Fraud 101

Stephen Pedneault, CPA, CFF, CFE, is the founder and Principal of Forensic Accounting Services LLC, a CPA firm located in Glastonbury, Connecticut, specializing in forensic accounting, employee fraud, and litigation support matters. Steve is also the author of the forthcoming Wiley title, Anatomy of a Fraud Investigation. He has written numerous articles appearing in local and national media and is a contributor to Fraud Casebook: Lessons from the Bad Side of Business (Wiley). For more information about Stephen Pedneault, go to www.forensicaccountingservices.com.

• Preface ixAcknowledgments xvIntroduction xviiChapter 1 The World of Fraud 1Definition of Fraud 1The Many Types of Fraud 2Chapter 2 Why Is Fraud Committed? 19A Rationalizing Society 20Financial Statement Fraud 22Financial Fraud Comes in Different Shapes and Sizes 23Motivators Differ by Type of Business 25Employee Schemes 27In the End 32Chapter 3 Financial Statement Fraud Schemes 33Where Do Things Go Wrong? 34Trend Analysis 42Beyond Traditional Audits 45Chapter 4 Employee Embezzlements 51The Fraud Triangle 55Areas for Concern 57Chapter 5 Other Fraud Schemes 69Duplicate Payment Fraud 71Multiple Payee Fraud 72Shell Fraud 73Defective Delivery Fraud 77Defective Receipt Fraud 88Defective Shipment Fraud 89Defective Pricing Fraud 91Chapter 6 Contract Rigging Schemes 97Stage One: Obtaining the Contract 97Stage Two: Contract Change Orders 102Unbalanced Bidding 114Detection Recommendations 118Rotation Fraud 119Where Do We Go from Here? 121Chapter 7 Responses to Fraud 123Government’s Response to Fraud 124Accounting Profession’s Response to Fraud 129Internal Audit Profession’s Response to Fraud 133New Credentials, More Training, Better Awareness 134Articles, Books, and More Resources 136Chapter 8 The Importance of Internal Controls and Internal Audit 143Why Have Internal Controls? 144Déjà Vu 148Good Internal Controls 150Internal Audit 152Chapter 9 Evidence 159What Is Evidence? 160Documentation 163Chapter 10 Conducting Fraud Investigations: A Practical Approach 171Proactive Fraud Investigations 171Discovery Investigations 172Supportive Investigations 175Strategy 178Predication 180The Investigative Plan 181Conducting the Procedures 183Findings 186Use of the Findings 188Chapter 11 Fraud Investigation Alternatives 189Assessing the Feasibility of a Full Investigation 189Monitoring Operational Areas at Risk of Fraud 197Revamping Internal Controls: Closing the Barn Door 200Doing Nothing? 203Appendix A Vending 209Lessons Learned 213Appendix B Living a Façade 217Prevention Techniques 221Appendix C Disappearing Inventory 225Internal Controls 230Index 231