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• eBook-Kapitel aus dem Buch Accounting Fraud

  Fraud Theories

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Fraud Case Analysis: Lessons Learned 276 3.3 Fraud Theories 3.3.1 The Fraud Triangle Although it is common knowledge today that people… …may commit fraud, it is often not understood why they do it. Donald R. Cressey, one of the pioneers in fraud re- search, came to the conclusion that… …fraud is most likely to occur when three critical elements come together: incentive/pressure, opportunity, and attitude/rationaliz- ation. In the case of… …accounting fraud, for example, the incentive/pressure might be the need to make earnings look better in order to meet debt covenants. The oppor- tunity might… …financial hump”. Cressey developed a three-pronged framework, commonly known as the fraud triangle, which is a very useful tool for fraud-fighters seeking to… …under- stand and manage fraud risks. The fraud triangle is shown in Exhibit 6 (see, e.g., Montgomery/Beasley/Menelaides/Palmrose 2002, p. 63; Wells 2007… …, p. 7). Fraud Opportunity Attitude/Rationalization � Financial stability or profitability threatened by economic, industry or entity operating… …Exhibit 6: The Fraud Triangle Fraud Case Analysis: Lessons Learned 277 According to Cressey, each of these three elements is necessary in order… …for a person to actually commit a fraud. The absence of any one of them would not allow a person to perpetrate a fraud. However, the three… …elements in the fraud triangle are also interrelated. The greater the perceived opportunity or the more intense the perceived incentive/pressure, the…

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  Types of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …257 Chapter 3: Fraud Case Analysis: Lessons Learned 3.1 Types of Fraud 3.1.1 A Classification System for Fraudulent Acts: The Fraud Tree… …Joseph T. Wells, chairman and founder of the “Association of Certified Fraud Ex- aminers” (ACFE), has developed a classification system – known informally… …as the fraud tree – that accounts for all of the most common types of fraud. The fraud tree encompasses a wide range of misconduct by executives… …2007, p. 46; ACFE 2008, p. 7). Occupational Fraud Fraudulent Statements (Accounting Fraud) Asset Misappropriation Corruption Fictitious Revenues… …Economic Extortion Exhibit 3: The Fraud Tree Fraud Case Analysis: Lessons Learned 258 According to Wells, the types of occupational fraud can… …generally be broken down into three broad categories: asset misappropriation, corruption, and fraudulent statements (accounting fraud). Within each of these… …three major categories, there are several sub-categories of fraud scheme types. It should be noted, however, that a number of cases described in… …this book involve aspects of more than one of the three basic categories. For example, several cases involve both accounting fraud and asset… …misappropriation, or both accounting fraud and corruption. In these cases where there are multiple schemes, it is impossible to subdivide the losses in order to… …the property, but has “misappropriated” it. Asset misappropriation is the most common of the three primary categories of occupational fraud…

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  A Practice Aid for Auditors: Fraud Interviews – An Inquiry Guide

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Appendix: Practice Aids 297 Appendix II A Practice Aid for Auditors: Fraud Interviews – An Inquiry Guide Of… …course, some cases of accounting fraud described in this book were so complex and well-concealed that no auditor would have been able to uncover them… …. These cases were well beyond the scope of a traditional audit. Nevertheless, auditors have to be more aggressive in order to detect fraud. They have to… …team have to be motivated to think about how and where fraud might occur. They have to conduct the audit with a mindset that recognizes the possibility… …that fraud could be present, regardless of any past experience with the audit client and regardless of the belief about manage- ment’s honesty and… …integrity. Eventually, they must not be reluctant to conduct so-called fraud interviews and ask sensitive questions. This inquiry guide is a… …practice aid designed to help the audit team to plan and tailor these fraud interviews as required by the international auditing standards. It in- cludes… …– As you are probably aware, CPAs today are required to assess the risk of fraud in the audit of every company, not just yours. Therefore, we need to… …begin. – When we talk about fraud in business, we are talking about a whole range of fraudulent activities. However, we are not talking about taking a… …pen or making a few photocopies for private use. Do you believe fraud is a problem for business and society in general? – We know that fraud…

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  The Warning Signs of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Fraud Case Analysis: Lessons Learned 268 3.2 The Warning Signs of Fraud 3.2.1 A Schedule of Fraud Red Flags In almost all of the cases… …described in this book the signs of impending doom have been apparent for some time – for those who wished to see them. According to numerous fraud… …detected more quickly had the warning signs not been ignored. These warning signs are often being referred to as fraud risk factors, fraud risk indicators… …not necessarily indi- cate that fraud is occurring within the organization. Their presence, however, either individually or in combination, could… …indicate the occurrence of fraud or an in- creased likelihood thereof. Red flags should therefore, when encountered, trigger a higher level of… …professional scepticism. The aim of this schedule is to act as an aid to all anti-fraud-practitioners when considering fraud risk mitigation initiatives… …frequency of occurrence. And, to say it clearly, a positive answer to any of the following red flags does not necessarily imply that fraud has occurred… …. Rather, a positive answer indicates that a heightened risk of fraud may exist and further evaluation may be prudent. The schedule was compiled from… …Significant declines in customer demand and increasing business failures in either the industry or overall economy Fraud Case Analysis: Lessons Learned… …, projected, or forecasted results – Overly unstable organizational structure (e.g., high turnover of senior management or board members) Fraud Case…

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  Introduction

  Professor Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …17 Chapter 1: Introduction 1.1 Fraud: A Constant Threat to Companies around the World Fraud is nothing new. History has shown that it has… …long been part of our society. In 1941, a well-known American judge said: “Fraud is as old as falsehood and as ver- satile as human ingenuity.” Several… …years later, in 1949, a criminologist from Indi- ana University named Edwin H. Sutherland coined the term white-collar crime, referring to fraud… …committed by the elite upper-world business executive, against either shareholders or the public. Sutherland, one of the pioneers in fraud research, defined… …indicating that the occurrence of white-collar crime (management fraud) and related aberrational behaviour of em- ployees (employee fraud) has been reduced… …. According to PricewaterhouseCoopers’ “Global Economic Crime Survey 2007”, fraud remains one of the most problematic issues for companies worldwide. In the… …respondents who suf- fered fraud also stated that this had caused significant damage to their businesses. The survey found that the level of damage was… …decreased. Although different sectors are impacted by different types of fraud, no industry is immune from the threat posed by economic crime. The key… …findings of KPMG’s “Fraud Survey 2009” are quite similar: fraud is a ma- jor threat to companies regardless of their size, location, or industry. About three… …out of four executives interviewed by KPMG believed that fraud risks would either stay the same or increase over the next 12 months. Nearly one-third…

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  Case 13: WorldCom (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 93 Case 13: WorldCom (2002) When Enron collapsed at the end of 2001, worried investors searched for who… …were managed. Former President George W. Bush condemned the fraud as “outrageous” and vowed to address the problems shaking Corporate America. The… …SEC said that WorldCom’s accounting improprieties were of “unprecedented magnitude”. But as enormous as the fraud was, it was accomplished in a… …relatively mundane way. The modus oper- andi of the fraud was rather simple, and it was carried out over a comparatively short period of time. Yet the… …reverberations of the fraud would echo around the world of business for years to come. Background: WorldCom from 1983–2002 The fraud was the consequence… …source of the culture that gave birth to this fraud. In 1983, he had discovered the telecom business and founded WorldCom. In the 1990s, the Clinton… …in this endeavour. Yet he continued to feed Wall Street’s expectations of double-digit Accounting Fraud in U.S. Companies 94 growth, and he… …fraud occurred. In the spring of 2002, amid questions regarding USD 400 million in personal loans, Ebbers was facing dismissal (although the board… …did not yet know about the fraud that had been committed). Knowing that the company had accumulated mas- sive levels of debt and that he could not… …standards others will follow.” It was shortly after Ebbers had left that the fraud was discovered and disclosed. Fraud detection and disclosure As…

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  Case 3: Crazy Eddie (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 36 Case 3: Crazy Eddie (1987) When Crazy Eddie, Inc., blew up in a financial scandal in 1987, the debacle… …in- volved just about every kind of accounting fraud then known, as well as receipts skimming and money laundering. Although the total dollars involved… …multi-pronged fraud, probably one of the twentieth century’s most infamous frauds. And even though the fraud is more than two decades old, it provides vivid… …financial statement fraud of all time, but for outrage- ousness, it is going to be very hard to beat.” In 1969, Eddie Antar, a 21-year old high school… …individuals, including Eddie Antar’s wife and mother, were receiving huge salaries for little or no work. Accounting Fraud in U.S. Companies 37… …the most frequent manipulations occur in inventory. In the Crazy Eddie fraud, Eddie Antar “borrowed” merchandise from cooperating suppliers to boost… …Accounting Fraud in U.S. Companies 38 inventory. Besides, Antar’s underlings shipped stock from one store to another overnight, so that it could be… …auditors. “Where were the auditors?” was a question posed repeatedly when the public learned of the Crazy Eddie fraud. The auditors did not detect the… …doctored numbers, and were later sued for malpractice (see Wells 2000, pp. 91–95): Accounting Fraud in U.S. Companies 39 – They had not… …inventory observations were conducted, the auditors inadver- tently contributed to the fraud. For example, rather than climb over boxes in the warehouse…

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  Case 22: Symbol Technologies (2004)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 144 Case 22: Symbol Technologies (2004) To the outside world, Symbol Technologies, Inc. was an icon of… …Holtsville, New York-based com- pany was more fittingly viewed as a classic case study in accounting fraud. “This was a veritable playbook of corporate… …fraud,” the chief prosecutor, Roslynn R. Mauskopf, said. “They cooked the books every which way they could. The execu- tive misconduct was breathtaking in… …its scope.” The investigation of fraud at Symbol began in April 2001 with an anonymous letter sent to the SEC. The letter described two specific… …charged 11 former Symbol executives with securities fraud. According to the Commission, the wide-ranging deception ran from at least 1998 until early… …, they were induced to place orders by the following common features of the “Frank spe- cials” (see SEC 2004): Accounting Fraud in U.S. Companies… …manipulating raw data to match the forecasts given to analysts. Accounting Fraud in U.S. Companies 146 Cookie jar reserves Company executives also… …picked” from a 30-day “look-back period” so as to reduce the cost of the exercise to the executives. Accounting Fraud in U.S. Companies 147… …In addition to committing fraud, some of the executives engaged in efforts to cover up the misconduct and to impede the SEC’s investigation as well as… …sanitize” key portions of schedules that they intended to provide to the investigators. The fraud at Symbol was orchestrated by CEO Tomo Razmilovic…

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  Case 29: Infomatec (Germany, 2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in European Companies 177 Case 29: Infomatec (Germany, 2000) Infomatec, an Augsburg-based maker of interactive TV… …, Infomatec was a darling of Ger- many’s “Neuer Markt”. However, first came euphoria, then came fear, and finally, fraud. The founders of Infomatec, Gerhard… …Harlos and Alexander Haefele, were among the first board members of a corporation from the Neuer Markt to be arrested for allegations of fraud… …information. Accounting Fraud in European Companies 178 Although there were many attempts by single investors to sue Infomatec and the… …suspicion of insider trading and stock price fraud. Haefele received a jail term of two years and nine months, and Harlos was given a two years suspended… …close down in September 2002. Accounting Fraud in European Companies 179 The famous “Infomatec decisions” of the BGH constituted the beginning…

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  Case 27: Flowtex (Germany, 2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in European Companies 169 Case 27: Flowtex (Germany, 2000) The allegedly biggest case of accounting fraud in post-war… …Germany reached a cli- max when the managers of “Flowtex Technologie GmbH & Co. KG” received jail terms of up to 12 years after being convicted of fraud… …executives to live luxurious lives, involving grand houses, chalets, yachts, private jets, and valuable paintings. The fraud was “of a scope without… …digging up road surfaces. In sale-and-lease-back transactions, the drilling machines were re-leased from over 60 leasing companies. The fraud was quite… …of Flowtex, referred to as “service partners”) until there were apparently some 3,400 machines on the company’s books. Once the fraud started, the… …documentation for the individual machines were changed, so that everything seemed to be in order. The classic signs of fraud had been apparent for some time… …line and refused to have anything to do with the company in the future. Accounting Fraud in European Companies 170 The number of leased… …so-called “whistleblower”) had exposed the fraud, because he alleg- edly wanted to warn investors. Shortly afterwards, the Flowtex group collapsed; Manfred… …Schmider, chief executive, and his deputy, Dr. Klaus Kleiser, were ar- rested and charged with fraud. Schmider and Kleiser had concluded 3,411 leasing… …Schmider and Kleiser, Accounting Fraud in European Companies 171 the two company directors, were courted by politicians of all parties as model…

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