Fraud Case Study

Abstract

This research paper will take a look at the battle of accounting fraud in the digital age. We will identify fraud not only as "gaining an unfair advantage.." (Romney & Steinbart, 2012, p. 123) but also touch on five specific occurrences that need to happen for an act to be legally fraudulent. Fraud can have quite an impact on the economy as shown in our discussion of Medicare and Medicaid fraud. Misappropriation of assets and financial reporting fraud are also popular types of fraud that we will cover. It is also important to touch base on fraud in the workplace and the impact employee access has on data integrity. Mere human error or intentional fraud happen in the workplace more often than you think and it doesn't stop, it continues and gets bigger and bigger. Lastly we will identify the measures companies can take to prevent fraud in this digital age.

What Is Fraud?

In today's economy, the term "Fraud" has been exposed at many levels. Some of the most common types of fraud we experience today may be securities fraud, identity fraud, Medicare fraud, insurance fraud, employee fraud and financial statement fraud. Unfortunately, technology evolves at rapid speed and so do the criminals that learn to deceive the systems. When we hear the term "fraud" we think of the words "stealing" or someone doing something "dishonest". Romney & Steinbart (2012) provide an elaborate definition to the term fraud:

"Fraud is gaining an unfair advantage over another person. Legally, for an act to be fraudulent there must be:

1. A false statement, representation, or disclosure

2. A material fact, which is something that induces a person to act

3. An intent to deceive

4. A justifiable reliance; meaning, the person relies on the misrepresentation to take an

action

5. An injury or loss suffered by the victim (p. 123)

"Three conditions are present when fraud occurs: a pressure, an opportunity, and a rationalization. This is referred to as the fraud triangle"(Romney & Steinbart, 2012, p. 126). Pressures refer to a person having motivation/incentives for committing the fraud. Opportunity refers to a person engaging in a situation which allows them to do three things: commit, conceal and convert to personally gain from the fraud that is taking place. The condition of "rationalization allows perpetrators to justify their illegal behavior" (Romney & Steinbart, 2012, p.130). Acts of fraud can be prevented by eliminating one or more of the elements mentioned in the fraud triangle, especially the element of opportunity (Romney & Steinbart, p. 130). An excellent system of internal controls should always be in place and monitored to help reduce the risk of fraudulent actions.

How Does Fraud Impact Our Economy?

It's very hard to accurately place a true number for loses encountered on many types of fraudulent schemes, but investigators come close to determining a significant figure. According to the Association of Certified Fraud Examiners, the typical organization may be exposed to lose around seven percent of its annual revenue to fraud. This figure may translate to a potential total fraud loss of more than $2.9 trillion (www.acfe.com., para. 1). For the purpose of this paper, we will discuss a few important fraud schemes our economy encounters today, as our data will provide high impact to our current and future economy due to fraud.

A popular scheme most states are encountering today is Medicare and Medicaid fraud. The number of citizens that have access to these programs is massive, making it very difficult to fully monitor and control. This issue imposes costs on taxpayers at least in the tens of billions of dollars each year. Some examples of how fraud is committed is by "health care providers billing for services not rendered, billing for products not delivered, misrepresenting services, billing for medically unnecessary services, increasing units of service which are subject to a payment rate and falsifying cost reports resulting in increased payment to the health care provider" (www.stopmedicarefraud.gov, para. 3). The Government Accountability Office (GAO) estimates that there are "about $17 billion of improper Medicare payments each year, including fraudulent and erroneous overpayments to health care providers" (GAO-09-628T, 2009, p. 12). This figure does not include the prescription drug benefit, which we all know is a current fraud issue costing us millions. Medicaid has its separate figures when it comes to fraud as well. The GAO states that "the cost of improper Medicaid payments may well be around $33 billion or about 10.5 percent of the program's total spending" (GAO-09-628T, 2009, p. 12).

Although it's the least common type of fraud, Financial Statement Fraud as reported by the Association of Certified Fraud Examiners "is the costliest form of occupational fraud in the U.S." (The Practical Accountant, 2006, p. 6). Financial Statement Fraud counts for only 10% of all fraud cases in the U.S. Some of the actions taken to commit this type of fraud center on manipulation of financial data like reporting fictitious revenues, understating liabilities/expenses and improperly valuating assets in order to create financial opportunities for an individual or entity. The reported average financial statement fraud costs a company about $2 million annually (The Practical Accountant, 2006, p. 6). We may think that the figure of $2 million is not much compared to other frauds like insurance and our example of healthcare fraud, but if we take into consideration how companies also use these fraudulent numbers to their benefit, for example paying lower taxes, the loss due to fraud will keep adding up not just for the business in question, but other sectors of the economy will be affected as well.

Popular Types of Fraud

The average organization loses 7% of its annual revenues to fraud. Fraud is defined by Webster's dictionary as: deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage. The Association of Certified Fraud Examiners estimates that most common frauds are corruption and fraudulent billing schemes, which will be explained further in this paper. Fraud perpetrators are frequently referred to as white-collar