Fraud Theories Dr. Raymond S. Kulzick, CPA, CFE St. Thomas University Miami, Florida Copyright 2004...
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Transcript of Fraud Theories Dr. Raymond S. Kulzick, CPA, CFE St. Thomas University Miami, Florida Copyright 2004...
Fraud TheoriesFraud Theories
Dr. Raymond S. Kulzick, CPA, CFEDr. Raymond S. Kulzick, CPA, CFESt. Thomas UniversitySt. Thomas University
Miami, FloridaMiami, Florida
Copyright 2004 R. S. KulzickCopyright 2004 R. S. Kulzick
Fraud TheoriesFraud Theories
Sutherland – White Collar CrimeSutherland – White Collar Crime Cressey – Fraud TriangleCressey – Fraud Triangle Albrecht – Fraud ScaleAlbrecht – Fraud Scale Hollinger - Clark StudyHollinger - Clark Study
Edwin H. SutherlandEdwin H. Sutherland
1939 First defined “white-collar 1939 First defined “white-collar crime”crime”– Criminal acts of corporationsCriminal acts of corporations– Individuals in corporate capacityIndividuals in corporate capacity
Theory of differential associationTheory of differential association– Crime is learnedCrime is learned– Not geneticNot genetic– Learned from intimate personal groupsLearned from intimate personal groups
Cressey’s Offender Cressey’s Offender TypesTypes
1. Independent businessmen 1. Independent businessmen – ““Borrowing”Borrowing”– Funds really theirsFunds really theirs
2. Long-term violators2. Long-term violators– ““Borrowing”Borrowing”– Protect familyProtect family– Company cheating themCompany cheating them– Company generally dishonestCompany generally dishonest
Cressey’s Offender Cressey’s Offender TypesTypes 3. Absconders3. Absconders
Take the money and runTake the money and run Usually unmarried, lonersUsually unmarried, loners Blame “outside influences” or Blame “outside influences” or
“personal defects“personal defects
The Fraud TriangleThe Fraud TrianglePRESSURE
OPPORTUNITY RATIONALIZATION
Nonsharable ProblemsNonsharable Problems
Violation of ascribed obligationsViolation of ascribed obligations Personal failuresPersonal failures Business reversalsBusiness reversals Physical isolationPhysical isolation Status gainingStatus gaining Employer-employee relationsEmployer-employee relations
PressurePressure
FinancialFinancial ViceVice Work-relatedWork-related OtherOther
OpportunityOpportunity
ControlsControls– EnvironmentEnvironment– AccountingAccounting– ProceduresProcedures
Performance qualityPerformance quality Discipline perpetratorsDiscipline perpetrators Access to informationAccess to information Ignorance, apathy, incapacityIgnorance, apathy, incapacity Audit trailAudit trail
RationalizationRationalization
They owe meThey owe me BorrowingBorrowing Nobody will get hurtNobody will get hurt I deserve moreI deserve more It’s for a good purposeIt’s for a good purpose
W. Steve AlbrechtW. Steve Albrecht
Nine motivators of fraudNine motivators of fraud1.1. Living beyond meansLiving beyond means
2.2. Overwhelming desire for personal Overwhelming desire for personal gaingain
3.3. High personal debtHigh personal debt
4.4. Close association with customersClose association with customers
5.5. Pay not commensurate with jobPay not commensurate with job
W. Steve AlbrechtW. Steve Albrecht
Nine motivators of fraudNine motivators of fraud6.6. Wheeler-dealer Wheeler-dealer
7.7. Strong challenge to beat systemStrong challenge to beat system
8.8. Excessive gamblingExcessive gambling
9.9. Family/peer pressureFamily/peer pressure
The Fraud ScaleThe Fraud Scale
Situational pressuresSituational pressures– Immediate problems with Immediate problems with
environmentenvironment– Usually debts/lossesUsually debts/losses
Perceived opportunitiesPerceived opportunities– Poor controlsPoor controls
Personal integrityPersonal integrity– Individual code of behaviorIndividual code of behavior
The Fraud ScaleThe Fraud Scale
Hollinger-Clark StudyHollinger-Clark Study
Hollinger-Clark study (1983)Hollinger-Clark study (1983) Surveyed 10,000 workersSurveyed 10,000 workers Theft caused by job Theft caused by job
dissatisfactiondissatisfaction True costs vastly understatedTrue costs vastly understated
Employee DevianceEmployee Deviance
Two categories:Two categories:– Acts against propertyActs against property– Production violations (goldbricking)Production violations (goldbricking)
Strong relationship: theft and Strong relationship: theft and concern over financial situationconcern over financial situation
Age and TheftAge and Theft
Direct correlationDirect correlation Younger employees less Younger employees less
committedcommitted But, higher position = bigger theftBut, higher position = bigger theft Opportunity is only a secondary Opportunity is only a secondary
factorfactor
Job Satisfaction and Job Satisfaction and DevianceDeviance Dissatisfied employeesDissatisfied employees
– More likely to break rulesMore likely to break rules– Regardless of age/positionRegardless of age/position– Trying to right perceived inequitiesTrying to right perceived inequities
Wages in kindWages in kind
Organizational Organizational ControlsControls
Some impact, but limitedSome impact, but limited Hollinger studied five aspects:Hollinger studied five aspects:
– Company policyCompany policy– Selection of personnelSelection of personnel– Inventory controlInventory control– SecuritySecurity– PunishmentPunishment
Hollinger’s Hollinger’s ConclusionsConclusions
Employee perception of controls is Employee perception of controls is importantimportant
Increased security may hurt, not helpIncreased security may hurt, not help Employee-thieves exhibit other devianceEmployee-thieves exhibit other deviance
– Sloppy work, sick leave abuses, etc.Sloppy work, sick leave abuses, etc.
Management should be sensitive to Management should be sensitive to employees employees
Pay special attention to young employeesPay special attention to young employees
Hollinger’s Hollinger’s ConclusionsConclusions
Four key aspects of policy Four key aspects of policy developmentdevelopment
1.1. Understand theft behaviorUnderstand theft behavior
2.2. Spread positive info on company Spread positive info on company policiespolicies
3.3. Enforce sanctionsEnforce sanctions
4.4. Publicize sanctionsPublicize sanctions
Overall Conclusion 1Overall Conclusion 1
Perpetrators feel justifiedPerpetrators feel justified Must counter thisMust counter this
– MorallyMorally– LegallyLegally– ConsequencesConsequences
Overall Conclusion 2Overall Conclusion 2
Concept of wages-in-kindConcept of wages-in-kind– Hire the right peopleHire the right people– Treat them wellTreat them well– Have reasonable expectationsHave reasonable expectations
Overall Conclusion 3Overall Conclusion 3
Controls must pose a visible and Controls must pose a visible and highly likely threat of highly likely threat of apprehensionapprehension– Perception of detection is the Perception of detection is the
greatest deterrentgreatest deterrent Hidden controls do not deterHidden controls do not deter Controls cannot be predictableControls cannot be predictable