Ways in which frauds are perpetrated

Section b requires companies to have external auditors not only report on financial statements themselves, but also attest to the effectiveness of the internal control environment. During that first year of implementation, Over time, the percentage of companies disclosing ICFR declined dramatically, to a low of only 3. This data is fairly misleading, however, as the majority of these material weaknesses were only disclosed after companies had already restated their financials.

Therefore, it was the restatements themselves, brought about by financial accounting discrepancies or oversight, that forced auditors to change their previous reports, changing the evaluation of the internal controls from effective to ineffective. Internal controls are themselves not a deterrent when power, influence, greed, and corporate malfeasance rule the corner offices.

The question then remains: if internal controls and their respective audits are not identifying accounting-related frauds, why not? The answer, it seems, lies in the research detailing where these frauds actually occur. Frauds largely do not occur amongst employees or managers, who are mainly subjected to internal controls such as segregation of duties, establishment of responsibility, or independent internal verification.

These acts are, for the most part, not perpetrated in the accounting departments of large corporations. In , American criminologist Donald Cressey identified three factors that are present in fraud; this theory has come to be known as the fraud triangle. Cressey theorized that for fraud to exist, an ordinary individual must encounter financial pressure or incentive to commit fraud, have the opportunity to commit the act, and be capable of rationalization of their fraudulent activities.

While the profession has tended to use these factors as a base for assessing and determining internal controls, the risk assessment of where large-scale frauds are most prevalent has been ignored. There is no greater role in a company than CEO or CFO, and correspondingly no greater opportunity or pressure to commit fraud. Take, for example, the role of equity-based compensation in fraud. As executive compensation packages shifted from cash-based to equity-based during the s and s, the likelihood of financial statement restatements increased dramatically.

As John Coffee pointed out in Gatekeepers: The Professions and Corporate Governance , the leading factor for restatements was the presence of significant stock-based incentives in the hands of executives Oxford University Press, How these frauds have been committed varies widely, from more sophisticated techniques involving improper accounting recognition, off—balance sheet financing, and related party sales to simply making up the numbers.

While many auditing standards have been changed or created in the past decades, so has technology. If companies such as GE, Enron, Wells Fargo, and Chesapeake Energy can perpetrate large-scale frauds simply by manipulating accounting techniques or outright lying, imagine what could be possible with the manipulation of AI to their benefit.

Numerous articles have touted the emergence of AI, blockchain, data analytics, and RPA as tools to be used by auditors to combat fraud. Consider, however, this thought: fraudsters will look to take advantage of the same technologies to commit more damaging and robust frauds than have previously been possible. Blockchain, for instance, has been lauded as a fraud-resistant superhero whose presence will eradicate evildoers in the financial accounting realm.

First, blockchain usage itself amongst companies, including those with imminent plans to implement, is almost nonexistent Exhibit 2. Second, many experts agree that blockchains generally represent targeted solutions to specific problems, making fraud more difficult in those instances, but also disregard blockchain as the complete fraud prevention tool that many have made it seem.

CEOs or persons with overwhelming authority, or those colluding with them, will be able to find a way to input fraudulent data. The blockchain will track it as valid data, so if you have the authority to input bad data, then the blockchain will validate the bad data.

You still have a dependency on the real world, trusted sources of data and authorization. If you corrupt that, then you corrupt the process.

In addition, cryptocurrencies continue to emerge and evolve, which also may contribute to the furtherment of more substantial and advanced financial frauds. While new cryptocurrencies move toward initial coin offerings ICO , however, it is possible that these offerings themselves may bring new technologically savvy scammers to the table.

Contrary to what some may believe, these currencies are not unreachable by hackers. CEOs with the ability to double spend while falsifying the blockchain ledger and accounting records could potentially perpetrate frauds costing investors and the economy billions. Moreover, it is important to note that while this is a step in the right direction, the framework is merely guidance and in no way legally binding. There is another risk to these new technologies, one more troubling than the hack-ability of the blockchain.

Technologies thought to protect investors against frauds and help auditors identify those activities, such as AI and RPA, could actually assist executives in committing fraud, or even learn to commit the frauds themselves.

Executive-level frauds also took much longer to detect. Fraud offenders were likely to be found in one of six departments. More than half of all cases in the study were committed by individuals between the ages of 31 and Generally speaking, median losses tended to rise with the age of the perpetrator.

Most of the fraudsters in the study had never been previously charged or convicted for a fraud-related offense. Only seven percent of the perpetrators had been previously convicted of a fraud offense. This finding is consistent with prior ACFE studies. Prize and Lottery Fraud. Debt Collection Fraud. Key Takeaways Consumer fraud occurs when a person suffers from a financial loss involving the use of deceptive, unfair, or false business practices. With identity theft, thieves steal your personal information, assume your identity, open credit cards, bank accounts, and charge purchases.

Mortgage scams are aimed at distressed homeowners to get money from them. Credit and debit card fraud is when someone takes your information off the card and makes purchases or offers to lower your credit card interest rate. Fake charities and lotteries prey on people's sympathy or greed. Debt collection fraud tries to collect on unpaid bills whether they are yours or not.

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Related Terms Spoofing Spoofing is a scam in which criminals try to obtain personal information by pretending to be a legitimate business or another known, trusted source. What Is Phishing? Phishing is a method of identity theft carried out through the creation of a fraudulent website, email, or text appearing to represent a legitimate firm.

Credit Card Cloning Credit card cloning is copying stolen card information using an electronic device and copying it to a new card. How Does a Checking Account Work? A checking account is a highly liquid deposit account held at a financial institution that allows deposits and withdrawals. What Is Social Engineering? Social engineering is the act of exploiting human weaknesses to gain access to personal information and protected systems. Identity Theft Identity theft occurs when your personal or financial information is used by someone else to commit fraud.

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