Corporate Fraud and Internal Control E-Book

Richard E. Cascarino

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2012

Beschreibung

Essential guidance for companies to examine and improve their fraud programs

Corporate governance legislation has become increasingly concerned with the ongoing resilience of organizations and, particularly, with their ability to resist corporate fraud from the lowest levels to the upper echelons of executive management. It has become unacceptable for those responsible for corporate governance to claim, "I didn't know." Corporate Fraud and Internal Control focuses on the appropriateness of the design of the system of internal controls in fraud risk mitigation, as well as the mechanisms to ensure effective implementation and monitoring on an ongoing basis.

• Applicable for a wide variety of environments, including governmental, financial, manufacturing and e-business sectors
• Includes case studies from the United States, Europe, and Africa
• Follows the standards laid down by the Association of Certified Fraud Examiners, the internationally recognized body governing this activity
• Accompanying interrogation software demo (software demo is not included as part of this book's e-book file, but is available for download after purchase)

Written by a fraud prevention leader, Corporate Fraud and Internal Control addresses the concerns of both management and audit in ensuring a demonstrable level of activity to ensure sustainability of the organization and minimization of the impacts of fraud, upon early detection.

Leseprobe

Table of Contents

Cover

Title

Copyright

Preface

CHAPTER ONE: Nature of Fraud

FRAUD AND IRREGULARITIES: DEFINITIONS AND CONCEPTS

COST OF FRAUD

NOTES

CHAPTER TWO: Elements of the Crimes of Theft and Fraud

DOCUMENT FRAUD

CORROBORATING DOCUMENTS

PROCUREMENT FRAUD

BRIBERY AND CORRUPTION

INDUSTRIAL ESPIONAGE

CHECK FRAUD AND MONEY LAUNDERING

NOTES

CHAPTER THREE: Frauds Against the Individual

ONLINE AUCTION FRAUD

CONSUMER FRAUDS

TELEPHONE FRAUDS

CHARITY FRAUDS

MISREPRESENTATION OF MATERIAL FACTS

CONCEALMENT OF MATERIAL FACTS

ADVANCE FEES (4-1-9) FRAUDS

“MIDDLEMAN” FRAUDS

BAIT AND SWITCH

LARCENY

EXTORTION

COUNTERFEIT GOODS AND INTELLECTUAL PROPERTY

AFFINITY FRAUDS

PYRAMID SCHEMES

PONZI SCHEMES

CAREER OPPORTUNITIES

CASH RECOVERY FRAUDS

CHAPTER FOUR: Frauds Against the Organization

BANKRUPTCY FRAUD

CHECK FRAUD

OBTAINING FRAUDULENT LOANS

UNSOLICITED ORDERS

EMBEZZLEMENT

BRIBERY

CORRUPTION

CONFLICTS OF INTEREST

BREACH OF FIDUCIARY DUTY

THEFT OF TRADE SECRETS

FALSE CLAIMS

FALSE CONVEYANCING

TUNNELING

CONSPIRACY

LAPPING

KITING

FRAUDULENT AFFILIATIONS

COUNTERFEIT MONEY

BENEFIT FRAUDS

INSURANCE FRAUD

PAYMENT CARD FRAUDS

PENSION FRAUDS

TAX FRAUD

INSIDER TRADING AND MARKET ABUSE

CLICK FRAUD

COUNTERFEIT GOODS AND INTELLECTUAL PROPERTY

PROCUREMENT FRAUD

NOTES

CHAPTER FIVE: Fighting Corruption

BRIBERY IN CONTRACTS

RED FLAGS AT ENRON AND WORLDCOM

NEPOTISM AND FAVORITISM

ABUSE OF AUTHORITY

DEVELOPING AN OVERALL ANTICORRUPTION CULTURE

NOTES

CHAPTER SIX: Role of Ethics in Fighting Fraud

HOW MORAL DECISIONS ARE MADE

NATURE AND ROLE OF ETHICS

MANAGING ETHICAL RISK

REPORTING OF FRAUD

NOTES

CHAPTER SEVEN: Controlling Fraud

CORPORATE GOVERNANCE AND FRAUD PREVENTION

AUDIT COMMITTEE’S ROLE IN FIGHTING FRAUD

INTERNAL CONTROL AND THE PREVENTION OF FRAUD

FIGHTING SHRINKAGE

INTERNAL AUDIT ROLE

NOTES

CHAPTER EIGHT: Fraud Risk Management

ESTABLISHING THE CORPORATE FRAUD RISK PROFILE

CASCARINO CUBE

ROLES OF THE INTERNAL, EXTERNAL, AND FORENSIC AUDITOR

WHISTLEBLOWING IN DETECTING FRAUD

NOTE

CHAPTER NINE: Investigating Fraud

RED FLAGS AND INDICATORS OF FRAUD

CORPORATE FRAUD INDICATORS

CONDUCTING AN INVESTIGATION

TOOLS AND TECHNIQUES

USE OF THE POLYGRAPH

DOCUMENTING THE INVESTIGATIVE PROCESS

EVIDENCE ANALYSIS

INVESTIGATIVE ERRORS

AFTER THE EVENT

ESTABLISHING AN INVESTIGATIONS FUNCTION

TRACING AND RECOVERING ASSETS

NOTES

CHAPTER TEN: Computer Fraud and Countermeasures

MAINFRAME ARCHITECTURES

MAINFRAME COMMUNICATIONS

CONTROL OF SERVERS

WAN COMMUNICATIONS

WORKSTATION SECURITY

MOBILE COMPUTING AND THE INTERNET

CLOUD COMPUTING

COMPUTER AND INFORMATION FRAUD

MONITORING TOOLS

PREVENTING E-COMMERCE FRAUD

E-COMMERCE CONTROL OPPORTUNITIES

E-PAYMENTS

INTERNAL CONTROL BEST PRACTICES

NEWER FRAUD SCHEMES

PROTECTING DIGITAL ASSETS

FOILING THE HACKERS

INVESTIGATING COMPUTER FRAUD

COMPUTER LAW

NOTE

CHAPTER ELEVEN: Legal Issues Surrounding Fraud

IMPACT OF A CONSTITUTION

FRAUD AND THE LAWS OF EVIDENCE

ASSET RECOVERY

LABOR LEGISLATION AND FRAUD

NOTE

CHAPTER TWELVE: Industry-Related Fraud Opportunities

BANKING FRAUD

MONEY LAUNDERING

HEALTH CARE FRAUD

INSURANCE FRAUD

TAX FRAUD

SOCIAL SECURITY FRAUD

FRAUD AFTER DEATH

CONSTRUCTION FRAUD

NOTES

APPENDIX A: Audit Committee Charter

APPENDIX B: Corporate Fraud Policy

POLICY

BACKGROUND AND IMPLEMENTATION

FRAUD AWARENESS TRAINING

APPENDIX C: Whistleblowing Policy

REPORTING AND INVESTIGATION

APPENDIX D: Fraud Prevention Checklist

APPENDIX E: Fraud Risk Questionnaire Sample

APPENDIX F: Fraud Risk Analysis

APPENDIX G: Fraud CAATs

TECHNIQUES

TOOLS

CONTINUOUS MONITORING

Glossary

About the Author

About the Web Site

Index

End User License Agreement

List of Illustrations

CHAPTER ONE: Nature of Fraud

EXHIBIT 1.1 Fraud Triangle

CHAPTER SIX: Role of Ethics in Fighting Fraud

EXHIBIT 6.1 Managing Ethical Risk

CHAPTER EIGHT: Fraud Risk Management

EXHIBIT 8.1 Fraud Risk Example

CHAPTER TEN: Computer Fraud and Countermeasures

EXHIBIT 10.1 IT Architecture

EXHIBIT 10.2 User Access Paths

Guide

Cover

Table of Contents

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Corporate Fraud and Internal Control

A Framework for Prevention

RICHARD E. CASCARINO

Copyright © 2013 by Richard E. Cascarino. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data

Cascarino, Richard. Corporate fraud and internal control : a framework for prevention/Richard E. Cascarino. p. cm.—(The Wiley corporate F&A series) Includes bibliographical references and index. ISBN 978-1-118-30156-2 (cloth); ISBN 978-1-118-41980-9 (ebk); ISBN 978-1-118-42172-7 (ebk);ISBN (eMobi) 978-1-118-43402-4 (ebk) 1. Fraud–Prevention. 2. Auditing, Internal. I. Title. HV6691.C38 2013 658.4’73–dc23

2012022692

Preface

DATING BACK TO 3500 BC, records of various civilizations indicate by patterns of checks and ticks that record verification took place. In ancient Egyptian, Greek, Chinese, and Roman civilizations, rulers sought to confirm official records by comparing two sets of such records. The lowest-ranking magistrate in ancient Rome was a quaestor, or investigator. This elected official traditionally worked within the treasury to supervise the financial affairs of the empire.

Accuracy of records was tested, typically by two officials working together. One official read from the one record sheet and the other checked against the other record sheet. The term “auditor” is derived from the Latin auditus, meaning a hearing.

With the fall of the Roman Empire, auditing and internal control disappeared in Europe. It was not until the Middle Ages that the growth of centralized control once again demanded proof of the adequacy and correctness of record keeping and the prevention of the defrauding of the king.

In the Orient, however, audit can trace its ancestry back to the Western Zhou Dynasty some 3000 years ago, in which it continued in various forms until the Song Dynasty in 992AD when a “royal audit court” was established. Audit in China took the form of Inspectorates until the Revolution of 1911 when an Audit Court was established, a Chamber of Audit set up, and Audit Law was issued. Auditing continued until the founding of the People’s Republic of China in 1949 when audit was conducted by internal supervision within the Departments of Public Finance.

In 1982, the Constitution of the People’s Republic of China was promulgated resulting in the 1983 formation of the National Audit Office of the People’s Republic of China.

Today, capital markets, which have been rocked by recent corporate scandals and frauds on an international scale, are demanding that financial organizations, publicly listed companies, multinational companies, and the public sector implement sound corporate governance. Large-scale fraud has severely eroded investor confidence; in many cases, investors are simply waiting for the next large fraud to be announced.

In the past, many organizations, companies, and government bodies have operated in a purely reactive mode to the problem of fraud. That is, only after a fraud had taken place were decisions made regarding how to combat it. With the increasing impact of corporate governance legislation and the changes in society of recent years, the need to fight fraud in a proactive manner has become paramount.

Companies now must accept their corporate responsibility to protect assets and employees from the temptations and impacts of fraud.

At the individual level, fraud is impacting every citizen, either directly through being defrauded or indirectly through the impact of higher taxation or shopping bills. Individual fraud is also creating an atmosphere in which individuals feel cheated and defrauded, and that they have the right to retaliate by cheating and defrauding others.

Police services are under increasing pressure to combat all types of crime, particularly violent crime. As a result, often white-collar crime, corruption, and fraud are treated as the “poor relation” at the low end of the resources chain and receive priority only in egregious cases when they become front-page news in the newspapers.

As a result, organizations have no choice but to develop plans and strategies to deter, detect, and, where required, prove fraud utilizing their own in-house control mechanisms and systems of internal control.

This book addresses the roles of the board and its management and audit committees in implementing a system of internal controls that adequately defends against fraudulent and corrupt practices both within the organization and against it. The book itself consists of 12 chapters.

Chapter 1, “Nature of Fraud,” introduces fraud and irregularities, covering the elements of the crimes of theft and fraud as well as the nature and cost of fraud. It includes the basics of fraud and financial irregularities and defines fraud and prejudice resulting from fraud. It also presents general safeguards to make fraud in commerce more difficult, and ways to seek redress from fraud perpetrators.

Chapter 2, “Elements of the Crimes of Theft and Fraud,” explores how fraud and conventional theft differ legally. It also helps identify the principal control elements required to reduce the likelihood of a fraud occurring and its impact, should it occur, and to increase the probability of early detection in the event of an occurrence.

Chapter 3, “Frauds Against the Individual,” identifies specific types of fraud against the individual that, left unchecked, may increase the probability of a loyal employee turning against the employer in desperation. It also identifies corporate responsibility in educating employees against potential fraud attacks against them personally.

Chapter 4, “Frauds Against the Organization,” helps readers recognize specific types of fraud against the organization, their red flags, and the failure or lack of internal controls that expose organizations to such attacks. It also differentiates between internal frauds carried out from inside the organization against the interests of the organization, and external frauds carried out against the organization from an external source with or without the cooperation of current employees.

Chapter 5, “Fighting Corruption,” identifies areas of vulnerability within the organization that expose it to managerial-level frauds and internal corruption. It also identifies areas and indicators where organizations may be—unwittingly or deliberately—the perpetrators of such corruption against third parties.

Chapter 6, “Role of Ethics in Fighting Fraud,” explores the nature and role of ethics within the organization to combat fraud and helps readers evaluate the current state of ethical structures within an organization. The chapter helps readers design a code of conduct that will reduce the likelihood of fraud occurrences and increase the probability of early detection.

Chapter 7, “Controlling Fraud,” defines the roles of corporate governance and the structures organizations utilize to prevent fraud. The chapter helps readers evaluate the system of internal control the organization relies on to minimize fraud and makes practical recommendations for improvement where required. The chapter emphasizes the role internal audit must play in controlling fraud.

Chapter 8, “Fraud Risk Management,” identifies appropriate techniques to establish the corporate fraud risk profile and clarifies the roles of internal, external, and forensic audit in the fight against fraud. It helps readers design and implement effective whistleblowing both within and external to the organization as a fraud preventive and detective measure.

Chapter 9, “Investigating Fraud,” assists the reader in identifying the red flags and indicators of fraud that should trigger a fraud investigation. It also identifies the forensic techniques available and the resources and training required to implement an appropriate fraud investigation. In addition, it covers the requirements for establishing an internal investigation function and determination of the appropriateness and the appropriate measures for tracing and recovering lost assets.

Chapter 10, “Computer Fraud and Countermeasures,” helps readers identify areas of vulnerability to fraudulent use of information systems and processing of fraudulent transactions. It also helps facilitate the design and implementation of appropriate measures to defend the digital assets of the organization.

Chapter 11, “Legal Issues Surrounding Fraud,” assists readers to evaluate the current legislative framework for the country or countries in which the organizations are operating and evaluate the effectiveness of deterrent mechanisms for fraud, including international electronic fraud.

Chapter 12, “Industry-Related Fraud Opportunities,” identifies fraud opportunities specific to certain industries as well as government institutions. Its aim is to assist in the design of effective control mechanisms against specific risks to achieve optimal control effectiveness at minimized cost.

In addition, appendices are provided to give examples of antifraud opportunities, policies, and checklists as well as the basis for legal jurisdictions for fraud prevention and prosecution. An educational version of IDEA Data Analysis software is also provided via a web site download.

CHAPTER ONENature of Fraud

Fraud is like cancer. Most of us know someone who has it. We know people who will eventually have it. It has become common but we can take steps to protect ourselves through healthy choices and regular checkups using the latest tools and technology. But if people ignore the problem and live dangerously, then there’s a much greater chance of becoming a victim.

—Toby Bishop, CEO, Association of Certified Fraud Examiners

After studying this chapter, you should be able to:

Briefly outline the definitions and concepts underlying fraud and irregularities

Describe the basic types of fraud

Understand the profiles and motivators of fraud

Define the responsibilities for fraud detection and prevention

More and more incidents of private and public fraud are being reported daily in the media, and increasingly prosecutions for this offense are being conducted in the various courts. This chapter examines the phenomenon in order to obtain a full appreciation of what exactly fraud is.