CFFE – FRAUD PREVENTION AND DETECTION NOTES

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INTRODUCTION

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Special appreciation and recognition to the lecturers who have helped in the development of our materials, These are: FA Kegicha William Momanyi (MBA Accounting, CPA, CISA and CCP), FA Bramwel Omogo (B.sc Actuarial Science, CIFA, CIIA, CFA first level and ICIFA member, Johnmark Mwangi (MSc Finance, CPAK, BCom Finance),CPA Gregory Mailu (Bsc. Economics) CPA Dominic Rasungu and CPA Lawrence Ambunya among others.

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PAPER NO. 7 FRAUD PREVENTION AND DETECTION

UNIT DESCRIPTION

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to effectively prevent and detect fraud in various settings.

 

LEARNING OUTCOME

A candidate who passes this paper should be able to:

  • Design and implement fraud prevention and detection controls
  • Develop a fraud/corruption policy
  • Develop fraud prevention programs
  • Conduct a fraud prevention health check up
  • Provide support to the various parties with responsibility for fraud

 

1.            Introduction to Criminology

  • Understanding criminal behaviour
  • Theories of crime causation
  • White collar crime
  • White collar crime and crimes of the middle class
  • Occupational crime and related criminology theories
  • Organisational crime and the related criminology theories
  • Fraud/Corruption study – cost, how fraud is committed, detection, victims, perpetrators, red flags, presence/absence of internal controls and commission of fraud
  • Perpetrators of fraud/corruption and white collar

 

2.            Introduction to Fraud Prevention and Detection

  • Introduction fraud and corruption
  • Red flags of fraud and corruption
  • Effects of fraud and corruption
  • Why fraud occur and the root causes of fraud
  • Fraud prevention versus internal controls
  • Types of basic controls
  • Types of fraud related controls
  • Strong and weak controls versus effective controls

 

3.            Fraud Prevention Programs

  • Promoting fraud prevention to board and management
  • Anti-Fraud Policy
  • Increasing the perception of detection
  • Analytical review procedures
  • Fraud assessment
  • Surprise audits
  • Proactive forensic audits and fraud audits
  • Fraud awareness training and education
  • Reporting programs
  • Enforcement of mandatory vacations
  • Job rotation policy
  • Effective management oversight
  • Tone at the top
  • Fair personnel practices and employee support programs
  • Open door policies
  • Organisation structure
  • Ethics based metrics and performance goals and evaluation
  • Response to fraudulent activities

 

4.            Corporate Governance – Responsibility for Fraud Prevention

  • The role of corporate governance in fighting fraud and corruption
  • Principles of corporate governance
  • Organisation of Economic Corporation Development (OECD) Principles of corporate governance
  • Treadway commission
  • Mwongozo – The code of governance for state corporations

 

5.            Management – Fraud Related Responsibilities

  • Vicarious or imputed liabilities
  • COSO – internal controls – Integrated framework
  • Anti – Fraud and corruption policy
  • Effective compliance and ethics program
  • Fraud prevention health check up

 

6.            Auditors’ Fraud Related Responsibilities

  • International standards on auditing (ISA240) – Auditor’s Responsibilities Relating to Fraud in an audit of financial Statements
  • International standards on auditing (ISA 315 Understanding the entity and its environment
  • International standards on auditing (ISA 200) Professional Scepticism
  • International standards on auditing (ISA 330)
  • The international organisation of securities commissions
  • The public interest oversight board
  • Institute of internal auditors – Professional Practice Standards related to fraud – Standard 1210 – 2130
  • Internal auditor’s role in fighting fraud
  • The auditors’ (internal and external) responsibility for auditing value for money in government audits

 

7.            Ethics for Forensic Auditors/Investigators

  • Introduction to ethics
  • General ethics
  • Professional ethics
  • Morality, ethics and legality
  • Examiners/investigators code of professional ethics
    • Commitment to professionalism and diligence
    • Illegal, unethical and conflict of interest
    • Integrity
    • Complying with lawful orders
    • Expression of opinions/ guilt or innocence
    • Confidentiality
    • Prohibition of concealment of material matters
    • Continuous practical education

 

8.            Case Study

The candidate will be required to do case study on:

  • Conduct a fraud prevention health check on a sample
  • Score the seven criteria of evaluation
  • Identify the fraud prevention gaps
  • Make recommendations on how to seal the gaps
  • Identify a scenario for a fraud examiner where there is no specific code conduct

                   

CHAPTER ONE

INTRODUCTION TO CRIMINOLOGY

Understanding criminal behavior

Criminal behavior is often a difficult topic to discuss, as there are many different variables that must be taken into account in order to truly define and obtain a thorough understanding of the concept. What is criminal behavior? “A criminal act occurs when there is a motive, a means, and an opportunity. Criminal behaviors that lead offenders to recidivate are often called “risk factors” or “criminogenic needs” (National Institution of Corrections & Services). One of the ways to attempt to understand criminal behavior is to gain comprehension and knowledge of criminogenic needs. These needs are traits associated with criminal thinking and behavior. It has also been dynamically defined as “crime producing factors that are strongly associated with risk” (Latessa & Lowenkamp, 2005). There are several factors related to increasing risk and criminality related to individuals exhibiting criminogenic traits; however, there is an identified beginning to criminal behavior, and it starts with biology and genetics.

Biological risk factors can be defined as “anything that impinges on the child from conception to birth” (Kaiser & Rasminsky, 2010). Many people would be surprised to hear that criminal behavior can be broken down and identified as early as conception. However, if we consider the fact that parents genetically pass on their prior behavior, we can try to begin to understand that parents who may have possessed criminogenic needs, could potentially pass on those traits that lead to criminal behavior. “Genes even help shape the environment. Genes influence how parents bring up their children; genes affect the responses that children evoke from their families and the others around them; and, as children grow older, genes sway their choice of companions and surroundings” (Kaiser & Rasminsky, 2010). Genes can define an individual’s ability to control temperament, impulsivity, low self-esteem, and a lack of empathy.

One of the easiest topics to discuss as it relates to how biological factors can contribute to criminal behavior would be substance abuse. “When the faces of sisters and brothers in a family resemble those of their parents, physical inheritance has clearly played a role in the clustering of physical characteristics within the family” (Miller & Carroll, 2006). If physical characteristics are passed on from generation to generation, it is certainly possible for psychological characteristics to be passed on as well. Some of those psychological characteristics include genes that are directly associated with substance abuse, which can often lead to increased negative criminal behavior.

Once an individual crosses over into the justice system, it is our responsibility as a society to make every attempt possible to rehabilitate. I am not so naïve to think that we can change everyone; however, I do believe we can change those that may simply be tired of the system, or are ambivalent about whether they want to change. Believe it or not, there are plenty of people that want to change, but they simply don’t know how. The best practice for achieving potential success is by using a combination of resources that are now being implemented by many agencies across the nation. The first involves assessing an individuals’ risk of recidivism by using a validated assessment tool. This calculates the likelihood an individual will commit additional crime based on various factors such as prior criminal history, marital status, age, a history of drug or alcohol abuse, employment and educational history, as well as financial status. All of these factors can help identify the percentage of risk a person portrays, and their likelihood that they will be arrested. These assessment tools are accurate, and can even break down the probability to identify the risk of re-arrest within a six month period. The higher the risk, the higher the chance that the individual will be back in the system with another criminal charge. While assessing risk can assist probation officers in learning how to monitor an individual, it is only a small part of an algebraic equation that can be used to help change the criminal mindset.

The second part of the assessment tool involves identifying criminogenic needs. As discussed earlier, these are traits that a person possesses that can lead to criminal behavior. There are a few schools of thought on this matter.  One study found a person could possess up to eight traits, while others identified that a person can possess up to six. For the purposes of this article, we will focus on six:

Anti-social values: This is also known as criminal thinking. It includes criminal rationalization or the belief that their criminal behavior was justified. Individuals possessing this trait often blame others for their negative behavior, and show a lack of remorse.

Criminal Peers: Individuals with this trait often have peers that are associated with criminal activities. Most are often involved with substance abuse including drugs or alcohol. Peer influence often persuades the individual to engage in criminal behavior. They will also typically present with a lack of pro-social community involvement.

Anti-social personality: These traits often include atypical behavior conducted prior to the age of fifteen and can include, running away, skipping school, fighting, possessing weapons, lying, stealing and damage to either animals or property.

Dysfunctional family: One of the most common traits includes a lack of family support, both emotionally and otherwise. An individual’s family lacks the ability to problem solve and often is unable to communicate effectively. Family members often don’t possess the ability to express emotions in an appropriate manner. More often than not, they are also involved with criminal activity.

Low self-control: This involves one’s ability to control temperament and impulsivity. People that carry this trait often do things that they didn’t plan, and will fail to think before acting. The mindset is of the here and now, and not on the consequences of the behavior.

Substance abuse: The use of drugs or alcohol that significantly affect one’s ability to engage in a successful and productive lifestyle. There is often an increased tolerance to substances, in addition to an inability to stop use.

A normal assessment process can take approximately sixty day to complete; any more or less can lead to inaccurate results that may be skewed. Once an officer has an idea of the risk level and has identified the criminogenic traits involved, they can begin the supervision using appropriate tactics that will help motivate the individual to be successful, but also hold them accountable by using appropriate sanctions to correct negative behavior during the entire course of supervision.

Theories of crime causation

 

Understanding human behavior and why people obey the law helps explain some of the reasons people commit fraud. However, there have been a number of theorists who have attempted to explain specifically why people commit crimes. In more sophisticated sciences, such as chemistry and physics, theories build on one another as new facts emerge from studies prompted by the reigning theories. In criminology (as in virtually all the social sciences), differing theories compete for acceptance and are often reevaluated and challenged by new developments.

 

The following sections summarize some of the better-known criminological theories, both past and present.

 

Classical Criminology

Classical criminology, based on the philosophical principle of utilitarianism, is founded in the belief that human beings are rational and calculating creatures and, therefore, do things in order to avoid pain and produce pleasure. Some of the components of classical criminological theory are:

  • People have free will, which they can use to engage in either criminal or noncriminal behavior.
  • Criminal behavior will be more attractive if the gains are estimated to be greater than the losses.
  • The more certain, severe, and swift the reaction to crime, the more likely it is that the penalties will control the behavior.

 

Two theorists’ names are most frequently associated with classical criminology: the Italian Cesare Beccaria and the Englishman Jeremy Bentham. (Bentham, marvelously eccentric, willed that his body be preserved and placed in the entryway of University College London. His wishes were carried out; the body can still be seen today by anyone visiting the university.)

 

The policy implications of classical criminological thought, which are prominent today in theories grouped under the heading of rational choice, are that penalties should be established that make the anticipated results of criminal behavior less appealing than the prospects of the losses, such as the loss of freedom. The theory also has a benevolent component in that it suggests that penalties that are too severe serve no purpose, since they are needlessly excessive for the deterrence they seek to achieve.

 

Utilitarianism remains a favored approach to understanding criminality, with its assumption that offenders will calculate potential gains and losses before they decide to disobey the law. Organizational sentencing guidelines, for example, are sometimes based on the teachings of classical criminology, mandating that monetary penalties be calculated at a level that will induce companies to conclude that breaking the law is not fiscally appealing.

 

There are several major difficulties inherent in the theory, though. The first is that many people do not stop and add up the gains and losses of lawbreaking before they engage in it. Second, the impact of penalties can be very different for different people; the thought of a week in prison might be terrifying to one person, but it could be nothing more than an inconvenience to someone else. Third, it is very difficult to know whether the penalty will, in fact, result from the behavior; most offenders optimistically assume that they will not be caught.

 

Rational Choice Theory

Rational choice theory, based on the tenets of classical criminology, is the theory that the decision to commit a crime is a rational and careful choice on the perpetrator’s part with the goal of some intended benefit. This theory states that specific crimes are chosen and committed for specific reasons. Before committing a crime, the offender performs a cost-benefit analysis that “weighs the chances of getting caught, the severity of the expected penalty and the value to be gained by committing the act.”5 Under this theory, the decision to commit a crime is influenced by characteristics of both the offender and the offense. Criminal activity will only occur when the opportunity to engage in it is present. Offenders will gravitate toward targets that are readily available to them, such as their employer.

 

Based on this theory, the best way to reduce crime is by making it more difficult to commit. Removing individuals’ opportunities to commit crime should lessen its occurrence. This idea is strongly supported by deterrence methods in the form of target hardening and punishment. Target hardening refers to preventive controls that aim to reduce or avoid the likelihood of a crime occurring. Examples include locking doors, separating duties, physically safeguarding assets, and using online two-factor authentication. Deterrence theory states that punishment should be swift, certain, and severe for it to be an effective deterrent. Thus, if someone in an organization commits fraud and their swift, certain, and severe punishment is made apparent, the rest of the organization will be deterred against committing that crime. Rational choice theory presents crime as a conscious choice that must be met with reduced opportunities for criminal activity and increased personal risk in order for deterrence methods to be successful.

 

Routine Activities Theory

Routine activities theory, a variation of classical theory, holds that both the motivation to commit crime and the supply of offenders is constant. There will always be a certain number of people, motivated by greed, lust, and other forces, who are inclined toward lawbreaking. The determining factor, particularly in predatory crimes, such as those involving violence and theft, are the activities of potential victims. There are three important elements that influence crime:

  • The availability of suitable targets, such as companies and individuals
  • The absence of capable guardians, such as auditors and security personnel
  • The presence of motivated offenders, such as unhappy or financially challenged employees

 

Routine activities theory states that crime occurs in specific instances where these three elements come together. For example, it predicts that crime is likely to occur when an employee (i.e., the motivated offender) has access to a company’s payroll (i.e., the suitable target) and there are few controls (i.e., capable guardians) to prevent the employee from embezzling money. Similar to other classical theories, routine activities theory emphasizes the premeditated thoughts that exist prior to making the decision to commit crime. If someone thinks it is likely that they will be caught or there is not a suitable target, then they are less likely to commit a crime.

 

Biological Theories

Biological theories maintain that criminal behavior is not the result of choice (the calculation of benefits and potential losses), but rather is caused by the physical traits of those who commit crime. The foundations of biological theory were laid by Cesare Lombroso, an Italian doctor, who insisted that there were born criminals—people who were atavistic, or a throwback to more primitive human types. Lombroso spent his career measuring the bodies of offenders and concluded that they were significantly asymmetrical, with such things as sloping foreheads and other “anomalies.” Later critics would point out that Lombroso used no control group—that is, he did not measure people who were not criminals. If he had done so, he would have found that non-criminals possessed the same physical traits that Lombroso presumed were indicative of criminal propensities.

SAMPLE WORK

Complete copy of CFFE FRAUD PREVENTION AND DETECTION study notes is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com

Unsurprisingly, Lombroso’s view and others like it have been roundly discredited. However, more nuanced scientific studies have impacted criminological research. These studies generally focus on certain biological aspects that can affect an individual’s behavior. For example, testosterone and adrenaline are generally associated with aggression, and high testosterone or adrenaline levels might make a person more aggressive and more likely to commit crime. Additionally, the excessive consumption of alcohol has also been linked to an increase in aggression.

 

Of course, these studies are limited in scope and do not imply, for example, that a person who has high testosterone levels is more likely to commit crime; these kinds of studies simply suggest that there are certain biological factors that can influence an individual’s behavior.

 

Culture and Crime

Cultural theories view crime as the product of a culture or subculture to which an individual belongs. Beginning at childhood, culture shapes the set of values, beliefs, and actions that are learned through interactions with others. Transmitted through intimate peer groups and across familial generations, cultural ideas provide support toward behavior that is deemed acceptable and valued in the greater society. Under cultural frameworks, crime rates will differ globally due to the prioritization of individual and group needs, economic models, and the importance of other social institutions in a specific country.

 

Individualism Versus Collectivism

In countries where an individualistic culture is present, the needs of the individual are stressed over those of society. Behaviors tend to be dictated by individuals’ attitudes and preferences, and importance is placed on qualities such as independence, self-reliance, and assertiveness. Conversely, collectivistic cultures emphasize the needs and goals of all members over those of the individual. In this type of culture, relationships with other members of the group and the interconnectedness that results play a central role in forming personal identities. Qualities viewed as favorable in collectivistic cultures include generosity, helpfulness, and harmony with others.

The relationship between individualistic and collectivistic cultures has been used to explain the difference in crime rates across countries. In countries where individualistic characteristics govern the norms of society, crime rates tend to be higher. Due to success being measured by one’s own personal achievements, more people will commit crime to align their outcomes with what is expected of them. In collectivistic cultures, where more importance is placed on social groups, individuals are less likely to commit crime for fear of being ostracized.

Individualistic ideals generally support increasing the power given to law enforcement and the court system, combined with stronger punishment, as a way to deter future crime.

Collectivistic cultures place more focus on improving social conditions and creating a more equal society to make crime less appealing.

 

Psychological Theories

Theories rooted in psychology are based on the view that criminal behavior is the product of mental processes. The psychoanalytical ideas of Sigmund Freud focus on early childhood development and on unconscious motivations—that is, motivations of which the offenders themselves are not aware. Freud identified a three-part structure to human personality: the id (the drive for food, sex, and other life-sustaining things), the superego (the conscience that develops when learned values become incorporated into a person’s behavior), and the ego (the “I,” or the product of the interaction between what a person wants and what their conscience will allow them to do to achieve what they want).

SAMPLE WORK

Complete copy of CFFE FRAUD PREVENTION AND DETECTION study notes is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com

Cognitive and Personality Theories

Cognitive theories stress inadequate moral and intellectual development as the foundation of criminal acts. There are also personality theories, which support the belief that traits such as extroversion are responsible for a significant amount of crime.

 

Integrated Theories

Integrated theories draw from choice theory, biological theory, and psychological theory. These theories often acknowledge that, while criminal activity is a choice, this choice is heavily influenced by biological, psychological, and social factors.

 

Conditioning Theory

  1. J. Eysenck, working with what he calls conditioning theory, argues that the failure of a person to incorporate the rules of society satisfactorily represents the major explanation for subsequent criminal behavior. Eysenck maintains that extroverted persons, both normal

and neurotic, are more difficult to condition—that is, to train—than introverted persons, and that extroverts, therefore, get into more trouble than introverts.

 

Another psychological theme is that frustration is the precursor of aggression. The theory suggests that the expression of aggression, such as a fraud perpetrator retaliating against their employer, will alleviate the frustration and allow the organism to return to a more satisfactory state.

 

Social Structure Theories

These theories concentrate on the kinds of societies that generate particular levels of crime. Why is the crime rate in Japan so much lower than in the United States? Why do many

Central American countries have high rates of homicide while Hong Kong’s homicide rate is notably low? There are various kinds of sociological theories, all based on similar premises but with differing emphases.

 

Social structure theories address the relationships between individuals and large-scale social arrangements, such as class structure and the economy. Social structure theories treat crime as the result of social progress, economic injustice, or the disconnect between the goals that a society favors (e.g., wealth and power) and the means by which those goals are achievable. To explain crime, these theories tend to focus on poverty, poor education, the presence of neighborhood subcultures (e.g., gangs), a lack of employment opportunities, and the pressure to be materially successful.

 

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