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Dr. Robert K. MinnitiDBA. CPA, CFE, Cr.FA, CVA, CFF, MAFF, CGMA, PI
President, Minniti CPA, LLC
Understanding Fraud:The Basics
Dr. Robert K Minniti
DBA – Doctor of Business AdministrationCPA - Certified Public AccountantCFE – Certified Fraud ExaminerCrFA – Certified Forensic AccountantCFF – Certified in Financial ForensicsCVA – Certified Valuation AnalystMAFF – Master Analyst in Financial ForensicsCGMA – Charted Global Management AccountantPI – Licensed Private Investigator
Objectives
Upon completing this class you will be able to:
Identify the parts of the fraud triangleDefine fraud and occupational fraud
Definition of Fraud
“An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.
Black, Henry, Black’s Law Dictionary, Sixth Edition, West Publishing Co., St. Paul, MN, 1990
Definition of Fraud
Anything calculated to deceive, whether by a single act or combination, or by suppression of the truth, or suggestion of what is false, whether it be by direct falsehood or innuendo, by speech or silence, word of mouth, or look or gesture. A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.”
Black, Henry, Black’s Law Dictionary, Sixth Edition, West Publishing Co., St. Paul, MN, 1990
Polling Question #1
True or False
Fraud requires a false statement or omission
Fraud Research
Theory of Differential Reinforcement – Gabriel Tarde
The major components of the theory of differential reinforcement are that people are most likely to imitate the actions of those with whom they are in close contact and that individuals will imitate the actions of superiors.
Gabriel Tarde was also the first to recognize a criminal’s tendency to return to the scene of the crime and to be a repeat offender.
Fraud Research
Theory of Differential Association – Edwin Sutherland
Criminals learn criminal behavior by associating with other criminals, also people who don’t associate with criminals don’t commit crimes.
Dr. Sutherland coined the term “White Collar Crime”
Fraud Research
Social Learning Theory – Ronald Akers
Dr. Ronald Akers expanded fraud theories with his Social Learning Theory that combined the Theory for Differential Reinforcement and the Theory of Differential Association. He deviated by suggesting that criminal behavior was a part of normal learning.
Peer pressure can keep people from committing crimes.
Fraud Research
Fraud Triangle Theory – Donald Cressey
Polling Question #2
True or False
Edwin Sutherland developed the theory of differential association
The Elements of Fraud
1. The Act or Theft
2. Concealment
3. Conversion
Predication of Fraud
The direct and circumstantial evidence that would lead a reasonable person, trained in law enforcement or fraud investigations to believe that a fraud occurred, is occurring, or will occur in the future.
Suspicion, alone without any objective evidence is an insufficient basis for conducting a fraud investigation.
Polling Question #3
True or False
There are four elements in the fraud triangle
Consumer Sentinel Network Data Book – January – December 2019
Consumer Sentinel Network Data Book – January – December 2019
2019
Consumer Sentinel Network Data Book – January – December 2019
2019
Consumer Sentinel Network Data Book – January – December 2018
2018
Consumer Sentinel Network Data Book – January – December 2019
2019
Consumer Sentinel Network Data Book – January – December 2019
2019
Consumer Sentinel Network Data Book
– January – December 2019
2019
Consumer Sentinel Network Data Book – January – December 2019
2019
Consumer Sentinel Network Data Book
– January – December 2019
2019
Polling Question #4
True or False
There are five elements of fraud
Occupational Frauds
Financial Statement Fraud
Asset Misappropriation
Corruption
ACFE 2018 Report to the Nations on Occupational Fraud and Abuse
Association of Certified Fraud Examiners 2016 Report to the Nations on Occupational Fraud and Abuse
Occupational Frauds
Association of Certified Fraud Examiners 2016 Report to the Nations on Occupational Fraud and Abuse
Occupational Frauds
Small Business Fraud Risks
1. Lack of segregation of duties
2. Lack of management review
3. Management’s limited accounting knowledge
4. Minimal if any internal controls
5. Informal atmosphere
6. Related parties
7. QuickBooks
Government Fraud Risks
1. Lack of segregation of duties
2. Lack of management review
3. Elected official’s limited accounting knowledge
4. Minimal if any internal controls
5. Lack of a profit motive
6. Corruption
7. Use it or lose it budgets
8. Fund accounting
Not-For-Profit Fraud Risks
1. Lack of segregation of duties
2. Lack of management review
3. Management’s limited accounting knowledge
4. Minimal if any internal controls
5. Informal atmosphere
6. Related parties
7. Use of volunteers
8. Accounting records
9. Cash transactions
10.Donations of tangible and financial assets
Polling Question #5
True or False
North Dakota leads the nation in fraud complaints
Asset Misappropriations
Skimming
Cash Disbursement Frauds
Receipt Frauds
Check Tampering
T&E Frauds
Expense Frauds
Shell Companies
Theft of Cash
Inventory Frauds
Asset Misappropriations
Payroll Frauds
Billing Frauds
Register Frauds
Misuse of Assets
Refund Frauds
Sales Frauds
Cyber Frauds
Expense Reimbursement Frauds
Corruption
Conflicts of Interest
Bribery
Illegal Gratuities
Economic Extortion
Association of Certified Fraud Examiners 2014 Report to the Nation on Occupational Fraud and Abuse
Most Corrupt Countries
According to the U.S. News & World Report the 10 most corrupt countries, ranked by perception are:
1.Nigeria2.Iran3.Pakistan4.Colombia5.Mexico
6.Ghana7.Angola8.Kenya9.Brazil10.Russia
https://www.usnews.com/news/best-countries/articles/10-most-corrupt-countries-ranked-by-perception
Financial Statement Fraud
Balance Sheet Frauds
Income Statement Frauds
Association of Certified Fraud Examiners 2014 Report to the Nation on Occupational Fraud and Abuse
Methods for Committing Financial Statement Fraud
Manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared
Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information
Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure
AU Section 316
Association of Certified Fraud Examiners 2017 Report to the Nation on Occupational Fraud and Abuse
Occupational Frauds
Association of Certified Fraud Examiners 2016 Report to the Nation on Occupational Fraud and Abuse
Polling Question #6
True or False
Undisclosed conflicts of interest are a type of corruption
Association of Certified Fraud Examiners 2018 Report to the Nation on Occupational Fraud and Abuse
Association of Certified Fraud Examiners 2016 Report to the Nation on Occupational Fraud and Abuse
Duration of Expense Reimbursement Schemes
Occupational Frauds
Association of Certified Fraud Examiners 2014 Report to the Nation on Occupational Fraud and Abuse
Association of Certified Fraud Examiners
2016 Report to the Nation on Occupational
Fraud and Abuse
Association of Certified Fraud Examiners 2016 Report to the Nation on
Occupational Fraud and Abuse
Source of Tips
Money Laundering
Structured Payments
Cash Businesses
Casinos
International Transactions
SARs
CTRs
Non-Occupational Frauds
Medical Insurance Fraud
Unemployment Fraud
Worker’s Compensation Fraud
Product Liability Fraud
Advertising Fraud
Identity Theft
Credit Card Fraud
Tax Return Identity Fraud
Tax Fraud
Cyber Frauds
Data Breaches
Property Insurance Fraud
Life Insurance Fraud
Employment Fraud
Insurance Frauds
According to the FBI the total cost of insurance fraud, not including medical insurance fraud, is estimated to be more than $40 billion per year.
Insurance fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums.
Medicare fraud costs over $60 Billion a year
https://www.fbi.gov/stats-services/publications/insurance-fraud
Identity Theft
According to NBC News 15.4 million Americans were victims of identity theft in 2016. An increase of 16% over 2015.
Identity theft cost Americans over $16 Billion in 2016.
http://www.nbcnews.com/business/consumer/identity-fraud-hits-record-number-americans-2016-n715756
Data Breaches
Hackers break into company computers and steal large volumes of credit and debit card information.
Target
Home Depot
Blue Cross/Blue Shield
Adobe
Bank of America
Data Breaches
The average cost of a data breach in the U.S. in 2017 was $7.91 million
Smaller data breaches with less than 10,000 records stolen cost an average of $4.5 million
Larger data breaches with more than 50,000 records stolen cost an average of $10.3 million
Note: The study only looked at data breaches where <100,000 records were stolen
2018 Cost of Data Breach Study: Global Analysis, Benchmark research sponsored by IBM, Independently conducted by Ponemon Institute LLC
Data Breaches
2018 Cost of Data Breach Study: Global Analysis, Benchmark research sponsored by IBM, Independently conducted by Ponemon Institute LLC
Polling Question #7
True or False
Financial statement fraud only affects the income statement of a company
Card Fraud
Criminals use card duplicators and blank cards to make duplicates of legitimate credit, debit and gift cards.
Skimming devices are used to record the information on the magnetic strip on the back of a card. These devices can be purchased online.
Duplicate Card Fraud
Here is a card duplicator I purchased on the internet for $150
Duplicate Card Fraud
You can purchase credit card blanks, including those with the VISA, MC, Discover and AMEX logos on the internet for less than a penny apiece.
You can also purchase the new cards with the computer chips, they are slightly more expensive at 1 to 8 cents each.
Duplicate Card Fraud
You can also duplicate the new chip cards
RFID Protection
Purchasing Credit Card Numbers
https://www.zdnet.com/article/cybercrime-market-selling-full-digital-fingerprints-of-over-60000-users/
Criminals sell fingerprints on the darknet
Fake IDs
Fake IDs
The Darknet
The Darknet
The Darknet
Ransomware
Ransomware is placed on computers to encrypt your data until a ransom is paid for the decryption key
CryptoLocker is one example of ransomware.
CryptoWall 2.0 is one of the newer versions
The FBI estimates that ransomware is a $1 Billion a year fraud
http://money.cnn.com/2016/04/15/technology/ransomware-cyber-security/index.html?section=money_technology
CryptoLocker
RANSOMWARE ATTACKS EMAIL
https://www.knowbe4.com/
Consequences of Committing Fraud
Association of Certified Fraud Examiners 2018 Report to the Nation on Occupational Fraud and Abuse
Consequences of Committing Fraud
Association of Certified Fraud Examiners 2018 Report to the Nation on Occupational Fraud and Abuse
Consequences of Committing Fraud
Association of Certified Fraud Examiners 2018 Report to the Nation on Occupational Fraud and Abuse
Association of Certified Fraud Examiners
2018 Report to the Nation on Occupational
Fraud and Abuse
Polling Question #8
True or False
It is possible to purchase stolen credit card numbers on the internet
Any Questions?
