Executive Roadmap to Fraud Prevention and Internal Control E-Book

Martin T. Biegelman

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

Seitenzahl: 629

Veröffentlichungsjahr: 2012

Beschreibung

Now in a Second Edition, this practical book helps corporate executives and managers how to set up a comprehensive and effective fraud prevention program in any organization. Completely revised with new cases and examples, the book also discusses new global issues around the Foreign Corrupt Practices Act (FCPA). Additionally, it covers best practices for establishing a unit to protect the financial integrity of a business, among other subjects. The book has many checklists and real-world examples to aid in implementation and an instructor's URL including a test bank to aid in course adoptions.

Leseprobe

Contents

Cover

Endorsement

Series

Title Page

Copyright

Dedication

Foreword to the Second Edition

Foreword to the First Edition

Preface

Acknowledgments

Chapter 1: Fraud's Feeding Frenzy

FRAUD'S FEEDING FRENZY STILL GOING STRONG

WHAT A DIFFERENCE A FEW YEARS MAKE

PERSONAL PIGGY BANK CONCEPT OF LEADERSHIP

THE ROGUE EMPLOYEE

THE CEO'S CHUTZPAH DEFENSE

A SAMPLING OF CORPORATE FRAUDS

THE DRIVE FOR CORPORATE RESPONSIBILITY

FIGHTING FRAUD IS GUARANTEED EMPLOYMENT

NOTES

Chapter 2: Fraud Theory and Prevention

FRAUD 101

CORPORATE FRAUD

THE ACFE 2010 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

FRAUD PREVENTION

PERP WALKS AS A FORM OF FRAUD PREVENTION

EDWIN SUTHERLAND AND WHITE-COLLAR CRIME

DR. DONALD CRESSEY AND THE FRAUD TRIANGLE

FINANCIAL PRESSURE AND OTHER MOTIVES

OPPORTUNITY

RATIONALIZATION

DR. W. STEVE ALBRECHT'S FRAUD SCALE

FRAUD DIAMOND

FRAUD THEORIES

THE SHORT MEMORY SYNDROME

RECIDIVIST FRAUDSTER

NOTES

Chapter 3: The Path to Greater Corporate Compliance, Accountability, and Ethical Conduct

WHAT IS CORPORATE GOVERNANCE?

A CULTURE OF COMPLIANCE

COSO

FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONAL CRIME

SAS 82

ARTHUR LEVITT AND THE “NUMBERS GAME”

THE SARBANES-OXLEY ACT OF 2002

NOTES

Chapter 4: The Path to Greater Corporate Compliance, Accountability, and Ethical Conduct

THE SAS 99 FIX

PRINCIPLES OF FEDERAL PROSECUTION OF BUSINESS ORGANIZATIONS

THE FINAL RULE OF THE SEC FOR SECTION 404 OF SARBANES-OXLEY

THE PCAOB AND AUDITING STANDARD NO. 2

STEPHEN CUTLER'S “GATEKEEPERS SPEECH”

ENHANCED SENTENCING GUIDELINES: LESS CARROT AND MORE STICK

FILIP MEMORANDUM

2010 AMENDMENTS TO FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONS

NOTES

Chapter 5: Internal Controls and Antifraud Programs

MANAGEMENT ANTIFRAUD PROGRAMS AND CONTROLS: THE 14-POINT PROGRAM

MANAGING THE BUSINESS RISK OF FRAUD

FRAUD RISK ASSESSMENT

ENTERPRISE RISK MANAGEMENT

NOTES

Chapter 6: Financial Statement Fraud

RECURRING THEMES IN FINANCIAL STATEMENT FRAUD

COOKING THE BOOKS

RED FLAGS OF FINANCIAL STATEMENT FRAUD

WHY DO THEY TAKE THE RISK?

GEITHNER'S 5 PRINCIPLES ON COMPENSATION

THE PERCEPTION OF DETECTION

IS SARBANES-OXLEY WORKING?

THE GREED FACTOR

MICROSTRATEGY BECOMES MICROTRAGEDY

WHERE WERE THE STOCK ANALYSTS?

NOTES

Chapter 7: Internal Fraud

FRAUDULENT DISBURSEMENTS AND ASSET MISAPPROPRIATION

FALSE BILLING SCHEMES

PAYROLL SCHEMES

BRIBERY, KICKBACKS, AND BID-RIGGING

NOTES

Chapter 8: Former Fraudster and New Man

CONVERSATION WITH WALT PAVLO

Chapter 9: External Schemes and Scams

PONZI SCHEME

MADOFF FRAUD

BUST-OUT SCAM

CREDIT CARD FRAUD

TOOLS TO STOP ONLINE FRAUD

NOTES

Chapter 10: Not Too Big to Fail

IN THE BEGINNING

TOO BIG TO FAIL POLICY BEGINS

THE COMMITTEE TO SAVE THE WORLD

MORAL HAZARD

REGULATION SEEN AS RESTRICTING MODERNIZATION

MORE DEREGULATION

FORESHADOWING

THE RISE OF SECURITIZATION

WAS IT FRAUD?

MISALIGNED INCENTIVES AT THE RATINGS AGENCIES

THE GROWTH OF SUBPRIME LENDING

WAS IT MORTGAGE FRAUD?

EVOLUTION OF COLLATERALIZED DEBT OBLIGATIONS

THE HOUSING BUBBLE BURSTS

MISALIGNED INCENTIVES IN THE BONUS STRUCTURES

MARK TO MARKET

WERE THEY MISLEADING THE MARKET?

RISK MANAGEMENT IS HARD

BEAR STEARNS

FANNIE MAE AND FREDDIE MAC

LEHMAN BROTHERS

MERRILL LYNCH

AIG

TARP

TOO BIG TO FAIL POLICY

WAS ANYONE DOING THINGS RIGHT?

LOOTING: AKERLOF AND ROMER

NOTES

Chapter 11: Designing a Robust Fraud Prevention Program

ONLY ROBUST WILL DO

THE INVESTIGATIVE RESPONSE

THE FINANCIAL INTEGRITY CONCEPT

INVESTIGATIONS CODE OF CONDUCT

TECHNOLOGY SOLUTIONS

EMBEDDING A FRAUD PREVENTION PROGRAM IN INTERNAL AUDIT

WHERE FRAUD WILL BE FOUND

ABUSE CANNOT BE IGNORED

EMPLOYEE COOPERATION WITH COMPANY INVESTIGATIONS

INVESTIGATIVE PLAN

CONDUCTING INTERVIEWS

ROLE OF HUMAN RESOURCES

INTERACTION WITH CORPORATE EXECUTIVES AND THE AUDIT COMMITTEE

PROSECUTION AS A FRAUD DETERRENT

RECOVERY OF DEFRAUDED ASSETS FROM FRAUDSTERS: MAKING FRAUD LESS PROFITABLE

INTERNATIONAL INVESTIGATIONS

ONGOING DISCUSSIONS WITH COMPANY LEADERS

QUARTERLY FRAUD DISCUSSIONS WITH THE EXTERNAL AUDITOR

NOTES

Chapter 12: Whistleblowers and Hotlines

WHAT ARE WHISTLEBLOWERS?

THE GOVERNMENT'S USE OF INFORMANTS AND WHISTLEBLOWERS

WHISTLEBLOWERS ARE CORPORATE SENTINELS

SARBANES-OXLEY WHISTLEBLOWER REQUIREMENTS AND PROTECTIONS

DODD-FRANK ACT

IRS WHISTLEBLOWER PROGRAM

HOTLINES: BUILD IT RIGHT AND THEY WILL CALL

THE FALSE CLAIMS ACT

NOTES

Chapter 13: Time to Do Background Checks

FCRA REQUIREMENTS

WHAT IS A BACKGROUND CHECK?

THERE IS NO ONE-STOP SHOPPING FOR CRIMINAL RECORDS

THE BEST INDICATOR OF FUTURE BEHAVIOR IS PAST BEHAVIOR

THE TREND TOWARD RESTRICTING USE OF BACKGROUND SCREENING TO PREDICT JOB PERFORMANCE

RESUME FRAUD AND AN ADEQUATE BACKGROUND REVIEW

IT IS NOT NECESSARY TO BE FORT KNOX

ARE BACKGROUND CHECKS WORTH THE COST?

THE ROLE OF HUMAN RESOURCES IN BACKGROUND CHECKS

NOTES

Chapter 14: Training, Training, and More Training

BUILDING FRAUD AWARENESS THROUGH TRAINING

THE ROLE OF FRAUD INVESTIGATORS IN TRAINING

TRAINING FOR CHIEF EXECUTIVES AND DIRECTORS

NEW EMPLOYEE ORIENTATION

MANAGERS ARE ROLE MODELS

NEW MANAGER TRAINING

FRAUD PREVENTION TRAINING FOR FINANCE EMPLOYEES

TRAIN YOUR ACCOUNTS PAYABLE DEPARTMENT: LOOKING FOR FRAUD ON THE FACE OF THE INVOICE

TRAIN THE AUDIT STAFF TO DATA MINE

NOTES

Chapter 15: Global Fraud and Corruption Risk

GLOBAL CRACKDOWN

DEVASTATING COST OF CORRUPTION

FCPA PROVISIONS

GLOBAL ANTI-CORRUPTION EFFORTS

OECD CONVENTION ON COMBATING BRIBERY

UK BRIBERY ACT

TRANSPARENCY INTERNATIONAL

COMPLIANCE PROGRAM DESIGN

CONTROL COMPONENTS, INC.

NOTES

Chapter 16: The Feds Are Watching

THE GOVERNMENT'S “SHOCK AND AWE” STRATEGY

SNAPPING THE BONDS OF LOYALTY: JOINING TEAM AMERICA

THE CHALLENGES OF RUNNING A BUSINESS WHILE ATTEMPTING TO PROSECUTE A COMPLICATED CIVIL FRAUD CASE

MAKING THE BEST OF A BAD SITUATION: WHAT TO DO IF THE FEDS SHOW UP AT YOUR DOOR

NOTES

Chapter 17: A Fraud Prevention Culture That Works

CRITICAL ROLE OF COMPLIANCE

FRAUD NEVER TAKES A HOLIDAY

HAVE A ZERO TOLERANCE FOR FRAUD AND MEAN IT

GATEKEEPER ROLE OF THE AUDIT COMMITTEE

THE WALL STREET JOURNAL RULE

A FRAUD PREVENTION VISIONARY: INTERVIEW WITH DR. JOSEPH T. WELLS ON THE FUTURE OF FRAUD AND FRAUD PREVENTION

FROM A COMPLIANCE INITIATIVE TO A CULTURAL MIND-SET

THE ROAD AHEAD

NOTES

Appendix: ACFE Fraud Prevention Checklist

About the Authors

Index

Praise for Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance

“Executive Roadmap touches all the bases on corporate fraud. The authors–both experienced fraud investigators and federal law enforcement agents–lay out the history and major milestones of corporate fraud, and discuss with precision the key issues facing today’s executives and compliance leaders. The book provides a valuable overview for business leaders looking to develop and implement effective compliance programs and instill a culture of integrity in order to help their organizations defeat the challenges posed by today’s sophisticated fraudsters.

–Jeffrey Eglash, Senior Counsel, Litigation & Legal Policy, GE

“Biegelman and Bartow provide great insight into not just how fraud occurs inside of companies, but why. Preventing fraud requires a solid understanding of both, making this book a must read for any executive who is serious about creating the compliance mechanisms and the corporate culture needed for effective fraud prevention.”

–Aaron G. Murphy, Partner, Latham & Watkins LLP

“Business leaders would be wise to follow the recommendations in this book. Fraud prevention is more than just creating a set of policies. As the subtitle indicates, it is essential to create a culture of compliance. Empty words accomplish nothing. The authors, both experienced fraud examiners, have spent decades investigating fraud, as well as developing strategies to prevent it. This book is an essential tool in creating an antifraud environment in any company.”

–James D. Ratley, CFE, President & CEO, Association of Certified Fraud Examiners

“Biegelman and Bartow’s Executive Roadmap to Fraud Prevention and Internal Control is an essential guide for all who have an interest in eradicating corporate or institutional fraud. Written by experts in detecting and preventing fraud in its myriad forms, this book is a handy source for those who hope to avoid the predicaments that the authors have seen or in managing the crises that arise when the problems cannot be avoided. The new second edition is an indispensable addition to the libraries of internal compliance and legal officers, and forensic accountants.”

–Joel M. Cohen, Partner, Gibson Dunn & Crutcher, former New York federal prosecutor and liaison to the French Ministry of Justice and OECD

“Biegelman and Bartow’s book offers expert guidance to anyone tasked with understanding and tackling fraud in the workplace. Their straightforward approach informs the reader and provides a roadmap and guidance for implementation of an effective fraud mechanism within any organization–small or large. I plan to provide a copy of the book to my Board of Directors and executive members of management.”

–Lisanne E. S. Cottington, Compliance Officer, Insight Enterprises, Inc.

“This next edition is extremely timely. It covers key topics that any management member needs to know in today’s regulatory climate. These authors have used their extensive corporate and government experience to create a practical and easy to understand compliance guide. A superb resource for any executive.”

–Karen Popp, Partner at Sidley Austin LLP and former federal prosecutor and Associate Counsel to President Clinton

“With executives increasingly on the hot seat when corporate compliance issues arise, clear guidance regarding risk areas and best practices is invaluable. Executive Roadmap to Fraud Prevention and Internal Control contains a timely combination of illustrative stories and practice tips regarding hazards in this complex area. It is a good resource for both corporate executives and the many professionals assisting corporations to prevent or detect fraud and build a culture of legal compliance.”

–Barb Dawson, partner with focus on internal investigations and business litigation, Snell & Wilmer LLP

“Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance is a truly phenomenal book. Martin Biegelman and Joel Bartow have accomplished an incredible achievement: They have flawlessly bridged the chasm between the theoretical/academic and practical/tangible. This is a volume that should not be on the bookshelf of every manager interested in compliance and fraud prevention (which should be every manager); it should be dog-eared and open on the desktop of every such manager! Kudos to Messrs. Biegelman and Bartow!”

–William J. Kresse, M.S., J.D., CPA, CFF, CFE; Associate Professor, Graham School of Management; Director, Center for the Study of Fraud and Corruption, Saint Xavier University, Chicago

“Biegelman and Bartow have again provided an invaluable resource for leaders in the corporate world who have responsibility for fraud, integrity, and compliance. They send a clear message that addressing fraud is a two part process: establishing robust controls and detection measures and creating a culture of compliance and integrity. This work provides a detailed tour through the world of fraud controls while keeping the importance of culture at the forefront.”

–Ronald C. Petersen, Executive Director, Global Security, Ally Financial

“From the perspective of an ethics and compliance practitioner, Martin Biegelman’s and Joel Bartow’s new offering is a Thanksgiving feast. Too often, companies and organizations get caught up in the moment, and don’t stand back to examine the cultural, organizational and historic reasons that fraud exists. Biegelman and Bartow plow that road, and use their insights to offer invaluable tips in the design of effective antifraud programs.”

–James D. Berg, Vice President, Chief Ethics and Compliance Officer, Apollo Group Inc.

“Biegelman and Bartow have indeed produced a functional road-map for the executive to follow in fraud prevention and internal control. This book is a great asset for those engaged in the seemingly endless struggle to control fraud. A “must read” for the industry.

–Raymond L. Philo, MPA, Executive Director, Economic Crime Institute, Utica College

“As if Executive Roadmap to Fraud Prevention and Internal Control wasn’t a powerful enough tool for fraud fighters, now Biegelman and Bartow have added fresh insight and advice to the second edition. With compelling updates on costly internal and external fraud and corruption, together with easy-to-read descriptions of latest fraud-fighting technologies, this is a must-read for fraud examiners, auditors, attorneys, and others–whether they’ve read the first edition or not.

–Peter Goldmann, President, White-Collar Crime 101 LLC/FraudAware

“Fraud borders on the ubiquitous in contemporary corporate culture. This book provides a rich and comprehensive guide to crafting a state of the art fraud deterrence program. While the book is sure to better equip corporate executives and directors in their fight against fraud, I intend to draw heavily upon its content in educating accounting students who represent the CEOs and CFOs of the future.”

–Ingrid E. Fisher, PhD, CPA, Associate Professor and Chair of the Department of Accounting and Law, The University at Albany-SUNY

“The book’s exploration of fraud theories ranging from “rotten apple” to the “potato chip” (can’t eat just one!), provides useful examination of the psychology of corporate fraud that explains its recurring nature and offers clues to creating a fraud resistant culture.”

–Zachary W. Carter, Partner and head of the Trial Group, Dorsey & Whitney LLP and former United States Attorney for the Eastern District of New York

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Biegelman, Martin T. Executive roadmap to fraud prevention and internal control : creating a culture of compliance / Martin T. Biegelman, Joel T. Bartow. – 2nd ed. p. cm. Includes index. ISBN 978-1-118-00458-6 (hardback); 978-1-118-22179-2 (ebk.); 978-1-118-23551-5 (ebk.); 978-1-118-26035-7 (ebk.) 1. Corporations–Accounting–Corrupt practices–United States. 2. Corporations–Corrupt practices–United States. 3. Accounting fraud–United States. I. Bartow, Joel T., 1958– II. Title. HF5686.C7B52 2012 658.4′73–dc23 2011042677

This book is dedicated to our families, who have supported and encouraged us throughout our careers. Without them, we would not be where we are today.

Foreword to the Second Edition

In the aftermath of the worst financial crisis since the Great Depression, companies both in the United States and around the globe struggle to meet investor expectations and remain competitive on the international stage. Faced with challenging financial conditions, companies have focused efforts on essential cost-cutting measures, while also exploring opportunities in emerging markets and developing new products and services for this decade and beyond. With these challenges come tremendous opportunities, and out of the ashes of the financial crisis will rise stronger, more resilient companies. Unfortunately during challenging times, some employees become tempted to cut corners and engage in fraud.

At the same time, regulators, faced with increased scrutiny for their apparent shortcomings prior to and during the financial crisis, have increased investigative and enforcement efforts to combat a perceived growth in corporate fraud. Armed with new enforcement powers such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and the UK Bribery Act, regulators have increased their efforts to investigate and prosecute corporate fraud.

Against this backdrop, companies must remain focused on building and maintaining a strong fraud prevention and compliance program. The best global companies of today and the future must make corporate integrity and ethics the centerpiece of their culture—permeating every level of the organization, from the board and senior management down to entry-level employees in foreign subsidiaries. Focus must be placed not only on compliance with the law but compliance with the tenets of honesty, ethics, and highest levels of integrity. Creating such a culture is not easy, but must become a reality for any organization that hopes to compete on the global stage.

A strong antifraud program is not only an essential business requirement in today's modern world, it is a crucial factor for regulators when determining sanctions after problems arise. The United States Department of Justice and the Securities and Exchange Commission have written policies that allow for leniency when sanctioning companies that have established and maintained robust compliance programs and internal controls.

Having spent their careers investigating and preventing fraud and corruption, Messrs. Biegelman and Bartow have unique insights in helping organizations develop best-in-class compliance programs and internal controls. Following a distinguished career in federal law enforcement, Mr. Biegelman entered the private sector and became a senior compliance official at a Fortune 25 company. In that role, Mr. Biegelman designed and oversaw a financial integrity unit that remains the model for corporations around the globe. A prolific writer and speaker, Mr. Biegelman has assisted corporations worldwide in crafting and improving fraud prevention programs. Mr. Bartow followed a similar path with leadership roles in law enforcement, consulting, and the corporate sector. He also has designed and implemented fraud prevention programs for corporations and is an accomplished speaker and author.

Martin Biegelman and Joel Bartow understand both regulators and corporations; they have conducted law enforcement investigations and internal investigations; and they have interacted with companies at the preventative stage and following a scandal. The two men have spent their careers with a singular, unwavering focus on improving organizations through fraud prevention and deterrence. Always searching for new and innovative methods, Messrs. Biegelman and Bartow remain thought-leaders and driving forces in the field.

In this second edition of the acclaimed Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance, Martin Biegelman and Joel Bartow convert their lifelong experiences and unparalleled knowledge into a concise, well-written book. They provide the essential tools to take aspirational goals for fraud prevention and compliance and build them into concrete and effective programs. The authors offer subject matter expertise on fraud risk assessments, internal investigations, hotlines, whistleblowers, training, and much more. This second edition also discusses the significant regulatory changes that have transpired since their last edition. Through engaging and thought-provoking examples and case studies, the authors provide practical advice for all types and sizes of organizations. As with the prior edition, this book will prove to be essential reading for compliance professionals.

–Bradley J. Bondi Partner, Cadwalader, Wickersham & Taft LLP

Foreword to the First Edition

Today's business leaders operate in an environment of unprecedented opportunity and complexity. The globalization of business grows apace in nearly every industry. The most competitive companies and best business leaders are seizing this opportunity with new products and services that are developed, manufactured, and sold in every country of our planet. Partnerships between companies from different regions of the world are commonplace today; in fact, they are expected. The workforces of the best companies reflect the brightest minds from a multitude of cultures and backgrounds. Technological advances have facilitated the advances of global business practices and in many ways have accelerated the speed of change. Capital markets operate around the clock, rewarding the successful and punishing those who fall short. Media and press coverage and scrutiny have never been as pervasive as today. News made in Cairo, Illinois, reaches a world audience as quickly as news from Cairo, Egypt. Legal and regulatory regimes vary dramatically from both a regional and national perspective. The largest market, the United States, recently enacted the most sweeping reform of public companies since the 1933 and 1934 Securities Acts. It is accurate to characterize this period as one of the most complex and exciting in the history of capitalism. There is unprecedented opportunity and complexity.

To seize the opportunity and manage the complexity, business leaders are elevating their leadership and improving their management practices. This heightened performance is evident in every facet of the best companies’ operations, from R&D and Sales and Marketing all the way through to the Board and the governance of the extended organization. The rewards of global markets for the best companies are unprecedented. However, companies that fail to improve or have lapses in performance face swift and negative consequences to their financial results and company brands.

Nowhere are the negative consequences of inadequate leadership and performance more glaring than when fraud has been perpetrated or internal controls have been compromised. Unfortunately, too many companies have failed to establish a well-architected system of controls and governance. The Sarbanes-Oxley Act is providing a catalyst for change, but in too many instances it is a checklist exercise.

The best global companies today and those of the future will have well-defined and disciplined business practices that are executed uniformly on a global basis. This includes systems of accountability and compliance, regardless of different customs and laws. The Board of Directors and senior management establish codes of conduct and a tone that is well understood and a core part of the company culture. Business processes are defined and established to ensure that accounts are correct, disclosures are complete, and policies are followed. Management does the job of ensuring that prevention and detection systems are established. In short, the best leaders and companies ensure that compliance systems are an integral component of their business. Surprisingly, fraud is often overlooked as a key component of an ongoing compliance environment. The best companies assume that they hire the top people. They set the right tone at the top. They have well-understood and articulated codes of conduct. They are often surprised when individuals in their organizations commit fraud.

The leading companies of the world are taking their compliance programs to the next level by building and staffing fraud units to prevent compliance problems. Having been a senior executive at one of the world's premier companies, I can speak first hand about the value and importance of establishing a preventative fraud program as part of a comprehensive compliance environment. Establishing this unit allowed Microsoft to detect and address problems we would not have seen. In addition, the fraud unit leadership became an important part of a management training program to ensure consistent and disciplined business practices worldwide. From a CFO perspective, I was most pleased to see a unit and a program that helped to ensure compliance, but also more than paid for itself!

In this book, the reader will be given a delightful roadmap to fraud prevention and internal controls. Illustrative stories and tips along with practical managerial advice on establishing the right organization, objectives, and practices make this book a must read. There is important contextual information on current practices and requirements from regulatory regimes. Finally, the 14-point management antifraud program will allow every reader to meet challenges and complexities in a global business environment.

Enjoy!

–John Connors

Preface

Welcome to the second edition of Executive Roadmap to Fraud Prevention and Internal Control. The first edition was very well-received with excellent feedback from readers, and for that we are most appreciative. Nothing pleases authors more than to know their writing labor is providing educational value. This book is being used as a textbook at colleges and universities. It has been translated into Chinese and used in compliance programs as a reference source. Yet time and fraud march on. There have been events and changes since the original publication that require updating this book. For this second edition, we have kept what is still timeless and relevant while adding new material.

We continue to see fraud and corporate misdeeds with the inevitable impact and enforcement response. Dozens of companies were caught up in the government probes of backdating of stock options. The United States Department of Justice and the Securities and Exchange Commission ramped up investigations of corruption and bribery, bringing more and more prosecutions for violations of the Foreign Corrupt Practices Act. A huge accounting fraud occurred at a once highly regarded technology powerhouse in India. We witnessed the worst financial crisis since the Great Depression and the collapse of once-venerable financial institutions. As a result, new laws were enacted, including the Fraud Enforcement and Recovery Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

In a perfect world, this book would not be needed. All corporate employees, from the Chief Executive Officer, the Chief Financial Officer, and the Board of Directors to the entry-level workers, would have the highest degrees of honesty and integrity. Fraud and abuse would be nonexistent. There would be no financial statement fraud, asset misappropriation, kickbacks, or bribery. Unfortunately, we live in an imperfect world in which noncompliance, misconduct, fraud, and corruption exist. One only needs to read the daily papers or watch the evening news to learn of the latest corporate scandal, government investigation, or shareholder litigation. Once respected corporate titans continue to face the prospect of “perp walks” and prison because of financial impropriety.

Common sense tells us that a business executive or manager only needs to hear: “Never commit fraud of any kind.” However, fraud prevention always involves further measures: a zero tolerance of fraud in any shape or form, providing fraud awareness and prevention training for all employees, instituting strong internal controls, and limiting exposure to fraud through a robust fraud detection, investigation, and prevention program. Nevertheless, it is naïve to expect that these steps alone can stop all forms of fraud and abuse from occurring. It is a given that corporate crime will always be with us. What is really needed is an ongoing culture of compliance that takes years to build but only a moment to collapse. Corporate executives who are charged with protecting their companies from fraud need a guide to establish an effective program. The passage of the Sarbanes-Oxley Act of 2002, the Amendments to the Federal Sentencing Guidelines for Organizational Crime, the enactment of Dodd-Frank, and other related compliance enhancements have required CEOs, CFOs, and boards to understand the protections that need to be in place to prevent corporate fraud.

Fraud is nothing new. History has shown that fraud has long been a part of our society and will continue to be. As Judge Edwin R. Holmes said in the case of Weiss v. United States in 1941, “The law does not define fraud; it needs no definition; it is as old as falsehood and as versatile as human ingenuity.”1 We continue to see corporate scandals and the strong enforcement response of the government. Gone are the days of a slap on the wrist to the wrongdoer and all is forgotten. Today, corporate fraud results in shareholder lawsuits, the implosion of companies, executive prison sentences, and an investor outcry for reform.

In addition, there is a greater focus than ever before on uncovering and preventing fraud as a result of the loss of billions of dollars in equity and greatly diminished investor confidence in the markets. Financial statement fraud and other internal fraud schemes provide considerable risk to a corporation. The enactment of enhanced reporting requirements and greater public scrutiny of companies have contributed to this new age of enforcement. However, internal fraud is not the only risk that businesses face. External fraud schemes also attack companies and can do significant damage to both finances and reputations.

Although no one expects CEOs, CFOs, and other corporate executives and managers to be experts in fraud prevention, the current climate requires a thorough understanding of the principles of fraud examination and state-of-the art compliance programs. This book is a roadmap to help executives understand fraud and reduce its impact. George Santayana once said that those who do not remember the past are condemned to repeat it. This book looks to the past to gain a better understanding of the nature of fraud and how to prevent it. It relates lessons that can be applied now and in the future to prevent fraud, and it also reviews theories and models that explain how and why fraud happens inside an organization. It then describes the current climate as well as the critical importance of fraud prevention and culminates by providing a roadmap to establishing a culture of compliance. Creating this culture is the only way businesses can position themselves to meet the new environment of tighter regulations, transparency, and accountability. It is a proactive method for actually preventing fraud. Simply reacting to fraud issues as they occur is no longer acceptable.

The authors bring a unique perspective to corporate fraud prevention. We are life-long practitioners in the field, with a combined 60-plus years of experience in both the public and private sectors detecting and investigating fraud and white-collar crime. Our careers parallel each other. As federal agents with the United States Postal Inspection Service and the Federal Bureau of Investigation, we investigated fraud and corruption, including corporate crime, investment fraud, kickback schemes, international fraud scams, insurance and healthcare fraud, organized crime, and violations of the Racketeering and Corrupt Organizations Act (RICO). We were involved in the prosecutions of hundreds of fraudsters.

We then went into the private sector to conduct investigations on behalf of corporate clients that were victims of fraud and other crimes. We worked cases all over the world for companies large and small, public and private, and we helped business executives understand the importance of fraud prevention. We were subsequently recruited by corporations and given the responsibility of creating and managing worldwide fraud prevention and anti-corruption programs using our knowledge, skills, and experience. We are both Certified Fraud Examiners (CFEs) who are still doing this work today.

After spending our careers with victims and perpetrators, investigators and prosecutors, in courtrooms and boardrooms, we have great insight into all kinds of fraud and the reasons people commit them. We have many lessons to share as well as numerous case studies and experiences about how to detect, investigate, and prevent fraud. This book is intended to be a primer for corporate executives at both public and private companies who are expected to protect their organizations from fraud and inappropriate behavior. This book will provide special insights to executives at medium and smaller size companies who may falsely believe that they are not facing fraud issues or who may not fully understand the relationship between fraud prevention and good corporate compliance. In addition to senior executives, this book will be beneficial for middle and lower-level executives and managers to help them understand their roles in fraud prevention. It will also be of value to fraud investigators, prosecutors, academics, students, and anyone with an interest in the world of fraud. Each chapter starts with an Executive Summary detailing the key points and takeaways from each chapter. Executive Insights and exhibits are used in various chapters to emphasize important concepts and provide case studies. We have designed the book to be user friendly—the reader does not have to be a CFE to understand the concepts and procedures described. By setting out the generally accepted standards for fraud prevention along with new recommendations, this book helps executives establish a world-class fraud investigation and prevention program. A discussion of the enforcement landscape helps the reader understand the implications of fraud and the need for compliance at every turn.

In all the years we have been investigating fraud and corruption, we have yet to see a decrease in the problem. We probably never will. However, there have been changes in how fraud is addressed. Tougher laws against corporate wrongdoing have been enacted with greatly increased prison sentences for those convicted. It is not the best of times for fraudsters; it is definitely a good time for guardians and gatekeepers. There has never been a better time to be a fraud investigator. Any corporate executive, manager, or employee contemplating a journey to the “dark side” should keep in mind that fraud and noncompliance will be met with the strong arm of the law.

This book will be your roadmap to an understanding of corporate fraud, the implementation of fraud prevention, and the creation of a culture of compliance. Lastly, it is our honor and privilege to be your guides on this journey.

Acknowledgments

Writing a book such as this is never an easy task, and we could not have completed it without the wisdom, assistance, and encouragement of others. First, to our friend and mentor, Joe Wells, founder and Chairman of the Association of Certified Fraud Examiners (ACFE), a true fraud prevention visionary: He encouraged us to write this book and helped us along the way.

Daniel Biegelman again provided extraordinary assistance in contributing ideas, research, and content while helping with editing and proofing. Martin Biegelman's wife, Lynn, reviewed the manuscript, providing valuable feedback and suggestions.

A special note of thanks to our executive editor, Timothy Burgard. Tim gave us the original opportunity to write this book and then guided us through the writing and publishing process. He did it again with this second edition, and we are especially grateful. We also want to acknowledge Helen Cho, Stacey Rivera, and Todd Tedesco at John Wiley & Sons, who were invaluable in helping us successfully navigate through the production process.

We acknowledge those who provided ideas, content, and assistance: Jim Ratley, John Gill, Dick Carozza, Brock Phillips, Tammi Johnson, Jerry Bamel, Gaurav Ajmani, Karen Popp, Frank Goldman, Walt Pavlo, John McDermott, George Stamboulidis, Mark Kirsch, Anthony Migliaccio, Patricia Sweeney, and Aaron Beam. Dr. Richard Hurley provided rich feedback on our first edition that helped us make this book even better, and for that, we owe him a debt of gratitude.

Our deep appreciation to Bob Tenczar who provided guidance and content for the enterprise risk management (ERM) section in Chapter . As Senior Director of Enterprise Risk Management at Microsoft Corporation, Bob's unique subject matter expertise in building a world-class risk management program has made him a much-sought-after thought leader in the field.

A special thank you to Barbara Thompson for sharing her rich knowledge and experience in conducting background checks discussed in Chapter . Her wisdom and contribution are much appreciated.

When we wanted someone to read our second edition manuscript, we again turned to a dear friend, DeWayn Marzagalli. DeWayn, a former federal agent extraordinaire, provided a keen eye and constructive comments.

 Our special appreciation to Bradley Bondi for writing the Foreword to our second edition. Brad is an exceptional litigator, prolific author, and a respected speaker. Thank you again to John Connors for the Foreword to our first edition. As the CFO of Microsoft Corporation, he built a world-class finance organization and led by example in creating a culture of compliance and integrity.

To those dedicated law enforcement professionals and CFEs who fight fraud and corruption on a daily basis, we salute you. It is their work that we recognize in this book. They are the ones whose unflagging efforts hold corporate fraudsters accountable while protecting the common good.

CHAPTER 1

Fraud's Feeding Frenzy

EXECUTIVE SUMMARY

In the first decade of this century, the ongoing “feeding frenzy” of corporate fraud proves that we fail to learn from history. Respected and trusted corporate executives have been revealed to be morally corrupt fraudsters. They became rogue employees: too busy stealing from the corporate “piggy bank” to think of the consequences for their employees, shareholders, customers, or themselves. Corporate powerhouses such as Enron and WorldCom and their executives were swept up in fraudulent financial accounting and a multitude of other frauds. The government reacted strongly in response to the public outcry after billions of dollars in investments evaporated. The President promoted the need for corporate responsibility and promised to arrest any corporate executive with a hand in the corporate coffers. Some indicted CEOs tried to use the “Chutzpah Defense,” claiming they were deaf, dumb, and blind when the frauds were going on at their companies. The outcome has been indictments, followed by “perp walks” as well as convictions, and a change in how the government views corporate fraud prevention. Yet, fraud still rears its ugly head.