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Fraud

A guide to its prevention,

detection and investigationwww.pwc.com/au 1

Corporate fraud is a persistent

fact of business life, affecting businesses of all sizes and across all industries. Consider the following recent statistics:

€ 49.5% of Australian businesses

suffered some form of fraud between 2005 and 2007 (PricewaterhouseCoopers"

Economic Crime Survey 2007)

€ Fraud costs Australian

business and government $5.8 billion a year ... one-third of the total cost of all crime in

Australia (Australian Institute

of Criminologys 2003 report,

Counting the costs of crime in

Australia)

€ 21.4% of Australian respondents

suffered losses in excess of $1 million between 2005 and

2007 (PricewaterhouseCoopers

Economic Crime Survey 2007).While there is no foolproof method of preventing fraud, the risk can be minimised by taking a systematic and considered approach to its management.

For most organisations, internal

fraud (fraud committed by an organisations employees or offi cers) is its greatest risk. In fact, the PricewaterhouseCoopers

Economic Crime Survey 2007

identifi ed that 71.4% of Australian fraud was committed by internal perpetrators.

Therefore this guide is primarily

directed toward the mitigation of internal fraud, even though many of the methods described can be used to mitigate external fraud.

The guide will take you on the

iterative journey of fraud risk management, providing a basic summary of better practice techniques in fraud prevention, detection and investigation.Fraud in the Australian contextFraud control

DetectionPreventionRisk assessment

Investigation

2

Internal fraud control

While there is no foolproof method of preventing

fraud, certain fraud prevention techniques have proven to be successful.

Contents

Introduction _______________________________________________________ 4

1Fraud risk management ______________________________________ 7

How to establish a robust framework

2Fraud prevention techniques ________________________________ 13

Some easy-to-implement fraud prevention techniques

3Proactive fraud detection ___________________________________ 21

Making fraud detection part of business-as-usual

4Effective fraud investigation _________________________________ 27

A step-by-step plan

5Electronic investigations ____________________________________ 35

What if theres no paper trail?

6Financial statement misrepresentation ________________________ 39

Do your numbers lie?

3

Internal fraud control

4 4

Introduction

Shell company

Non accomplice supplier

Personal purchasesGhost employee

Commission schemes

Workers compensation

Falsifi ed wages

False voids

False refundsMischaracterised

expenses

Overstated expenses

Fictitious expenses

Multiple

reimbursementsForged maker

Forged endorsement

Altered payee

Concealed cheques

Authorised maker

Unrecorded

Understated

Write-off schemes

Lapping schemes

Billing

schemesPayroll schemesCheque tampering

Point of sale

payments

Expense

reimbursement schemes

Cash on

hand

From the

deposit

OtherSales

Receivables

Refunds

and other T h e f t F r a u d ulent paym en ts S k i m m i n g M i s u s e T h e f t I n v e n t o r y a nd all o th e r a s s e t s Cash Asset requisitions and transfers

False sales

and shipping

Purchasing

and receiving

Unconcealed

theft Asset misappropriation

Petty cash box access

Falsifi ed documentation

and/or reconciliations

Falsifi ed bank reconciliations

Safe deposit box access

Kiting

Personal use of stationary

and other consumablesInadequate physical security controls

Inventory

Plant and

equipment

Intellectual property

and other assets

Utilisation for personal

benefi t or gain

Inadequate supervision

or controls

Low staff morale and

disgruntled employees increases the risk of unethical behaviourLarge unexplained stocktake variances to accounting recordsInappropriate segregation of duties

Skimming deliveriesInappropriate segregation

of duties

Fictitious customersFalsifi ed transfer

documents

Unauthorised write-off

schemesMultiple refunds

Unauthorised or

fi ctitious refunds

Falsifi ed delivery dockets

The web of deceit

"O, what a tangled web we weave when fi rst we practice to deceive!" - Sir Walter Scott - 5 5

Fraud Tree ... is adapted from a uniform

occupational fraud classifi cation system developed by the United States based

Association of Certifi ed Fraud Examiners.

Areas of risk and fraudulent schemes are

grouped under the broad categories of asset misappropriation, fraudulent statements and corruption.It is important when investigating incidents of fraud to remember the concept of the web. This helps remove mental blinkers and reminds the investigator to consider all potential aspects of a perpetrators fraudulent activities.

In many cases perpetrators will use several

different fraudulent schemes that are interconnected. For example, invoicing schemes will often require the perpetrator to create false suppliers and then cover their tracks by creating false accounting records. These have a direct impact on an organisations fi nancial statements.

Improper

disclosures/ classifi cations

Improper

asset valuationsConcealed liabilities and expensesFictitious revenuesTiming differences A s s e t r e v e n u e o v e r s t a t e m e n ts Liabilitie s e x p e n s e s u n d e r s t a t e m e n t s E m p l o y m e n t c r e d e n t i a l s Inquotesdbs_dbs22.pdfusesText_28