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Contents

  1. Association of Certified Fraud Examiners - Fraud Examiners Manual
  2. Misappropriation of Confidential Information
  3. Optimal auditing with scoring: theory and application to insurance fraud
  4. New Approaches to Fraud Deterrence: It's Time to Take a New Look at the Auditing Process
  5. Article excerpt

For example, people may lie about meeting this quarter's earnings targets, or in this quarter's account statements sent to clients. People who do this may be embarrassed to admit the truth of the losing trade or sub-par performance. We've all seen instances of this type of fraud — while the person may have intended to merely borrow the money or to make up the difference in account performance, almost inevitably, what happens is that the hole is not filled, the lie must be perpetuated, the pressure builds on the "borrower," he gets deeper and deeper into trouble, may take other actions to conceal the initial borrowing, like taking money from other accounts, trading excessively or taking on too much risk, or lying to auditors, and the fraud becomes much worse.

It all starts with a single "borrowing. Eliminating the opportunity for it by having strong controls to prevent the initial "borrowing. Because this type of fraud sometimes comes to light when the person responsible is not around to conceal it, some firms have implemented a mandatory vacation policy. Regulators and firms also may want to continue to remind employees of the importance of the highest level of integrity in the small decisions in life, in that small missteps can mushroom leading to personal and financial ruin.

Reminding employees that people started down a dangerous path with what appeared to be a small indiscretion might contribute to building a culture of compliance. The "Opportunist.

Association of Certified Fraud Examiners - Fraud Examiners Manual

This is the "open cash drawer" scenario. These people see an opportunity to make some easy money and they believe that the risks of detection are relatively low. They may not take a lot of time to consider the ramifications of acting on the opportunity, and they may not stand to make a lot of money.


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  • The Handbook of Fraud Deterrence?

Examples of this are seen in insider trading cases involving people who otherwise may hold positions of respect and authority — corporate executives, lawyers, even compliance professionals. These are people who may not have sought out the material non-public information, but rather came into possession of it through their positions, and becoming opportunists, used that information to trade. Deterrence is particularly important — the opportunist must believe that he or she runs a high risk of detection and punishment. When the opportunist is making a decision to act, he must remember the ramifications.

This is why criminologists say that press photos of white collar criminal defendants arrested and in handcuffs are valuable as a deterrent. In addition, opportunists must also face a credible risk of detection by their own firms' internal controls, and a risk of serious sanction. Firms must have internal supervisory, compliance and audit controls, and a program for addressing non-compliance that will discourage the opportunist when he or she is making the opportunistic decision to commit fraud.

Misappropriation of Confidential Information

The "Crowd Follower. These are people who may acknowledge when pressed that their actions were illegal or unethical but will say, in their defense, that "everyone is doing it. Often, in these situations we find that competitors are not "all doing it," and that that statement was used as a canard to get people to go along with the action.

Examples of this were seen in our market timing and late trading cases, where some people convinced themselves that their actions were acceptable because other industry participants were purportedly doing the same thing. A variation of this are people who believe that other employees in the company are acting in the same way, and that the fraudulent action is expected or will be tolerated.

Examples of this are corporate employees who work in an environment that places pressure on them to make earnings projections and who may believe that "doing whatever it takes" to make the numbers is acceptable or even expected. This type of fraud can be minimized within firms by having a strong Culture of Compliance — a culture that emphasizes from the top down doing what's right even if others are not. Having a Code of Ethics that specifically addresses this issue may help to discourage it.

Also, I think that compliance and legal staff can actively shoot down rumors of "everyone's doing it" before they can get a foothold within the firm and be used to support illegal or unethical actions by the crowd followers. As regulators, we can help minimize it by speaking clearly about prohibited and permissible behavior, issuing interpretive guidance or rulemaking when necessary, and by making clear that illegal conduct will not be condoned by one, or more than one, market participant.

Optimal auditing with scoring: theory and application to insurance fraud

The "Minimizer. For example, these may be people who sell legitimate investment products, but to customers for whom they are unsuitable. They are motivated by the sales commission, winning the sales contest, or other remuneration.

These people may minimize the harm they cause in selling a product with excessive fees or risk, because the customer is obtaining some real benefit from the investment product. Another example of "minimizing" behavior is by people who do not disclose material conflicts of interest or other material information, and may believe, with respect to their investors, clients and customers, that "what they don't know won't hurt them," thereby minimizing in their own minds the harm they cause. These people may not want to answer the client's questions as such discussion may risk losing the sale, the deal or the account.

We've seen examples of this in many instances — such as the investment adviser who does not disclose his revenue-sharing arrangement or his use of his client's soft dollars, and the broker who doesn't tell his customer about penalties that will be imposed on the customer for selling a security early contingent deferred sales loads. While they may minimize it in their own minds, these people can do enormous harm. This is a particularly insidious type of fraud.

These people are perhaps less likely to be deterred by public enforcement action because they have a tendency to minimize their conduct and therefore may not see their conduct mirrored in SEC, FINRA or state enforcement cases. Because this type of fraud often involves non-disclosure, the client may not know what information is not being provided. To prevent this type of fraud, firms need to be aggressive in ensuring that their salesperson has made full disclosure, and the best preventative measure is disclosure to the client or customer in writing and in plain English.

Regulatory examiners also spend a fair amount of time searching for non-disclosures or inadequate disclosures in our examinations of investment advisers and broker-dealers, and I think we must continue to do so, to minimize this type of fraud by "minimizers. I'm sure that there are other types of fraudsters than these, but these types — the " Grifter ," the " Borrower ," the " Opportunist ," the " Crowd-Follower " and the " Minimizer " are examples of those that I have encountered. What's critical in this analysis is to identify the measures and steps that we can take to prevent these types from doing damage to firms and to investors.

For firms, while implementing preventative measures has costs, I hope that firms would consider the costs of not doing so. While no exact measure of the amount of money lost by investors to fraud is available, according to NASAA, each year investors lose billions of dollars due to fraud. Clearly, the benefits of prevention outweigh the costs. For us as regulators, our three-fold efforts should be seen as a common attack on fraud.

New Approaches to Fraud Deterrence: It's Time to Take a New Look at the Auditing Process

First, we seek to educate investors to protect themselves against fraud, second, we conduct regulatory examinations to ensure that firms have robust compliance systems to prevent and detect fraud and other violations, and finally, we aggressively prosecute securities fraud, working together with criminal prosecutors. Your work, collectively and individually, in this fight against fraud could not be more important.

I've enjoyed speaking with you today, and I hope that this Conference will help you to further our collective goals. Many of these included indications of fraud.

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According to this model, there are three factors that must exist for a normal person to commit fraud: pressure e. See, Statement on Auditing Standards No. See , e. This effort includes targeted outreach and education for seniors. Further the report found that the implementation of anti-fraud controls appears to have a measurable impact on an organization's exposure to fraud.

Physician Fraud Deterrence

The SEC's "Compliance Rule" Rule 4 -7 under the Advisers Act and Rule 38a-1 under the Investment Company Act requires that funds and advisers adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws, review those policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.

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Article excerpt

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