine data for symptoms of fraud

- Communication Skills - effectively interview witnesses and suspects, communicate findings to witnesses, courts and others

- Technological Skills - search for fraud by effectively using information systems

- Some understanding of accounting and business

- A knowledge of civil and criminal laws, criminology, privacy issues, employee rights, fraud statutes, and other legal fraud-related issues

- The ability to speak and write in a foreign language

- A knowledge of human behavior (why and how people rationalize dishonesty, how people react when caught, what are the most efficient ways to deter individuals from committing fraud)

Becoming a Certified Fraud Examiner – The following some requirements for an individual to become a certified fraud examiner:

- Be an associate member of the ACFE in good standing

- Meet minimum academic and professional requirements: a minimum of a Bachelor’s Degree or 2 years of fraud-related professional experience

- Be of high moral character

- Agree to abide by the Bylaws and Code of Professional Ethics of the ACFE