Fraud Handbook: Prevention and Detection
Joseph T. Wells
Wiley & Sons, Inc., 2004; ISBN: 0-471-49121-7; 440 pages,
by Allan M. Rabinowitz
2005 - Joseph T. Wells is the most prominent and prolific
writer, speaker, and researcher on fraud-related matters.
A former FBI agent and a criminologist, he founded the Association
of Certified Fraud Examiners (ACFE) in 1988 and serves as
its chairman. Many of the ACFE’s nearly 30,000 members
worldwide are credited, either broadly or by name, with their
contributions to this volume.
book begins with a legal definition of fraud and the range
of employee abuses, details the “relatively little”
research done in occupational fraud and abuse during the
past 65 years, and overviews the ACFE’s 2004 Report
to the Nation on Occupational Fraud and Abuse. This survey
is the third in a series initiated in 1996. The report measured
the cost of fraud and abuse and responses to perpetrators,
and also provided data on the perpetrators’ positions,
genders, ages, education, tenure, and criminal histories,
as well as the sizes and types of victimized organizations.
It also reveals how frauds were first detected.
the 2004 survey, participants were asked, based upon their
personal experience and general knowledge, what they believed
a typical entity loses to fraud and abuse. Their median
response, which the author states is consistent with the
two prior surveys, was 6% of gross revenues. Applying this
percentage to the U.S. Gross Domestic Product of $10 trillion
results in the startling figure of $600 billion in losses.
book presents a ranking by CFEs of the effectiveness of
fraud prevention methods, along with a “fraud tree”
that classifies and categorizes the 2,500-plus fraud cases
disclosed by the ACFE’s three surveys. Three major
categories of occupational fraud are identified and quantified
to arrive at the most common methods of fraud and the vulnerabilities
that permit frauds to succeed.
first category, asset misappropriations, includes theft
or misuse of an entity’s assets through larceny, skimming,
and fraudulent cash disbursements, as well as misuse and
larceny as they apply to inventory and other assets. Wells
defines, clearly explains, and illustrates each of what
might be termed the branches and leaves on the fraud tree.
He supplies excellent case studies and uses the ACFE 2004
survey data as they relate to the misappropriation classifications.
Case studies and report data are similarly used for the
other major categories.
defines corruption, the second major category, as employees
wrongfully using “their influence in a business transaction
to benefit themselves or another person, contrary to their
duty to their employer or the rights of another.”
This can occur via conflicts of interest, bribery, illegal
gratuities, or extortion. Fraudulent statements, the third
major category, constitute intentional misreporting of financial
data about an entity in order to mislead users.
indicating who commits different kinds of fraud, as well
as why and how, Wells covers some financial statement basics
and schemes involving fictitious revenues, recording revenues
or expenses in improper periods, concealed liabilities and
expenses, improper disclosures, and improper asset valuations.
He briefly discusses financial statement audits, analysis,
and fraud prevention.
closing chapter discusses fraud deterrence, which Wells
defines as “the modification of behavior through the
perception of negative sanctions.” He distinguishes
it from fraud prevention, which involves the root causes
of fraud, often societal in nature. He discusses a number
of deterrents, including internal controls, employee education,
the threat of surprise audits, and adequate employee programs
for reporting suspected illegal activities. He makes fitting
reference to the legislative guidelines that set uniform,
mandatory punishments for both individuals and organizations.
appendix contains a sample code of business ethics and conduct
containing sections on: competition and antitrust law; compliance
with laws and regulatory orders; gifts and entertainment;
outside employment of employees; relationships with suppliers
and customers; confidentiality and privacy; cash and bank
accounts; company assets and transactions; expense reimbursement;
company credit cards; software and computers; political
contributions; employee conduct while on company business;
reporting violations; discipline; and compliance with a
code of ethics.
book is filled with fascinating statistics and cases. It
is very clearly written and makes for easy and absorbing
reading. I consider it a wonderfully comprehensive exhibition
of the many faces of fraud.
excellent academic edition of this book is also available,
as are instructional materials. Called Principles of
Fraud Examination, from the same author and publisher,
it comprises substantially the same content. Additionally,
it contains a chapter on interviewing witnesses; a series
of computer audit tests for detecting the various forms
of fraud; learning objectives preceding each chapter; term
definitions; review questions; and a summary and discussion
of issues following each chapter.
M. Rabinowitz, CPA, is a professor of accounting
at the Lubin School of Business, Pace University, and the
former president of the Scribner Book Companies.