Corporate Fraud Handbook Prevention and Detection

Put the brakes on fraud.

It is much more cost-effective to prevent fraud than to punish it. Providing an insider's look into the most prevalent fraud schemes used by employees, owners, managers, and executives, Corporate Fraud Handbook, Fourth Edition provides you with a systematic approach to stop fraud in its tracks before it happens.

Sharing his four decades of experience in the field of fraud detection and deterrence, author Dr. Joseph T. Wells—founder and chairman of the Association of Certified Fraud Examiners—brings each scheme to life by using real case studies submitted to the ACFE by the fraud examiners who investigated them.

Written for anyone responsible for reducing fraud losses and mitigating the risk of fraud, Corporate Fraud Handbook features:

• Tips and techniques for quantifying financial losses from fraud schemes
• Observations and conclusions in each chapter to help you devise prevention and detection strategies
• Real-life case studies that provide a view inside the mind of a fraudster
• The fraud tree, a systematic classification of the various types of occupational fraud
• Statistics from the ACFE's 2012 Report to the Nations on Occupational Fraud and Abuse

From sophisticated investment swindles to petty theft, false overtime to bribery, discover how to prevent and detect corporate fraud with the expert guidance found in Corporate Fraud Handbook, Fourth Edition.

Dr. JOSEPH T. WELLS, CFE, CPA, spent nearly a decade as a U.S. FBI Special Agent, is the founder and Chairman of the Association of Certified Fraud Examiners (ACFE) and the author of twenty-two books. For his landmark research in fraud detection and deterrence, Dr. Wells has been inducted into the American Institute of Certified Public Accountants' Business and Industry Hall of Fame and, for nine years in a row, was named to Accounting Today's list of the 100 most influential people. He holds a doctorate in commercial science from York College, The City University of New York.

Preface ix

About the ACFE xiii

1. INTRODUCTION1

Defining “Occupational Fraud and Abuse” 2

Research in Occupational Fraud and Abuse 6

2012 Report to the Nations on Occupational Fraud and Abuse 25

Notes 42

PART 1 ASSET MISAPPROPRIATIONS45

2. INTRODUCTION TO ASSET MISAPPROPRIATIONS 47

Overview 48

Definition of “Assets” 48

How Asset Misappropriations Affect Books of Account 49

Notes 58

3. SKIMMING 59

Overview 63

Skimming Data from ACFE 2011 Global Fraud Survey 64

Unrecorded Sales 68

Understated Sales and Receivables 73

Theft of Checks through the Mail 74

Short-term Skimming 79

Converting Stolen Checks 80

Concealing the Fraud 83

Detection 89

Prevention 90

Notes 91

4. CASH LARCENY 93

Overview 96

Cash Larceny Data from ACFE 2011 Global Fraud Survey 97

Incoming Cash 101

Cash Larceny from the Deposit 106

Miscellaneous Larceny Schemes 110

Detection 111

Prevention 113

5. CHECK TAMPERING 115

Overview 118

Check Tampering Data from ACFE 2011 Global Fraud Survey 119

Forged Maker Schemes 123

Intercepted Checks 129

Forged Endorsement Schemes 129

Altered Payee Schemes 133

Concealed Check Schemes 137

Authorized Maker Schemes 137

Concealment 141

Detection 149

Prevention 151

Electronic Payment Tampering 153

Prevention and Detection 153

Notes 155

6. REGISTER DISBURSEMENT SCHEMES 157

Overview 157

Register Disbursement Data from ACFE 2011 Global Fraud Survey 161

False Refunds 165

False Voids 171

Concealing Register Disbursements 171

Detection 174

Prevention 174

7. BILLING SCHEMES 177

Overview 181

Billing Scheme Data from ACFE 2011 Global Fraud Survey 182

Cash-Generating Schemes 186

Invoicing via Shell Companies 186

Invoicing via Nonaccomplice Vendors 191

Personal Purchases with Company Funds 196

Detection 202

Prevention 203

8. PAYROLL AND EXPENSE REIMBURSEMENT SCHEMES 205

Overview 208

Payroll Scheme Data from ACFE 2011 Global Fraud Survey 209

Payroll Schemes 212

Expense Reimbursement Data from ACFE 2011 Global Fraud Survey 226

Expense Reimbursement Schemes 230

Detection of Payroll Schemes 237

Detection of Expense Reimbursement Schemes 238

Prevention of Payroll Schemes 239

Prevention of Expense Reimbursement Schemes 241

9. INVENTORY AND OTHER ASSETS 243

Overview: NonCash Misappropriation Data from

ACFE 2011 Global Fraud Survey 246

Misuse of Inventory and Other Assets 249

Theft of Inventory and Other Assets 252

Concealment 264

Detection 266

Prevention 269

Misappropriation of Intangible Assets  271

Note 272

PART II CORRUPTION273

10. BRIBERY 275

Overview 278

Corruption Data from ACFE 2011 Global Fraud Survey 282

Bribery Schemes 286

Something of Value 300

Economic Extortion 301

Illegal Gratuities 301

Detection 301

Prevention 303

Notes 305

11. CONFLICTS OF INTEREST 307

Overview 311

Purchasing Schemes 312

Sales Schemes 315

Other Schemes 316

Detection 318

Prevention 319

Note 319

PART III FRAUDULENT STATEMENTS321

12. ACCOUNTING PRINCIPLES AND FRAUD 323

Introduction 323

Fraud in Financial Statements 327

Major Generally Accepted Accounting Principles 330

Responsibility for Financial Statements 334

Users of Financial Statements 335

Types of Financial Statements 335

Sarbanes-Oxley Act 336

Financial Statement Fraud Data from ACFE 2009 Global Fraud Survey 347

Notes 352

13. FINANCIAL STATEMENT FRAUD SCHEMES 353

Overview

Defining Financial Statement Fraud

Costs of Financial Statement Fraud

Methods of Financial Statement Fraud 359

Fictitious Revenues 359

Timing Differences 362

Concealed Liabilities and Expenses 368

Improper Disclosures 371

Improper Asset Valuation 374

Detection of Fraudulent Financial Statement Schemes 379

Deterrence of Financial Statement Fraud 395

14. OCCUPATIONAL FRAUD AND ABUSE: THE BIG PICTURE 401

Defining “Abusive Conduct” 401

Measuring the Level of Occupational Fraud and Abuse 402

Understanding Fraud Deterrence 405

Corporate Sentencing Guidelines 409

Ethical Connection 411

Concluding Thoughts 413

Notes 414

APPENDIX: SAMPLE CODE OF BUSINESS ETHICS AND CONDUCT 415

Introduction 415

Conflicts of Interest 417

Company Assets 421

Political Contributions 423

Employee Conduct 423

Compliance Letter and Conflict of Interest Questionnaire 425

Bibliography 427

Index 435