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A comprehensive overview of various fraudulent practices commonly encountered in business and financial institutions. It presents a series of questions and answers covering topics such as bid pooling, travel and entertainment fraud, purchasing card fraud, check fraud, payroll fraud, theft of confidential information, insider abuse of computer systems, and financial statement fraud. Particularly useful for students studying business ethics, fraud detection, and risk management.
Typology: Exams
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A process by which several bidders conspire to split contracts, thereby ensuring that each gets a certain amount of work, which does not require collusion with an insider. - ....ANSWER...Bid pooling.
Employees using traveling and entertainment expenses as a way to defraud the company. - ....ANSWER...Travel and Entertainment fraud (T&E)
When two or more employees dine together while on the road, each may submit a forged claim for reimbursement for his or her own meal even though a single member of the group paid the entire bill. Similar practices often occur with shared
taxis, airport shuttle services, and other expenses. (T&E Fraud) - ....ANSWER...Making multiple reimbursement claim submissions.
Receipts for transportation, hotel, restaurant, and other business travel expenses are easily obtained and "recycled" by employees either by forgery or by alteration. It is all too easy, for example, to alter the date or amount on a receipt before it is submitted. (T&E Fraud). - ....ANSWER...Falsifying receipts.
If receipts are required for all expenses over $25 for meals, an employee may fraudulently submit undocumented claims for amounts of $24.99 or $24.95. (T&E Fraud) - ....ANSWER...Claiming expenses just below the minimum documentation requirement.
A dishonest employee may test your organization's anti-fraud controls by submitting a receipt for a personal expense incurred during a business trip. If the form is complicated the processor may just approve payment (T&E Fraud) - ....ANSWER...Claiming for "out-of-policy" expenses.
Corporate card used by legitimate holders who charge non-business expenses to the employer and falsely document them as legitimate job-related purchases. - ....ANSWER...Purchasing Card Fraud (P- Card)
The majority of payments fraud activity is conducted outside the legitimate card holder via forged checks or stolen credit card data. - ....ANSWER...Who conducts the majority of P-Card fraud?
An electronic network for financial transactions in the U.S. The network processes batches of debits and credits to various financial institutions allowing for fast, safe and efficient transfer of funds. - ....ANSWER...Automated Clearing House (ACH)
A check signed by someone else other than who is specified on the check without that person's permission. - ....ANSWER...Forged Check
An employee stealing blank checks ad making them out to him or herself or cash, and forges the name of
the authorized person to sign checks. - ....ANSWER...Theft and Forgery of stolen check
Perpetrator steals checks made out to legitimate payee and are signed. The perpetrator whites out the payee, alters or changes the payee information to themselves or others. - ....ANSWER...Check interception and forgery of endorsement
Where an insider in AP, modifies the Vendor Master File changes the name of a legitimate business to a name that is similar enough that it wont be noticed. The perpetrator simply changes the information back after the execution of the fraud. - ....ANSWER...Electronic Payee Alteration
Changing the amount of the check by changing one or more number. - ....ANSWER...Check alteration by inserting numbers
Changing or washing the check to change the name of the payee by adding letters or words. - ....ANSWER...Check alteration by inserting letters
A dishonest employee puts an unauthorized check in a pile of authorized checks, betting on the odds that the signer will not check each check and just sign the unauthorized one. - ....ANSWER...Hidden check fraud
A bank employee using fear or intimidation on a person responsible for issuing the checks (such as AP) to write a check without proper invoices, documentation or signatures etc. - ....ANSWER...Check fraud intimiation
A perpetrator provides the routing number and the account number of the victim's account to the receiving company (utility, car loans, etc) to make the required payments. - ....ANSWER...ACH fraud
Perpetrators (possible employees) steal PII of customers and use the information to commit identity frauds such as unauthorized loans, credit accounts.
(Many successful breaches result from employee error). - ....ANSWER...Theft of confidential information
Insiders pose a substantial threat by virtue of their knowledge of and access to their employers' systems and/or databases, and their ability to bypass existing physical and electronic security measures through legitimate means. - ....ANSWER...Insider abuse of Computer Systems
the greatest insider threats in these areas. • The first step toward preventing employee-level fraud is understanding and detecting the numerous red flags of such schemes.
Many types of fraud committed at the employee level also occur at top management levels. The only difference is that due to their greater authority, broader executive privileges, and costlier lifestyles, senior managers who commit crimes such as embezzlement, travel and entertainment (T&E) fraud, and billing schemes that are common at lower levels (as detailed in Chapter Three) cause substantially greater losses than their criminal counterparts in subordinate positions. - ....ANSWER...Remember:
Self-dealing is approving loans to oneself.
Bank executives with the poor judgment to authorize a loan to themselves run the risk of being
terminated and charged through legal proceedings with breach of fiduciary duty, which can result in significant financial penalties. - ....ANSWER...Management-Level self dealing
A law enacted in 1977 that prohibits U.S. corporations from making illegal payments to public officials of foreign governments to obtain business rights or to enhance their business dealings in those countries - ....ANSWER...Foreign Corrupt Practices Act (FCPA)
The U.S. federal government has substantially enhanced its monitoring and enforcement activities with respect to the Foreign Corrupt Practices Act. While the temptation to offer bribes to overseas officials to obtain government or business contracts may be hard to resist, the danger of discovery and subsequent penalties indicate that the risk is usually too high. - ....ANSWER...Remember:
Misrepresenting financial performance involves recording nonexistent revenue or misrepresenting the period in which the revenue was received. - ....ANSWER...Recording false revenues
Involves recording revenue—typically loan interest income and interest from investments and related revenue—from a future reporting period in the current period, or understating amounts set aside for loan losses. - ....ANSWER...Fraudulent revenue recognition
Neglecting to record expenses and burying vendor invoices, management can make it appear as if expenses for a particular reporting period are lower than they actually are, thereby making earnings appear greater than they are. - ....ANSWER...Manipulating liabilities
Failure to mark investments to market when the securities markets decline, overstating the amount of cash, or recording the value of an outstanding
loan as being greater than its estimated market value. - ....ANSWER...Overstating Assets
Libor (London Inter-Bank Offered Rate) is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were. - ....ANSWER...Manipulating interest rates
Being able to detect management-level fraud at your organization depends on your ability to recognize the numerous red flags of the many types of fraud. These red flags can be complicated and unclear, especially as they apply to potential senior management misconduct. Thus, reviewing them from time to time will help you to focus on the evidence of potential fraud. - ....ANSWER...Remember:
Financial statement frauds are among the least frequently committed frauds in most organizations. However, they are by far the costliest. Implementing effective internal controls for this type of fraud is
usually challenging but imperative. - ....ANSWER...Remember:
Fraudster who removes tools from a job site and then sells them and keeps the proceeds but reports the tools as lost. - ....ANSWER...Tool Theft
Fraudster orders more material than necessary on an existing purchase order and reports the excess waste or scrap and sells it. - ....ANSWER...Materials Waste
One grade of material is specified, submitted, approved, an billed but a lower grade is delivered. - ....ANSWER...Product Substitution
Duplicate payments are issued for legitimate vendors for legitimate invoices. One check goes to the vendor and one goes to the fraudster but shows the check as voided or canceled. - ....ANSWER...Duplicate payments
Basically time card fraud, where employees clock in for other employees or create a fictitious employee and collect their pay. - ....ANSWER...Employee ghosting
Fraudster agrees to send construction company- owned or leased vehicles to a service provider for what is described as regular maintenance. However, either the pricing for the actual services rendered is greater than the market price, or the services documented are not actually rendered. In either case, the service provider gives a kickback to the company employee. - ....ANSWER...Vehicle maintenance scheme
Collusive fraud wherein an employee helps a vendor illegally obtain a contract that was supposed to involve competitive bidding, by the employee getting a kickback. - ....ANSWER...Bid-Rigging Schemes or collusion
Business borrowers create false invoices to document bogus receivables, or otherwise cook the books to appear financially sound to a lending institution. - ....ANSWER...Asset-based or working capital loan fraud
Hiding critical information about the loan, or falsifying employment history, and indicating the property would be a primary residence when it was
purchase for investment. - ....ANSWER...External mortgage fraud
The boom in subprime mortgage lending accounted for a substantial portion of total mortgage lending in the 1990s and early 2000s. A solid majority of subprime mortgage applications contained at least some element of deception, misrepresentation, or outright fraud. - ....ANSWER...Remember:
"Any illegal acts characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the perpetrated by individuals and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business ad-vantage." - ....ANSWER...Fraud
Internal Fraud and External Fraud - ....ANSWER...Main types of fraud
Activities that may be criminal, committed within an organization, typically by the employee against the employer. - ....ANSWER...Internal Fraud
Deceptive conduct by non-employees that
deprives the organization of value, and/or is undertaken for financial gain. - ....ANSWER...External Fraud
The theft of money, property, or other assets of the employer. - ....ANSWER...Embezzlement
The taking away of the property of another, with the intent to convert it to his/her own use. - ....ANSWER...Larceny
"Cooking the books." This type of fraud generally refers to falsely representing the financial condition of the company, so as to inflate the value of stock, fraudulently boost executive bonuses, or otherwise mislead shareholders, lenders, employees, investment analysts, or other users of the information. - ....ANSWER...Financial Fraud
Accounts receivable fraud, this involves simply stealing cash before it enters the organization's accounting system. - ....ANSWER...Skimming (cash larceny)
Using false documentation to cause a targeted organization to issue a payment for false services and/or purchases. - ....ANSWER...Billing Schemes
Common method (Taking advantage of employee access to blank company checks, using a password to
steal computer-generated checks or producing counterfeit checks). - ....ANSWER...Check Tampering
Making false claims for reimbursement or inflating or creating fictitious business expenses. (Travel /meal reimbursement. - ....ANSWER...Employee reimbursement scheme
Bribery, illegal gratuities, and/or extortion. - ....ANSWER...Corruption
When something of value is offered or given to influence a business decision. - ....ANSWER...Bribery
When something of value is given to an employee to reward a business decision. - ....ANSWER...Illegal Gratuities
When a person demands payment or seeks to influence a business decision by threat of harm through loss of business or personal injury. - ....ANSWER...Extortion
Forms of corruption involving employees and vendors, often using inflated billing or invoices for which the employee is paid a portion of the inflated or fictitious invoice. - ....ANSWER...Kickback Schemes
The creation, sale, or use of a counterfeit credit card, or the use of a stolen credit or debit card. - ....ANSWER...Credit Card Fraud
Card not present transactions - ....ANSWER...C.N.P
The fraudulent acquisition or stealing of confidential personal information through social engineering. - ....ANSWER...Identity Theft
Involves the unauthorized use of another person's personal data for illegal financial benefit. Involves
abusing the stolen information to transact personal business in the victim's name. - ....ANSWER...Identity Fraud
An extreme form of what was called free banking. "A bank that issued notes without adequate security in the period before the establishment of the national banking system in 1864". - ....ANSWER...Wildcat Banking
Theft (stealing money, ID, or assets) and deception (cooking the books, lying to shareholders, employees or partners) - ....ANSWER...2 categories that encompass Fraud
The failure of about 1000 savings and loan banks as a result of risky business practices. The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees. - ....ANSWER...Savings and Loan Crisis
"We have very little fraud here" ex: subprime mortgage fraud - ....ANSWER...Myth #1 of the Financial Services
"Ethics and training compliance has us covered" Fraud is not always covered in ethics policy or training. - ....ANSWER...Myth #2 of Financial Services
"Fraud is an unavoidable cost of doing business" Fraud is usually not serious enough to destroy a financial service firm, it is much more than necessary cost of doing business. - ....ANSWER...Myth #3 of Financial Services
20% of people will never commit fraud
60% are fence sitters and may commit fraud if given the opportunity
20% of people are inherently dishonest - ....ANSWER...20-60-20 rule of human component of fraud
Employee level fraud and management level fraud - ....ANSWER...2 types of insider fraud threat
True: Management level fraud is committed less frequently than employee level fraud however the financial loss is almost always greater. - ....ANSWER...True or False: Managment Level Fraud is committed less frequently than employee level fraud?
Created by leading criminologist Donald Cressey. The three factors that contribute to fraudulent
activity by employees: opportunity, financial pressure, and rationalization. - ....ANSWER...Fraud Triangle
Financial difficulties, such as large amounts of credit card debt, an overwhelming burden of unpaid medical bills, large gambling debts, extended unemployment, or similar financial difficulties. - ....ANSWER...Financial pressure
Employee identifies a weakness in the organization's anti-fraud controls. For example, if an employee is able to set up a phony vendor, have fraudulent invoices approved, and have payment sent to an address that he or she controls. - ....ANSWER...Opportunity
Persons who have committed fraud convince themselves that the act is either not wrong or that even though it may be wrong, it will be corrected because they will eventually return the money. Another, often more damaging form of rationalization occurs when employees justify the fraud by taking the attitude that they deserve the stolen money—because the company unfairly denied them a raise or promotion, or because some other
form of mistreatment made them "victims." - ....ANSWER...Rationalization
The opportunity element of the Fraud Triangle helps to explain the ways in which many frauds are committed by employees, middle managers, and executives of financial services organizations. - ....ANSWER...Remember:
A reevaluation for peoples unadorned lust for money caused personal Greed to become the 4th side, morphing the triangle into the diamond. - ....ANSWER...What caused the Fraud Triangle to morph into the Fraud Diamond?
Internal fraud where an employee can submit a fictitious loan to a loan officer of the same company. That loan officer can play as a co-conspirator or as an unknowing personal. - ....ANSWER...Loans to phantom borrowers
Oftentimes referred to as "Accounts receivable fraud" the fraudster will make loan payments from funds received from subsequently closed or older fraudulent loans in a form of loan lapping scheme. - ....ANSWER...Loan Lapping
"A third-party"or "nominee" loan is a loan in the name of one party that is intended for use by another. In other words, a persons PII is used with permission to secure a loan for someone who would not qualify, thus circumventing the system. - ....ANSWER...Nominee or straw borrowers
A bank insider is induced to approve a loan to a non- credit worthy borrower, where the borrowers agrees to give something of value to the banker to approve the loan. - ....ANSWER...Kickback on Illegal loans
A dishonest loan officer or bank manager agrees to authorize loans to one or more crooked bank colleagues or to dishonest counterparts in other financial institutions made with the understanding that a comparable, reciprocal loan or favor would be made in return. - ....ANSWER...Reciprocal loans
A form of loan fraud in which a large depositor or a deposit broker agrees to give a bank its business in exchange for a loan that it might otherwise not qualify for or that is used to perpetrate a real estate fraud. - ....ANSWER...Linked financing
Typically are made by committing the borrower's receivables, inventory, or other assets as collateral. Also referred to a "Floor-plan" lending as merchandise is used as collateral for the loan. - ....ANSWER...Working Capital or Asset-based Loan Fraud
Bank employees with authority to credit and debit these accounts would and to move funds held in suspense accounts the fraudster controls, such as a personal checking account. - ....ANSWER...Suspense Account fraud