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FRAUD as defined by the AICPA's AU-C Section 240 is “an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are the subject of an audit.”

 

Black’s Law Dictionary defines fraud as “any deliberate misrepresentation of the truth or a fact used to take money, rights, or other privilege or property away from a person or persons.”

 

A global fraud study conducted by the Association of Certified Fraud Examiners mentions, "the typical organization loses an estimated 5% of its annual revenue to fraud." Median occupational fraud loss was $200,000 for organizations with fewer than 100 employees.

 

Most common method of fraud detection was a HOTLINE: 79% of large organizations have hotlines; 22% for smaller organizations.

 

 

 

REDUCING FRAUD to YOUR ENTITY

 

See my section "Internal Control" on ways of reducing fraud to your entity.

The Center for Audit Quality has noted, "fraud cannot occur unless an opportunity is present. Opportunity has two aspects: the inherent susceptibility of the organization's accounting to manipulation, and the conditions within the organization that may allow a fraud to occur."

 

THREE CATEGORIES of FRAUD:

  • Corruption

  • Asset Misappropriation

  • Fraudulent Statements

CONDITIONS PRESENT WHEN FRAUD OCCURS:

  • Incentive or financial pressure

  • Rationalization

  • Opportunity

REALISTIC PUNISHMENT WHEN FRAUD OCCURS:

 

  • Companies, especially non-profits & churches, are reluctant to report fraud. Management feels the negative publicity may hurt the image of the entity.

  • Not reporting can affect the community. The individual often gets no punishment and sometimes commits fraud again at another entity.

FRAUD, WHETHER FRAUDULENT FINANCIAL REPORTING OR MISAPPROPRIATION OF ASSETS, INVOLVES INCENTIVE OR PRESSURE TO COMMIT FRAUD, A PERCEIVED OPPORTUNITY TO DO SO, AND SOME RATIONALIZATION OF THE ACT, AS FOLLOWS:

 

  • INCENTIVE OR PRESSURE TO FRAUDULENT REPORTING MAY EXIST WHEN MANAGEMENT IS UNDER PRESSURE, FROM SOURCES OUTSIDE OR INSIDE THE ENTITY, TO ACHIEVE AN EXPECTED (AND PERHAPS, UNREALISTIC) EARNINGS OR DONATION TARGET OR FINANCIAL OUTCOME--PARTICULARLY BECAUSE THE CONSEQUENCES TO MANAGEMENT FOR FAILING TO MEET FINANCIAL GOALS CAN BE SIGNIFICANT. SIMILARLY, INDIVIDUALS MAY HAVE AN INCENTIVE TO MISAPPROPRIATE ASSETS (FOR EXAMPLE, BECAUSE THE INDIVIDUALS ARE LIVING BEYOND THEIR MEANS).

  • A PERCEIVED OPPORTUNITY TO COMMIT FRAUD MAY EXIST WHEN AN INDIVIDUAL BELIEVES INTERNAL CONTROLS ARE NOT IN PLACE OR CAN BE OVERRIDDEN (FOR EXAMPLE, BECAUSE THE INDIVIDUAL IS IN A POSITION OF TRUST OR HAS KNOWLEDGE OF SPECIFIC DEFICIENCIES IN INTERNAL CONTROL).

  • INDIVIDUALS MAY BE ABLE TO RATIONALIZE COMMITTING A FRAUDULENT ACT. SOME INDIVIDUALS POSSES AN ATTITUDE, CHARACTER, OR SET OF ETHICAL VALUES THAT ALLOW THEM KNOWINGLY AND INTENTIONALLY TO COMMIT A DISHONEST ACT. HOWEVER, EVEN OTHERWISE HONEST INDIVIDUALS CAN COMMIT FRAUD IN AN ENVIRONMENT THAT IMPOSES SUFFICIENT PRESSURE ON THEM. MOREOVER, INDIVIDUALS MAY KNOW THE ENTITY WON'T FILE CHARGES TO PROTECT EMPLOYEES AND THE ENTITY.

FRAUD ISN'T ISOLATED to JUST the EMBEZZLEMENT of CASH FUNDS

 

FRAUD CAN HAPPEN TO ANY ENTITY. IT DOESN'T ALWAYS HAVE TO BE MONETARY. FOR EXAMPLE, IT CAN BE TAKING AWAY AN EMPLOYEE'S RIGHTS, PRIVILEGES, AND OBLIGATIONS. OTHER EXAMPLES INCLUDE:

 

  • FALSIFYING TIME CARDS TO HAVE A BIGGER PAY DAY

  • INCORRECTLY REPORTING EARNINGS OR NET INCOME SO A LOAN WON'T BE CALLED FROM A BANK

  • MANAGEMENT OR BOARDS TAKING AWAY AN EMPLOYEE'S VACATION TIME

  • NOT PAYING OVERTIME UNDER DOL'S RULES (NOTE: HAVING A SALARY DOES NOT PRECLUDE YOU FROM OVERTIME LAWS)

  • USING A ENTITY'S ASSETS FOR PERSONAL USE

  • CAUSING AN ENTITY TO PAY FOR GOODS OR SERVICES NOT RECEIVED

  • CONCEALING OR NOT DISCLOSING FACTS THAT COULD AFFECT THE AMOUNTS RECORDED IN THE FINANCIAL STATEMENTS

  • RECORDING FICTITIOUS JOURNAL ENTRIES

 

FRAUD in our TRI-STATE AREA   

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  • (Christiansburg, VA) - Treasurer  sentenced to prison for stealing $100,000 from the Virginia Tech Foundation and Virginia Flower Growers Association. Roanoke.com

  • (Virginia Beach) - Economic development official charged with using $4,000 to send packages to his girlfriend in the Philippines. Associated Press (WVVA).

  • (Huntington, WV) - Financial analyst embezzled $45,000 writing checks to himself and made federal payments to his family's private cemetery.  Associated Press.

  • (Beckley, WV) - Volunteer Fire Chief goes to prison for being reimbursed for the same expenses by three separate companies in the amount of $20,000. WVVA.

  • (Glen Allen, VA) - Woman billed VHDA for work never performed in the amount of over $30,000. Richmond Times Dispatch

  • (Pocohantas, VA) - Town Treasurer embezzled over $100,000 with cash payments on water bills that never got deposited into the bank. BDTonline.com

  • (Huntington, WV) - Woman pleaded guilty for stealing military veteran's benefits using an ATM card in the amount of $30,000.  WVVA.

  • (Wytheville, WV) - DSS worker convicted of embezzling $10,833 using a programs debit card. SWVAtoday.com

  • (Fayetteville, WV) - Woman investigated for taking money from a midget football league as Treasurer.  WVVA.com

  • (Chesterfield County, VA) - $2.5 million fraud involving a specialist who paid a fraudulent company using 115 invoices. Richmond Times-Dispatch. 

  • (Tennessee) - Mayor paid his son unlawful wages in the amount of $2,500. 2018, WCYB.com

  • (Danville, VA) - School board chairwoman lied about travel expenses. She said she drove there and got mileage reimbursement, but actually flew.  J WVVA.com

  • (Johnson City, TN) - Credit Union manager steals $1.1 million setting up family member accounts.  WCYB.com

  • (Huntington, WV) - Cabinet Chief secretary and wife embezzle over $178,790 from Volunteer Fire Department.  WVVA.com

 

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