Corporate fraud handbook : prevention and detection

423 Pages·2017·5.323 MB·English

by  Wells, Joseph T

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Corporate Fraud Handbook
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Corporate Fraud Handbook
Prevention and Detection
FifthEdition
Dr. Joseph T. Wells
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Copyright©2017byAssociationofCertifiedFraudExaminers.Allrightsreserved.
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To my loving wife, Judy Gregor Wells
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Contents
Preface xi
AbouttheACFE xv
1 INTRODUCTION 1
DefiningOccupationalFraudandAbuse 2
ResearchinOccupationalFraudandAbuse 6
2016ReporttotheNationsonOccupationalFraudandAbuse 26
Notes 40
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PARTI ASSETMISAPPROPRIATIONS 43
2 INTRODUCTIONTOASSETMISAPPROPRIATIONS 45
Overview 46
DefinitionofAssets 46
HowAssetMisappropriationsAffectBooksofAccount 47
Notes 56
3 SKIMMING 57
Overview 61
SkimmingDatafromtheACFE2015GlobalFraudSurvey 62
UnrecordedSales 63
UnderstatedSalesandReceivables 68
TheftofChecksThroughtheMail 70
Short-TermSkimming 75
ConvertingStolenChecks 76
ConcealingtheFraud 79
Detection 84
Prevention 85
Notes 87
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Contents
4 CASHLARCENY 88
Overview 91
CashLarcenyDatafromtheACFE2015GlobalFraudSurvey 92
IncomingCash 93
CashLarcenyfromtheDeposit 98
MiscellaneousLarcenySchemes 102
Detection 103
Prevention 105
Note 106
5 CHECKTAMPERING 107
Overview 110
CheckTamperingDatafromtheACFE2015GlobalFraudSurvey 111
ForgedMakerSchemes 111
InterceptedChecks 118
ForgedEndorsementSchemes 118
AlteredPayeeSchemes 122
ConcealedCheckSchemes 125
AuthorizedMakerSchemes 127
Concealment 130
Detection 137
Prevention 139
(cid:2) ElectronicPaymentTampering 141 (cid:2)
Notes 143
6 REGISTERDISBURSEMENTSCHEMES 144
Overview 145
RegisterDisbursementDatafromtheACFE2015GlobalFraudSurvey 148
FalseRefunds 148
FalseVoids 155
ConcealingRegisterDisbursements 157
Detection 158
Prevention 159
Note 159
7 BILLINGSCHEMES 160
Overview 164
BillingSchemeDatafromtheACFE2015GlobalFraudSurvey 165
ShellCompanySchemes 166
Non-AccompliceVendorSchemes 171
PersonalPurchaseswithCompanyFunds 176
Detection 182
Prevention 184
Note 184
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Contents
8 PAYROLLANDEXPENSEREIMBURSEMENTSCHEMES 185
Overview 188
PayrollSchemeDatafromtheACFE2015GlobalFraudSurvey 189
PayrollSchemes 190
DetectionofPayrollSchemes 201
PreventionofPayrollSchemes 202
ExpenseReimbursementDatafromtheACFE2015GlobalFraudSurvey 207
ExpenseReimbursementSchemes 208
DetectionofExpenseReimbursementSchemes 215
PreventionofExpenseReimbursementSchemes 216
Note 216
9 INVENTORYANDOTHERNONCASHASSETS 217
Overview:NoncashMisappropriationDatafromtheACFE2015
GlobalFraudSurvey 220
MisuseofInventoryandOtherAssets 221
TheftofInventoryandOtherAssets 223
Concealment 235
Detection 237
Prevention 241
MisappropriationofIntangibleAssets 242
Notes 243
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PARTII CORRUPTION 245
10 BRIBERY 247
Overview 250
CorruptionDatafromtheACFE2015GlobalFraudSurvey 255
BriberySchemes 255
SomethingofValue 269
EconomicExtortion 269
IllegalGratuities 270
Detection 270
Prevention 272
Anti-CorruptionLegislation 273
Notes 277
11 CONFLICTSOFINTEREST 278
Overview 282
PurchasingSchemes 283
SalesSchemes 286
OtherSchemes 287
Detection 289
Prevention 290
Note 291
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Contents
PARTIII FINANCIALSTATEMENTFRAUD 293
12 ACCOUNTINGPRINCIPLESANDFRAUD 295
Introduction 296
FraudinFinancialStatements 299
MajorGenerallyAcceptedAccountingPrinciples 303
ResponsibilityforFinancialStatements 306
UsersofFinancialStatements 307
TypesofFinancialStatements 307
Sarbanes-OxleyAct 309
FinancialStatementFraudDatafromtheACFE2015
GlobalFraudSurvey 320
Notes 321
13 FINANCIALSTATEMENTFRAUDSCHEMES 322
Overview 328
DefiningFinancialStatementFraud 329
CostsofFinancialStatementFraud 329
MethodsofFinancialStatementFraud 332
DetectionofFinancialStatementFraudSchemes 353
DeterrenceofFinancialStatementFraud 359
Notes 365
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14 OCCUPATIONALFRAUDANDABUSE:THEBIGPICTURE 366
DefiningAbusiveConduct 366
MeasuringtheLevelofOccupationalFraudandAbuse 367
UnderstandingFraudDeterrence 370
CorporateSentencingGuidelines 374
EthicalConnection 376
ConcludingThoughts 378
Notes 379
APPENDIX: SAMPLECODEOFBUSINESSETHICSANDCONDUCT 380
Introduction 380
ConflictsofInterest 382
CompanyAssets 386
PoliticalContributions 387
EmployeeConduct 388
ComplianceLetterandConflict-of-InterestQuestionnaire 390
Bibliography 391
Index 399
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Preface
As I wrote in my fifth book, Occupational Fraud and Abuse, few people begin their
careerswiththegoalofbecomingliars,cheats,andthieves.Yetthatturnsouttobethe
destinyofalltoomany.Corporatefraudandabuse—aswehaveseeninsuchheadline-
grabbing cases as Enron, WorldCom, Olympus, and Toshiba—costs organizations and
investorsbillionsandbillionsannually.Thelossesinhumantermsareincalculable.
CorporateFraudHandbook:PreventionandDetectionisforthosewhosejobitisto
reducetheselosses:fraudexaminers,auditors,investigators,losspreventionspecialists,
managers and business owners, criminologists, human resources personnel, academi-
cians,andlawenforcementprofessionals,amongothers.
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Therearefourbroadobjectivesofthiswork:
1. Todetailaclassificationsystemtoexplainthevariousschemesusedbyexecutives,
owners,managers,andemployeestocommittheseoffenses
2. Toquantifythelossesfromtheseschemes
3. Toillustratethehumanfactorsinfraud
4. Toprovideguidanceinpreventinganddetectingoccupationalfraudandabuse
How this book came about is a story in itself. As improbable as it seems looking
back, I am well into my fourth decade in the field of fraud detection and deterrence.
Like many of you, my career path did not start where it ended up. In the third grade,
I distinctly remember pledging to be an astronomer. But by college, quantum physics
had proved my undoing. Just a few credits shy of a math/physics degree, I switched to
businessschoolandmajoredinaccounting.
Aftertwoyearstoilingintheledgersofoneofthelargeinternationalauditingfirms,
IdecidedIcouldnotstanditanymore;mylifehadtohavemoreexcitement.SoIbecame
a real-life, gun-toting FBI agent. Thankfully, I did not have to use my pistol too many
timestotrackdownheinousrobbers.AndIlearnedinahurrythattheexpensivecrimes
werenotthebankrobberies,anyhow—theywerethebankembezzlements.Forthenext
nineyears,Ispecializedexclusivelyininvestigatingawiderangeofwhite-collarcrimes
in which the federal government was a party at interest.The cases ran the gamut, from
nickel-and-dimeconartiststoWatergate.
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Preface
MyseconddecadewaswithWells&Associates,agroupofconsultingcriminologists
concentrating on white-collar crime prevention, detection, and education. That eventu-
allyledtotheformationofaprofessionalorganization,theAssociationofCertifiedFraud
Examiners. For more than 25 years, I have been chairman of the Board of Directors.
IhopetospendtheremainderofmyprofessionalcareerwithwhatIhavediscoveredto
bemysecretlove:writing.
Corporate Fraud Handbook: Prevention and Detection has its genesis in Occu-
pational Fraud and Abuse. At the time, I was intrigued by the definition of fraud as
classicallysetforthinBlack’sLawDictionary:
All multifarious means which human ingenuity can devise, and which are resorted to by
oneindividualtogetanadvantageoveranotherbyfalsesuggestionsorsuppressionofthe
truth.Itincludesallsurprise,trick,cunningordissembling,andanyunfairwaybywhich
anotherischeated.
This definition implied to me that there was an almost unlimited number of ways
peoplecouldthinkuptocheatoneanother.Butmyexperiencetoldmesomethingelse:
Afterinvestigatingandresearchingliterallythousandsoffrauds,theyseemedtofallinto
definitepatterns.Ifwecouldsomehowdeterminewhatthosepatternswereandinwhat
frequencytheyoccurred,itwouldaidgreatlyinunderstandingandultimatelypreventing
fraud. And since so much fraud occurs in the workplace, this particular area would be
thestartingpoint.
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iners (CFEs). They typically work for organizations in which they are responsible for
aspects of fraud detection and deterrence. Each CFE provided details on exactly how
their organizations were being victimized from within. That information subsequently
wassummarizedina documentfor publicconsumption,the 1996Reporttothe Nation
on Occupational Fraud and Abuse. Since that time, the report has been published on
eightoccasions,thelatestbeingin2016.
Although the reports provide a basic framework, this book is intended for a differ-
ent audience—those of you who need to know all the details. You will discover that
while fraud may outwardly seem complex, it rarely is. You do not need an accounting
degree—justanunderstandingoffundamentalbusinessproceduresandterminology.As
thesayingcouldgo,fraudain’trocketscience.
Rather than an unlimited number of schemes, this book suggests that occupational
fraud and abuse can be dividedinto three main categories:asset misappropriation,cor-
ruption,andfinancialstatementfraud.Fromthethreemaincategories,weidentifiedand
classifiedseveraldistinctschemes,andtheyarecoveredindetailherein.
Thebookbeginswithanoverviewofthecomplexsocialfactorsthatgointocreatingan
occupationaloffender.Peopledothingsforareason,andunderstandingwhyemployees
engageinthisbehavioristhekeytocreatingwaystopreventit.Youwillthereforefind
thesepagesrichinpersonaldetail.
Following the introduction, the book is divided into chapters devoted to the specific
occupationalfraudandabuseschemes.Eachofthechaptersisorganizedsimilarly.First,
a case study provides insights. Next, the scheme itself is flowcharted and the scheme
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