Acc 646 - Fraud

Final Project Milestone 1

ACC 646

SNHU

Jay Black

Fraud is not something that is new to the world, but has been around for thousands of years. Fraud has likely been around since the existence of currency (Hammond, 2015). The first reported attempt of fraud goes back to 300 B.C., when Hegestratos, who was a Greek sea merchant, took out an insurance policy on his ship and its cargo. For this type of insurance policy, the merchant would borrow money and then repay the loan with interest when the cargo was delivered. If the loan was not paid soon after arrival, the ship and its cargo would be repossessed. In this case, Hegestratos planned to unload the cargo, sink his empty ship, and not repay the loan. Unfortunately for him, his plan did not work. He was caught by his crew trying to sink his ship, was chased off the ship and ended up drowning while trying to escape.

Fraud is defined as “the unlawful taking of another’s property by deception” (Rufus, et al, 2015). According to the United States common law, there are four basic elements to fraud: 1) a false representation of fact, 2) knowledge of the falsity by party making false representation, 3) the intent to deceive the party by making false representation, and 4) a reasonable reliance by the innocent party. There has been noted that the fifth element to fraud is that actual loss was suffered by an innocent party. All of these elements of fraud contain intent and it is said that fraud is a crime of intent (Rufus, et al, 2015).

In the past 20 or so years, there have been multiple corporate fraud cases where corporations and accounting firms have gone bankrupt and stakeholders have lost billions. Not only as an employee in the accounting department, but also as a stakeholder, you need to be aware of any evidence of fraud. Most fraudsters are relatively smart and know how to deceive. They usually do not start doing fraudulent activities taking large amounts of money. They usually start small and see if they get away with it without getting caught. If they don’t get caught they start taking more and more and trying new ways to deceive. As a stakeholder, you need to be aware of elements and signs of fraud to avoid being deceived and losing money.

There are three different sociological theories of crime, which are theories of why people engage in crimes. Understanding the following theories of crime will help the investigator determine the who, what, when and why the criminal has committed an illegal act. The three theories of crime include the strain theory, social learning theory, and control theory (encyclopedia.com, n.d.).

The strain theory is caused because the perpetrator has been experiencing some type of emotional or physical strain, and they end up engaging in some type of crime to escape the strain they are experiencing (encyclopedia.com, n.d.). They may also engage in a crime to get back at someone or to seek revenge or to make them feel better.

The social learning theory is a theory based upon who the criminal has associated with. Because your closest friends and associates have an influence on you, you sometimes behave differently around them than you do around your family. The criminals learn to engage in crime by their associations to others (encyclopedia.com, n.d.). Close friends and associates have can a large impact on your behavior and what we learn from them. If you have delinquent friends, then you are more likely to behave in a delinquent manner and are reinforced by their friends. The last theory is the control theory. The control theory focuses on how criminals have needs and desires that are satisfied through crime and legal channels, and they believe that it is easier to steal money than to work for it (encyclopedia.com, n.d.). Social control theory is derived from people’s relationships and values help to encourage them not to break laws. According to the theorists, people do not engage in crimes because of the controls placed on them. The control theory focuses on the factors that keep the individual from engaging in the crime (encyclopedia.com, n.d.). Crime is then less likely to occur when others try to directly control their behavior. These factors and theories will help the investigator understand why and how the crime happened.

The fraud triangle is a system designed to define the reasoning behind a worker’s decision to commit fraud in the workplace. The three stages of the fraud can be summarized as pressure, opportunity, and rationalization. Forensic Accountants need to be aware of these three indicators of the fraud triangle that are commonly present when workplace fraud occurs (Rufus, et al, 2015). Although the fraud risk factors do not indicate that fraud exists, there can still be warning signs that there is opportunity for fraud, and this is where internal audit can change the controls to prevent fraud if there are any indications of signs of fraud.

The fraud triangle can be broken out into personal and organizational characteristics, which give indicators of red flags associated with the occurrence of fraud. The fraud triangle and personal characteristics related to pressure and rationalization,