The Perpetrators of Frauds

The ACFE study examined a number of factors that

profile the perpetrators of the frauds, including position
within the organization, collusion with others, gender, age,
and education.

The study shows that loss from frauds relative to the

perpetrators education level. Frauds committed by high
school graduates averaged only $100,000, whereas those
with bachelors degrees averaged $210,000. Perpetrators
with advanced degrees were responsible for frauds with a
loss of $550,000.

Fraud Losses by Position within the Organization

The study shows that 40 percent of the reported
fraud cases were committed by non-managerial
employees, 37 percent by managers, and 23 percent by
executives or owners. Although the reported number of
frauds perpetrated by employees is higher than that of
managers and almost twice that of executives, the
average losses per category are inversely related.

Fraud Schemes
Fraud schemes can be classified in a number of
different ways. For purposes of discussion, this section
presents the ACFE classification format. Three broad
categories of fraud schemes are defined: fraudulent
statements, corruption, and asset misappropriation.

Fraud Losses and the Collusion Effect

Collusion among employees in the commission of a
fraud is difficult to both prevent and detect. This is
particularly true when the collusion is between managers
and their subordinate employees. Management plays a key
role in the internal control structure of an organization.
They are relied upon to prevent and detect fraud among
their subordinates. When they participate in fraud with the
employees over whom they are supposed to provide
oversight, the organizations control structure is weakened,
or completely circumvented, and the company becomes
more vulnerable to losses.

The Underlying Problems.

Fraud Losses by Gender

The study shows that the fraud loss per case caused
by males ($250,000) was more than twice that caused by
females ($110,000).
Fraud Losses by Age
The study indicates that perpetrators younger than
26 years of age caused fraud losses of $25,000, while
frauds perpetrated by individuals 60 years of age and
older were approximately 20 times larger.
Fraud Losses by Educational Level

Fraudulent Statements
Fraudulent
statements
are
associated
with
management fraud. Whereas all fraud involves some form
of financial misstatement, to meet the definition under this
class of fraud scheme, the statement itself must bring
direct or indirect financial benefit to the perpetrator.

1. Lack of auditor independence. Auditing firms that

are also engaged by their clients to perform nonaccounting activities such as actuarial services, internal
audit outsourcing services, and consulting lack
independence. The firms are essentially auditing their
own work.
2. Lack of director independence. Many boards of
directors are composed of individuals who are not
independent.
3. Questionable executive compensation schemes.
A Thomson Financial survey revealed the strong belief
that executives have abused stock-based compensation.
The consensus is that fewer stock options should be
offered than currently is the practice.

4. Inappropriate accounting practices. The use of

inappropriate accounting techniques is a characteristic
common to many financial statement fraud schemes.
Sarbanes-Oxley Act and Fraud. Congress enacted SOX
into law in July 2002 to address plummeting institutional
and individual investor confidence triggered in part by
business failures and accounting restatements due to
fraud. The act establishes a framework to modernize
and reform the oversight and regulation of public
company auditing. Its principal reforms pertain to:
1. Accounting oversight board. SOX created the
Public Company Accounting Oversight Board (PCAOB)
to set auditing, quality control, and ethics standards.
2. Auditor independence. The act addresses auditor
independence by creating more separation between a
firms attestation and non-auditing activities. This is
intended to specify categories of services that a
public accounting firm cannot perform for its client.
3. Corporate governance and responsibility. The
act requires all audit committee members to be
independent and requires the audit committee to hire
and oversee the external auditors.
4. Issuer and management disclosure. SOX
imposes new corporate disclosure requirements,
including:
(a)Public companies must report all off-balance-sheet
transactions.
(b)Annual reports filed with the SEC must include a
statement by management, asserting that it is
responsible for creating and maintaining adequate
internal controls and asserting to the effectiveness
of those controls.
(c)Officers must certify that the companys accounts
fairly present the firms financial condition and
results of operations.

(d)Knowingly filing a false certification is a criminal

offense.
5. Fraud and criminal penalties. SOX imposes a
range of new criminal penalties for fraud and other
wrongful acts.
Corruption
Corruption involves an executive, manager, or
employee of the organization in collusion with an outsider.
The ACFE study identifies four principal types of
corruption:
Bribery. Bribery involves giving, offering, soliciting, or
receiving things of value to influence an official in the
performance of his or her lawful duties. Officials may be
employed by government (or regulatory) agencies or by
private organizations.
Illegal Gratuities. An illegal gratuity involves giving,
receiving, offering, or soliciting something of value
because of an official act that has been taken. This is
similar to a bribe, but the transaction occurs after the fact.
Conflicts of Interest. A conflict of interest occurs
when an employee acts on behalf of a third party during
the discharge of his or her duties or has self-interest in the
activity being performed. This type of fraud can exist,
however, when bribery and illegal payments are not
present, but the employee has an interest in the outcome
of the economic event.
Economic Extortion. An Economic extortion is the use
(or threat) of force (including economic sanctions) by an
individual or organization to obtain something of value.
The item of value could be a financial or economic asset,
information, or cooperation to obtain a favorable decision
on some matter under review.
Asset Misappropriation

The most common fraud schemes involve some

form of asset misappropriation in which assets are either
directly or indirectly diverted to the perpetrators benefit.

Check Tampering. Check tampering involves forging or

changing in some material way a check that the
organization has written to a legitimate payee.

Skimming. Skimming involves stealing cash from an

organization before it is recorded on the organizations
books and records.

Payroll Fraud. Payroll fraud is the distribution of

fraudulent paychecks to existent and/or nonexistent
employees.

Cash Larceny. Cash larceny involves schemes where

cash receipts are stolen from an organization after they
have been recorded in the organizations books and
records.

Expense Reimbursements. Expense reimbursement

frauds are schemes in which an employee makes a claim
for reimbursement of fictitious or inflated business
expenses.

Billing Schemes. Billing schemes, also known as

vendor fraud, are perpetrated by employees who cause
their employer to issue a payment to a false supplier or
vendor by submitting invoices for fictitious goods or
services, inflated invoices, or invoices for personal
purchases.

Thefts of Cash. Thefts of cash are schemes that involve

the direct theft of cash on hand in the organization.
Non-Cash
Misappropriations.
Non
cash
fraud
schemes involve the theft or misuse of the victim
organizations non cash assets.