Corporate Fraud Handbook: Prevention and Detection

By Joseph T. Wells

John Wiley & Sons, Inc., 2004; ISBN: 0-471-49121-7; 440 pages, $65

Reviewed by Allan M. Rabinowitz

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JANUARY 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.

The 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.

In 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.

The 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.

The 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.

Wells 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.

After 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.

The 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.

An 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.

The 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.

An 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.

Allan 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.




















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