Detecting Fraud in Organizations E-Book

Joseph R. Petrucelli

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Corporate F&A
• Sprache: Englisch

Seitenzahl: 585

Veröffentlichungsjahr: 2013

Beschreibung

A savvy examination of where people and value meet, creating the opportunity for fraud An essential reference for all business professionals, Detecting Fraud in Organizations: Techniques, Tools, and Resources explains the process of how people commit fraud, as well as how to prevent and stop fraud from occurring in your organization. Organized by business processes which succinctly describe how fraud manifests itself on a daily basis, the authors explain ways in which everyone can help guard against fraud by familiarizing themselves with its building blocks and methods used to perpetrate and conceal it. Filled with situational examples the book is accompanied by a website featuring fraud simulations, business process maps, and other useful tools for combating fraud. * Focuses on the people who perpetrate fraud and those who are tasked with preventing and detecting it * Uniquely organized by business processes for more relevance and easier understanding by those people working within organizations * Shows how subtle factors play a large role in identifying and ferreting out fraud in addition to the traditional knowledge of fraud schemes giving people and organizations the edge they need to be successful in prevention and deterrence * Companion website includes additional fraud simulations, business process maps, and useful tools The price of fraud can be devastating to your business. Detecting Fraud in Organizations: Techniques, Tools, and Resources equips you and others in your organization with essential information and tools necessary to proactively catch fraud, reduce losses, improve efficiencies and develop actionable controls.

Leseprobe

Contents

Cover

Series Page

Title Page

Copyright

Preface

Acknowledgments

Introduction

THE 800-POUND FRIENDLY GORILLA

NUMBERS DON’T LIE, PEOPLE DO

AN OVERVIEW OF FRAUD

THE ONE-MINUTE FRAUD MYSTERIES

A FEW TIPS FOR DETECTING FRAUD AS YOU BEGIN

SETUP

NOTE

Chapter One: Understanding Fraud

PEOPLE ARE GREEDY—HOW GREEDY ARE YOU?

ONE-MINUTE FRAUD MYSTERY: TRUST US INC.

DISTINGUISHING AMONG DETERRENCE, PREVENTION, AND DETECTION

THE INCREASED RISK OF FRAUD LOSS

DIVERGENT AND CONVERGENT THINKING

CRITICAL THINKING REQUIRES CRITICAL QUESTIONS

THE PERSONALITY TRAITS OF A FRAUDSTER

THE MORAL COMPASS

THE ELEMENTS OF FRAUD: MIRD

EDUCATION ABOUT FRAUD

CONFUSION ABOUT RESPONSIBILITY

COMPLEXITY

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Two: Fraud Detection Approaches

WHY DOESN’T ENHANCED LEGISLATIVE, REGULATORY, AND PROFESSIONAL OVERSIGHT HELP TO PREVENT FRAUD?

ONE-MINUTE FRAUD MYSTERY: BIG FISH INVESTMENT INC.

PRINCIPLES AND RULES ALONE CANNOT ELIMINATE ALL FRAUD

A REAL-WORLD PERSPECTIVE

GETTING A HANDLE ON TRANSACTIONS

THE 10 FORENSICALLY ACCEPTED GENERALLY ACCEPTED ACCOUNTING PRINCIPLE ASSUMPTIONS

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Three: Deciding to Commit Fraud

ONE-MINUTE FRAUD MYSTERY: THE HOUSE OF WORSHIP

DO YOU REALLY KNOW WHAT THE PEOPLE IN YOUR ORGANIZATION ARE THINKING?

THE FOUR GENERATIONS AND MOTIVATION

PINPOINTING THE FRAUDSTER

THE THREE MOST PREVALENT TYPES OF FRAUD

AN ACCOUNTING CREED

THE CONSEQUENCES OF FRAUD

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Four: How to Act Like a Fraudster

ONE-MINUTE FRAUD MYSTERY: CATCH ME IF YOU CAN INC.

THE SIX Ps OF SUCCESSFUL FRAUDSTERS

THE CHARACTERISTICS OF A FRAUDSTER

FRAUDSTERS AND THEIR ORGANIZATIONS

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Five: The Dynamics of Business

ONE-MINUTE FRAUD MYSTERY: ACCRUAL INC.

CONTROL-POINT LINKS AND ACCOUNTABILITY

THE LAYERS OF TRUST

RESPONSIBILITY CHAINS

A FAILURE IN MANAGEMENT

MORE THAN THE BOTTOM LINE

OUTSIDE INFLUENCES

ORGANIZATIONAL FAILURES

UNDERSTANDING CASH FLOWS

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Six: Understanding the Accounting Process

ONE-MINUTE FRAUD MYSTERY: SNEAKERS ARE US INC.

UNDERSTANDING THE SALE OF GOODS

DECEPTIVE DATA

COMPUTERIZED FRAUD TECHNIQUES

OPERATING EXPENSES

BALANCED PRINCIPLES

BALANCE SHEET COMPONENTS

STATEMENT OF CASH FLOWS

RATIO ANALYSIS

BUILDING A CASE: DOCUMENT ORGANIZATION, DATA ANALYSIS, AND LIFESTYLE ANALYSIS

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Seven: It All Comes Down to Cash

ONE-MINUTE FRAUD MYSTERY:YANKEE PROPERTY MANAGEMENT

HANDLING CASH

CASH DISBURSEMENT CONTROLS

CASH AND FRAUD

CLASSIFICATIONS OF CASH AND CASH-EQUIVALENT FRAUD SCHEMES AND SCENARIOS

FRAUD CONTROL POINTS IN THE ORGANIZATIONAL PROCESS

SUMMARY

ONE-MINUTE FRAUD MYSTERY ANALYSIS

NOTES

Chapter Eight: Final Thoughts

POP: FINDING THE NEXT POTENTIAL FRAUD KERNEL IN YOUR ORGANIZATION

QUICK REFERENCES ON THE FUNDAMENTALS OF FRAUD

GAAP VERSUS FAGAAPA: A SUMMARY

FIVE CATEGORIES OF FRAUD

WHY AUDITORS AND ACCOUNTANTS FAIL TO DETECT FRAUD

RED FLAGS FOR POTENTIAL FRAUD

USING THE ACCRUALS-TO-ASSETS RATIO

A SIMPLE FRAUD RISK PLAN

CONCLUSION

NOTES

Afterword

Bibliography

About the Author

About the Website

Index

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Library of Congress Cataloging-in-Publication Data:

Petrucelli, Joseph R., 1960– Detecting fraud in organizations : techniques, tools, and resources / Joseph R. Petrucelli. p. cm. — (Wiley corporate F&A series) Includes bibliographical references and index. ISBN 978-1-118-10314-2 (cloth) — ISBN 978-1-118-22392-5 (ePDF) ISBN 978-1-118-26218-4 (Mobi) — ISBN 978-1-118-23735-9 (ePub) ISBN 978-1-118-55597-2 (O-BK) 1. Commercial crimes—United States. 2. Corporations— Corrupt practices—United States. 3. Fraud investigation. I. Title. HV6769.P48 2013 658.4′73—dc23 2012034377

Printed in the United States of America

Preface

IN WRITING THIS BOOK, MY goal was to keep the subject matter as simple and straightforward as possible. This book is designed to get you thinking about fraud from a new perspective, with a focus on people and proactive thinking.

When people in organizations put their own self-interest (greed) above the interests of others, it creates an atmosphere conducive to fraud. The FBI’s fiscal year 2010–2011 Financial Crimes Report to the Public states that “corporate fraud matters involving self-dealing by corporate executives, particularly utilizing companies to perpetrate large-scale, high-yield fraud schemes, continue to be an issue of concern.”1 The focus of this book is the people in today’s organizations and identifying how and where the value in those organizations is exposed to fraud.

I have spent more than 30 years in the accounting field in various positions. From my experiences and observations, I have learned that fraudsters ultimately give themselves away, through guilt, stupidity, or the obvious dissipation of assets. I have seen fraud perpetrated by the most unlikely person as well as by the most likely person in an organization. I have seen fraud in government, in private and public organizations, and domestically and internationally. One common theme has permeated my experiences of dealing with fraud: people are involved. As long as there are people with an access to something of value, the need to combat fraud will exist.

My mission in writing this book was to make learning about fraud both fun and easy. I express my concerns through cartoons, pictures, and humor. I reinforce the importance of developing the proper ethical tone with the people in your organization, from top to bottom. I hope the book will challenge you by continually posing questions and offering you brainstorming opportunities to solve multiple one-minute mysteries. I have included motivational quotes to help you maintain a positive attitude while getting through the sometimes grueling efforts and endless documents required to establish intent.

Remember that numbers don’t lie, people do. My hope is that after reading this book, you will see beyond the numbers and learn the importance of transparent and open communication with the people involved in various organizational processes. It is important to maintain independent and ethical judgments when you are called on to deal with the often gray areas that can arise in an organizational process. I believe that an 800-pound friendly gorilla awareness of fraud can aid in detecting, deterring, and preventing it. The only way to accomplish this is through the development of ethical people in organizations in order to maintain proactive rather than reactive thinking.

1 Federal Bureau of Investigation, “Financial Crimes Report to the Public: Fiscal Years 2010–2011 (October 1, 2009–September 30, 2011),” http://www.fbi.gov/stats-services/publications/financial-crimes-report-2010-2011.

Acknowledgments

WHENEVER YOU ACCOMPLISH A DREAM, it is possible only with a supporting cast. I would like to thank Mike Breon. I’m glad we had that first Jack and Diet Coke, and I appreciate all your initial input on the ideas for what would become this book.

I also want to thank Cheryl Hyder. What can I say, aside from the fact that having the same birthday makes us complement each other in all aspects of our professions. Thanks for your support and your contributions to this book.

I also want to thank James Lee for your incredible artistic contribution. Your artwork helped to shape my vision and give the book its perspective and personality.

Thank you to Brien Jones from the National Association of Certified Valuation Analysts for your continual support for this book.

Thanks to Jennifer MacDonald, Kimberly Monroe-Hill, Judith Antonelli, Judith Howarth, Brandon Dust, and John DeRemigis at John Wiley & Sons for believing in this project and for dealing with the twists and turns we encountered. Jen, I promise to “mind dump” less next time! John, I told you “I think I can” and managed to get the book done! Thanks for sticking with me and believing in me.

Thank you to my partners, Tim Piotrowski and Kevin Duffy, for your continual support and friendship and for being a big part of this book. I greatly appreciate all of your insight and input. We truly are the Three Musketeers! I want to thank our staff at PP&D Accounting: Lynn, Ian, Joey, Nicole, Matt, and Lauren. Your loyalty, integrity, and commitment to our firm have brought insight and energy into our business. I thank you for being a big part of getting this book done, too.

Thanks to all of my students at the College of Staten Island for challenging me every day and giving me the opportunity to make a difference in your lives and help you develop into professional accountants. To the Business Department at the College of Staten Island, thank you for your support and for allowing me to help create our Forensic Accounting Introduction course. Special thanks to Loretta, for believing in me, and to Professor Thomas Tellefsen.

To Professor Patricia Galletta, I thank you for taking the time to review the copyedited manuscript and your input. I appreciate your support and perspective not only in helping with this book but also as a colleague and friend at the College of Staten Island.

To Timothy G. Little, Esq., partner at Katten Muchin Rosenman, LLP. Tim, next to my family, you are one of my oldest relationships. It has spanned from being soccer teammates in grammar school to our current adult life. You are one of the smartest individuals I know, and I appreciate your taking the time to review the copyedited manuscript and provide feedback. But what I appreciate most is our lifelong friendship and the common values we share, specifically that we both live for our families.

To Sergeant Howard “Howie” Askelson, who gives me the opportunity to relive those moments when we first started our families. The expressions of love you show your children and wife make me feel as if I am looking back in time. Your ability to be an 800-pound friendly gorilla in as calming a manner as I have ever seen is a model for my 800-pound friendly gorilla spirit. Your ability to immediately take the copyedited material and make it your own amazes me. My purpose in writing the book was to capture that exact spirit. Thanks for your insight and input, but more important, the friendship we have developed.

To Robert Morrison, CPA, Hodulik & Morrison PA, thank you for taking the time to review the copyedited manuscript and provide me valuable feedback. It is not often that professionals support each other. Thank you for the wisdom you continually share and for the friendship we enjoy. You truly are an 800-pound friendly gorilla.

Thank you to my parents who taught me that I can be whatever I want to be. Mom, I think of all those times you made me read The Little Engine That Could and do my homework till I got it right. You taught me that practice and persistence lead to success. Dad, thanks for always encouraging me to make the most out of my life.

To my dog, Buddy, my miracle with paws: You are greatly missed.

To my brother, this is a professional book, so I cannot call you the names I would really like to. As your older brother, I learned to protect, help, and love. Everyone needs a little brother to act as the caboose and tag along. Thanks for always looking up to me and making me feel like a big brother.

Thanks to Spencer Rockman, my mentor, who proved to me that everything a person does is a life lesson and that life skills can be learned through soccer. Your advice over the years has been priceless. You truly are the older brother I never had.

To Rob Karabinchak, who always seems to bring me back down to earth: Thanks for the friendship and support and making me continually believe in my abilities. Rob, the numbers don’t lie with integrity like yours.

To my adopted accounting daughters, Nicole DiGeso and Lauren Komar, and my adopted son, Ian Aizenberg, thanks for the continual rereading and corrections and your youthful input to this book.

Thank you to my two sons. First, to Matt, for teaching me that it’s important to follow your dreams and not someone else’s. Thanks for all of the copying and organizational help. Second, to Joey, for being himself all the time—your genuineness is amazing. You help me to look at things from a different perspective. I could never have written this book without your help. What a great gift it is to be able to fulfill a dream with my child! I can’t wait to read your first book!

Thank you to my mother-in-law and father-in-law, who not only gave me the best soul mate and partner one could ask for but who have also provided continual support and love.

And finally, thank you to my wife, Angela, for your love, affection, amazing dedication to our family and continued support. Without you, this book could never have been written. I love you!

Introduction

I HAVE DRAWN INSPIRATION from the many people and experiences that have shaped my career and my life, and especially from the classic children’s novel The Little Engine That Could. The recurrent themes in that book are persistence, determination, and positive mental attitude. I truly believe that anybody can be what he or she wants to be by following the little train’s creed of “I think I can!”

I challenge you to become sufficiently self-aware by reflecting on the key events and influences that define you as both a professional and a person. This quest should lead to a greater insight into yourself, your ethics, and the many people who have influenced your character and who you are. Knowing yourself well and believing in yourself will inevitably assist you in learning to detect, deter, and prevent fraud.

THE 800-POUND FRIENDLY GORILLA

The “800-pound gorilla” is a concept often used to describe a person or an organization so powerful that it can act without regard for the rights of others or established principles and rules.1 In this book, we are going to adapt this metaphor for a more positive concept. The 800-pound gorilla in this book is friendly and promotes the interests of the organization in a positive manner. He or she generates effective communication with all of the people in an organization in a friendly, proactive way.

The 800-pound friendly gorilla has power, but his or her job is to ensure that people in the organization follow the rules. Our gorilla uses his or her power to ensure not only that people obey the organization’s principles and rules but also that the organization does not infringe on the rights of others and that it maintains open channels of communication. If someone commits fraud, for instance, the gorilla will not be happy, but he or she will try to understand why it took place and learn from it.

Throughout the book you will see that organizations need more than one 800-pound friendly gorilla to combat fraud. Organizations need to create a spirit that helps to develop a workforce full of 800-pound friendly gorillas. Whether investigating a potential fraud, or detecting, deterring, or preventing fraud, the 800-pound friendly gorilla seeks to understand the people in the organization in a calm, rational, and friendly manner. Start to think of who the potential 800-pound friendly gorillas are in your organization.

Organizations worldwide lose an estimated 5 percent of revenue to occupational fraud each year, according to the reports of the Association of Certified Fraud Examiners (ACFE). As a result of my professional experience, I believe the number is much higher because many frauds are not included in the ACFE estimate because of bankruptcy, failure to prosecute, insurance payments, and restitutions.

Clearly, we need to detect fraud in organizations by looking beyond the numbers and developing proactive thinking about the people in organizations. Starting with the device of our 800-pound friendly gorilla, we can communicate an organization’s principles, ensure that an organization tells the true story about its numbers, and discover any falsification or deception. To find where in an organization the business risk of fraud exists today and in the future, we will consider the following: