Fraud Examiners Research Articles

Machine Learning in Financial Fraud Detection: New Models for Predictive Analysis and Mitigating Business Risks

Abstract This research investigates how machine learning (ML) algorithms can be applied to financial fraud detection as a way to improve predictive analysis and reduce business risk of fraudulent activities. Financial fraud is a major threat according to Association of Certified Fraud Examiners (2023) which may cost corporations and consumers more than $5 trillion. Many traditional fraud detection systems have relied on rule-based methods which can be restricted with predefined criteria and not able to adapt to evolving fraud patterns. For this research, we use advanced ML models such as Random Forest, Gradient Boosting, Neural Networks which are trained to analyze the large datasets for anomaly detection and to measure the predictive accuracy with real time analysis. In achieving such rates and with the objectives of accuracy, precision and recall met, we employ a dataset of over 1 million financial transactions from verified sources and apply algorithms which we then evaluate against the metrics. Most notably, we show that ML driven models integrate with conventional methods to reduce false positives by 30%, leading to operational efficiency and cost savings. In addition to providing academic knowledge by validating the robustness of ML techniques, this study provides actionable insights for financial institutions which are looking to implement scalable, data driven fraud prevention system. Through addressing technical and operation challenges, our research demonstrates the practicality of applying ML in lowering financial risk.

The Celadon Group: accounting shenanigans backfire

Research methodology The authors gathered the core information for this case using publicly available filings from the US Department of Justice and the US Securities and Exchange Commission. Publicly available news articles were used to complement the core information. All sources are cited. Case overview/synopsis This case involves an assumed fraud perpetrated by the C-suite members of Celadon Group, Inc. – formerly one of the largest trucking companies in North America. By 2016, the value of Celadon’s truck inventory significantly decreased in value. Instead of reducing the inventory to its market value on the Balance Sheet, management engaged in a series of trades and creative accounting to conceal the fact they had overvalued the trucks. Investment analysts at Prescience Point Capital Management and Jay Yoon (both published on Seeking Alpha) found inconsistencies and red flags in Celadon’s 2016 and 2017 financial reports and reported their suspicions to the public. Soon after, Celadon’s audit committee declared the company’s recent financial statements could no longer be relied upon, resulting in an immediate market loss of $62.3m. In 2019, Celadon entered into a Deferred Prosecution Agreement and was ordered to pay $42.2m in restitution. The Department of Justice (DOJ) criminally charged Danny Williams (president of Quality, a Celadon subsidiary) and he entered a plea agreement. The DOJ also criminally charged Bobby Lee Peavler (CFO) and William Eric Meek (COO). Celadon filed for bankruptcy and operations ceased. Then, in an unexpected turn of events, in 2022, the DOJ dismissed the criminal case against Peavler and Meek. Complexity academic level This case allows students to apply theory learned in a fraud examination or forensic accounting course to an actual fraud case. It discusses red flags and how perpetrators of fraud often need to keep perpetrating wrongdoing to keep the original fraud from being discovered. The authors designed the case for upper-level or graduate business students. It should be included in the course when covering financial statement fraud.

Shift-left in your fight against supply chain fraud

Supply chain operations rely upon various supply chain software systems, centred around the enterprise resource planning (ERP) system. Traditional and still widely utilised and relied-upon audit techniques have addressed the issue of finding problems — particularly fraud — typically too late after they have happened. Inasmuch as the ERP system is considered the business system of record, it may not be the system of origination for every supply chain transaction, meaning that fraud examination needs to look beyond the ERP system and notably before the ERP general ledger. The closer to a transaction’s point of origin the unusual behaviour can be detected, the sooner the outlier issue can be fixed, and ideally averted in the future with the right corrective actions taken then and there. This all helps to prevent the problem — the bad data, the offending transaction, and possibly the incorrect goods — from travelling through the supply chain and manifesting into something worse. Ramifications can include knock-on effects to data analysis, impacts to decisions, passing bad information to supply chain partners, conveying the wrong goods and material effects on financial statements. This paper presents a supply chain perspective that reveals just how much control an enterprise really does have over its supply chain transactions, showcases how reactive fraud discovery methodologies remain firmly in place, and offers a more proactive business model that leverages what most companies already have to improve internal controls and decrease incidences of fraud.

Beyond the numbers: assessing the risk of management motives for fraud in external audits

PurposeThe purpose of this study is to explore how the risk of management motives for fraud can be assessed in external audits.Design/methodology/approachSemi-structured interviews were conducted with 26 experienced external auditors to explore their perspectives on the methods they employ to assess the risk of management motives for fraud.FindingsThe study identifies six methods external auditors can use to assess management motives for fraud. It emphasises that assessing management motives requires auditors to go beyond understanding these motives and necessitates a sceptical and analytical mindset. Auditors need to identify the accounts most vulnerable to management manipulations, observe management attitudes and assess the credibility of management assertions. The auditors in this study highlight specific accounts frequently manipulated by management. Still, manual year-end journal entries are the most vulnerable to management manipulations as they are subject to fewer controls. They recommend increasing the sample size to 100% and assigning more experienced staff, particularly, those with qualifications in fraud examination or anti-fraud training, to audit these vulnerable accounts thoroughly. They also provided examples of how auditors can identify management motives for fraud, observe management attitudes and assess the credibility of management assertions.Practical implicationsAudit standards (e.g. ISA 240, SAS99) lack explicit guidance on assessing management motives for fraud, but auditors are required to consider it in fraud risk assessment. This study proposes guidance recommendations to improve auditors' ability to assess this risk, which could be integrated into professional audit standards and training materials to improve auditors' professional scepticism, ability to challenge management and skills in fraud risk assessment.Originality/valueAssessing the risk of management motives for fraud in external audits has received limited attention in the literature. To the best of the authors’ knowledge, this study is the first to address this knowledge gap.

Anomaly detection with the density based spatial clustering of applications with noise (DBSCAN) to detect potentially fraudulent wire transfers

Most anomaly detection models are developed by using expert system methods that mimic human experts. The process to capture the expertise honed by fraud examiners is complicated and practically challenging, often resulting in suboptimal models. This study proposes a clustering-based model that captures hidden characteristics of potentially fraudulent wire transfers with less human intervention and expertise. Clustering methods classify and group observations with similar characteristics, excluding anomalies from major clusters. The choice of a clustering method and its parameters is often subjective and significantly affects a set of resulting clusters. In order to reduce the subjectivity of a clustering method while retaining its strength, this study proposes a clustering model with Density Based Spatial Clustering of Applications with Noise (DBSCAN) to detect potentially fraudulent wire transfers of an insurance company. The results show that the DBSCAN models identifies hidden relationships between the variables not only included but also excluded for the modeling with noise wire transfers while less human intervention is needed for clustering parameter selections.

THE EFFECT OF AUDIT CHARACTERISTICS ON FINANCIAL REPORTING QUALITY AND THE MEDIATING ROLE OF AUDIT QUALITY: EVIDENCE FROM MALAYSIAN PUBLIC COMPANIES

Our paper examines the effect of audit characteristics on financial reporting quality (FRQ) and the role of audit quality (AQ) as a mediator. The study adopted 201 companies listed in Malaysian Bursa from 2017 to 2019 to achieve our objective. The study used Stata to analyze the data to estimate the effect proposed in the hypotheses. Findings show that only audit fees affected FRQ positively. At the same time, audit fees and company size have positively influenced AQ. On the other hand, AQ has improved the link between audit characteristics and FRQ since the results show a positive effect of audit tenure, audit fees, and audit company size on FRQ through the mediator. This research can help the Institute of Internal Auditors and the Association of Certified Fraud Examiners improve their rules and regulations by enhancing audit characteristics, technical competence, and functionality to help organizations improve AQ. The study's findings are relevant to governments and investors worldwide worried about FRQ and want to guarantee that operations in Malaysia and other emerging markets are closely monitored.

Organizational Culture, Internal Auditors, and Fraud Prevention with Internal Control and Good Corporate Governance as Intervening

A survey conducted out by the Association of Certified Fraud Examiners (ACFE) Indonesia Chapter (2019) shows that the highest fraud cases in Indonesia are corruption. This type of research is explanatory research. The population in this study were all employees in the BLUD Puskesmas environment in Sumenep Regency. The sample selection used the Purposive Sampling method, totaling 210 respondents. The research results show that Organizational Culture has no effect on Fraud Prevention. The role of Internal Auditors influences Fraud Prevention. Organizational culture influences the effectiveness of internal control. The role of Internal Auditors influences the Effectiveness of Internal Control. Organizational culture influences the implementation of Good Corporate Governance. The role of Internal Auditors influences the Implementation of Good Corporate Governance. The effectiveness of Internal Control influences Fraud Prevention. Implementation of Good Corporate Governance influences Fraud Prevention. Organizational culture influences fraud prevention through the effectiveness of internal control. The role of Internal Auditors influences Fraud Prevention through the Effectiveness of Internal Control. Organizational culture influences fraud prevention through the implementation of good corporate governance. The role of Internal Auditors influences Fraud Prevention through the Implementation of Good Corporate Governance.

Application of Beneish M-Score to Detech Fraudulent Financial Statements in State-Owned Company in Indonesia

Introduction/Main Objectives: This study aims to determine which State-Owned Company are included in the manipulator, non-manipulator, and gray company groups. Background Problems: According to a study conducted in 2016 by the Association of Certified Fraud Examiners, the majority Fraud cases involved 81.2% of government agencies, 8.1% of State-Owned Enterprises, and 2.3% of private companies. The businesses designated by of State-Owned Company caused the most losses to the industrial sector due to fraud at 58.8%. Research Methods: This research uses a quantitative descriptive method. The objects in this study are State-Owned Company companies in Indonesia in 2018-2021. The research sample used a purposive sampling technique. Data analysis was performed using seven types of financial ratios contained in the Beneish M-score method. Finding/Results: The results showed that in 2018 there was 1 company that was included in the manipulator group, 22 companies were included in the non-manipulator group, and no company was included in the gray company group in 2018. Then in 2019 there were 3 companies that were included in the manipulator group, 17 companies are included in the non-manipulator group, and 3 companies are included in the gray company group. In 2020 there were 5 companies included in the manipulator, 16 non-manipulator companies, 2 companies included in the gray company group. And in the last year, namely 2021, there will be 1 company that is included in the manipulator group, 22 non-manipulator companies, and no company that is included in the gray company group in 2021.

Be an Expert: A Critical Thinking Approach to Responding to High-Profile Cybersecurity Breaches

ABSTRACT This case examines three high-profile cybersecurity breaches to illustrate how organizations respond to these situations. Students explore breaches involving Capital One, Equifax, and Target and apply critical thinking to examine attack details, breach prevention, and breach responses by assuming the roles of security consultants, chief information officers, and internal auditors. The case objectives include (1) summarizing how organizations respond to cybersecurity breaches, (2) evaluating threats to organizations’ cybersecurity infrastructure, and (3) justifying how accountants and auditors may respond to cybersecurity breaches. This case is designed for undergraduate- or graduate-level accounting information systems, auditing, information technology (IT) auditing, internal auditing, and fraud examination classes and can be extended for intermediate or advanced financial accounting courses. This case provides instructor flexibility, as the class can be split into three groups with each group assigned as the expert on one breach or one or more breaches can be assigned to all students.

The Fraud Triangel Approach: Detecting Fraudulent Behavior in Business Finance in Sidoarjo

Fraud that occurs in MSME players today is increasingly diverse. Fraud can take the form of financial statement fraud, mixing personal finances with business finances or dishonesty in running a business. This causes a prolonged dilemma for MSME actors in managing business income. Many MSMEs have not been able to manage good financial reports. This Research Objective is used to gain a deeper understanding of the behavior and detection of fraud that occurs in Micro, Small and Medium Enterprises (MSMEs) based on the Fraud Triangle Theory and the efforts made by MSMEs in preventing and detecting fraud early. The type of sample experiment research used is the random method. The method of collecting information through direct observation and questions, FGDs and the technique of using documentation in the data collection process. The data analysis approach involves the steps of data reduction, data presentation and data verification. The results of the analysis explain that MSME actors do not all carry out financial statement management and still carry out a lot of fraud. The implications of this research contribute to the understanding of fraud, especially by forensic accountants, auditors, fraud examiners and anti-fraud examiners who are used to see fraud in MSMEs. Highlights : Fraud in MSMEs is multifaceted, encompassing financial statement manipulation and unethical business practices. Research aims to understand fraud behavior using the Fraud Triangle Theory and explore MSME efforts in fraud prevention. Utilizes random sampling and data collection methods like direct observation, FGDs, and documentation to gather comprehensive insights. Keywords : Fraud Triangel, Financial Statements, Fraudulent Behavior and MSMEs

Differences in business fraud between state-owned and private companies: case of Croatia

Abstract Fraud presents a serious problem and arising issue for all of society at national and global levels. According to global fraud research conducted by the Association of Certified Fraud Examiners, it is estimated that the average company loses about 5% of its annual revenue due to different types of business fraud. Total estimated annual fraud losses according to global ACFE research reaches about 4.7 trillion dollars. Business frauds also present an important issue for the Croatian economy, business community and society as a whole. Thereby, considerable attention should be given to this issue with the aim of raising awareness throughout society on fraud and its negative and destructive impact on all of society. The main purpose of this paper is to examine differences in fraud characteristics between state-owned and private companies in the Republic of Croatia. Research was based on data on business frauds obtained by the Association of Certified Fraud Examiners Croatia which included 124 respondents. Data were related to frauds that occurred in Croatian companies in 2021 and 2020. In this paper we focused on fraud characteristics such as fraud loss, type of fraud, fraud duration and methods of fraud detection in order to determine whether fraud in privately owned companies differs significantly from fraud in state-owned companies. Research results revealed how differences in fraud characteristics among privately and state-owned companies exist. Based on a sample of Croatian companies that were victims of fraud, it is noted how fraud in state-owned companies lasts longer and creates greater loses in comparison to fraud in private owned companies. Moreover, data related to estimated fraud loss and fraud duration were statistically significant in terms of differentiating these two groups of companies. Based on data on discriminatory variables a logistic regression model correctly classified 78.46% of companies in the group of companies that are privately or state-owned.

The Fraud Goes On: The Effects of Fraud Duration, Victim Organization Type, and Perpetrator Status

ABSTRACT When occupational fraud is detected, the organization—the victim in the fraud case—decides whether or not to terminate and/or refer the case to law enforcement for possible prosecution. We use survey data collected by the Association of Certified Fraud Examiners (ACFE) to examine the impact of fraud duration, organization type, and perpetrator status on a victim organization’s decision to pursue a particular punishment outcome against the principal perpetrator. We find that fraud duration is an important attribute in determining whether and how victim organizations pursue punishments. Furthermore, fraud duration interacts with victim organization type and with perpetrator status to influence the punishment outcome selected by the victim organization. Our study contributes to the fraud literature by considering the interactions between perpetrator and victim organization characteristics on punishment outcomes and has practical implications for victim organizations and the certified fraud examiners who advise them. Data Availability: Data are available from the Association of Certified Fraud Examiners (ACFE). JEL Classifications: M40; M41; M49; L32; L33.

An Examination of Occupational Fraud Committed by Information Technology Professionals

ABSTRACT To keep up with the demands from increasingly complex systems, information technology (IT) departments have sought IT professionals and frequently provided these individuals with privileged access to organizational systems early in their tenure. This study uses survey data obtained from the Association of Certified Fraud Examiners (ACFE) Research Institute, to examine occupational frauds committed by IT professionals versus frauds committed by non-IT personnel. The differences between IT and non-IT personnel can have an impact on organizational fraud. Findings show that IT perpetrators engage in fraud earlier in their tenure and generate similar losses to their non-IT counterparts but in shorter time frames. Organizational managers and forensic accountants should be aware of these important differences and consider the use of monitoring controls, such as management reviews of access and user activity, to detect fraud committed by IT perpetrators. This study provides several suggestions for future research in this vein. Data Availability: Data are available from the Association of Certified Fraud Examiners (ACFE). JEL Classifications: M480; L860; L250.

Audit, Fraud, and Forensic Accounting

First, the paper will define fraud and analyze a fraudulent accounting situation and the responsibilities of a forensic accountant. Then, the paper will examine and analyze an accounting fraud case involving a money laundering scheme involving a retired couple who own a business and their son. Lastly, the paper will offer insight into the differences between an accounting audit and a fraud examination of financial statements and recommendations on what current fraud model offers the best explanation for the actions of the fraudulent retired couple.

Evaluasi Peranan Audit Internal pada Penerapan Strategi Anti Fraud

This research stems from the enormity of the threat of fraud that can be experienced by any company so it is considered a risk inherent in every company, especially the banking industry. This is shown in the report published by the Association of Certified Fraud Examiners (ACFE) in 2022 which recorded 2,110 cases of fraud in 133 countries across various industries, with the financial or banking industry being the industry victim with the highest number of cases. This research was conducted to evaluate the implementation of anti-fraud strategies in the companies under study to reduce the possibility of fraud occurring and also to identify the role of internal audit in implementing this strategy as one of the company's reliable early detection media. This research was conducted to explore the phenomenon of fraud using a research strategy in the form of a case study type of evaluation at PT. BCD as the company that is focused in this research.. The results of this study explain that PT. BCD, the company under study, has implemented an anti-fraud strategy that at least meets the minimum requirements for its implementation but is unable to instill a culture of the importance of implementing an anti-fraud strategy at every level of position and the company also does not carry out Internal Audit obligations for all aspects of implementation, resulting in weaknesses in the internal control system. Because the application of an anti-fraud strategy alone is not enough to reduce the threat of fraud.

EVOLUTION OF FRAUD-RELATED THEORIES: A THEORETICAL REVIEW

Background and Purpose: Association of Certified Fraud Examiners (ACFE) in their report projected that over 4.5 trillion dollars are globally lost due to fraud, with individual organizations losing about 5 per cent of their revenues to fraud annually. Thus, organizations need to understand what contributes to fraud from an individual to organizational perspective, so that strategies to mitigate fraud are formulated. The objective of this paper is to identify various fraud-related theories used in research and their evolution. Subsequently, this study tries to identify the most commonly used fraud theory, approach and unit of analysis.
 
 Methodology: This paper employed a systematic review process and the name of the theory was used as the keyword in the Scopus database to identify papers that discussed the theories. A total of 342 papers were initially identified and analysed after which repeated papers were eliminated. Following this, 39 most recent papers were further analysed to identify the most common theories, research approaches and units of analysis, used in fraud research.
 
 Findings: The analysis found that fraud theories comprised of theories discussing individual factors and organizational factors, which contribute to fraud. The findings further reveal that the Fraud Triangle Theory is the most frequently applied theory in fraud research, where quantitative approach is most adopted with individuals as a unit of analysis.
 
 Contributions: This paper contributes to the growing interest in the study related to fraud by providing a comprehensive analysis of theories related to fraud by bringing together most commonly used theories in fraud research.
 
 Keywords: Fraud theories, theoretical review, social control theory, theory of reasoned action, theory of planned behaviour.
 
 Cite as: Rasheed, F., Said, J., & Khan, N. I. (2023). Evolution of fraud related theories; a theoretical review. Journal of Nusantara Studies, 8(TI), 322-350. http://dx.doi.org/10.24200/jonus.vol8issTIpp322-350

The impact of the Fraud Examiners on Fraud Risk Management in Lehman Brothers Inc. in the financial crisis in the United States

In this research we try to provide a practical recommendation to help the business leaders prevent and detect the fraud in various business environment, these strategies may help the companies to make difference when it comes to fraud risk management through highlighting the importance of fraud examiners in the fraud risk management. Moreover, fraud examiners can help corporates monitor and control their fraud exposures using five main principles, Risk governance, Risk assessment, Control Activities, Investigation and Corrective Action, Risk Monitoring. This research focuses on the pivotal role of fraud examiners in preventing and detecting fraud particularly in the United States. Through an examination of historical financial scandals such as Enron, Lehman Brother Inc, …etc., corporate governance, risk management theories. The study aims to elucidate the multifaceted contributions of fraud examiners. Adopting a mixed-methods approach involving qualitative interviews and quantitative surveys, the research seeks to uncover the impact of the fraud examiners on identifying, preventing, and addressing fraudulent activities which hold implications for the corporate governance, financial stability, and investor confidence. Association of Certified Fraud Examiners. (2022) report to the Nations on Occupational Fraud and Abuse, found that fraud examiners who are independent of the entity being audited are more likely to be objective and impartial in their investigations. They are also less likely to be influenced by management or other employees who may be involved in the fraud

Constructing an Investment Scam Detection Model Based on Emotional Fluctuations Throughout the Investment Scam Life Cycle

ABSTRACT In recent years, the COVID-19 pandemic has increased investment scams as individuals seek alternative investment opportunities. This study employs emotion analysis to examine the emotional expressions of scammers in investment scams and proposes an investment scam detection model to identify fraudulent behavior. Using data from seven real-world investment scam chat rooms, we perform a two-stage analysis to evaluate the emotional fluctuations of scammers and construct a machine learning-based investment scam detection model. Our findings reveal distinct patterns of emotional fluctuation in investment scam chat rooms according to the established Investment Scam Life Cycle (ISLC), which portrays the progression of fraudulent behavior. We confirm the applicability of machine learning in scam detection, and the emotion analysis presented in this study can assist researchers and fraud examiners in identifying scam scenarios and reducing financial losses.

Developing learning objectives for forensic accounting using bloom’s taxonomy

ABSTRACT This paper aims to identify and explore the learning objectives outlining the core knowledge for forensic accounting education. Bloom’s taxonomy is used to outline and analyze the core knowledge for forensic accounting education (e.g. fraud examination, litigation support, business valuation, and IT forensic accounting) in 15 Australian universities that provide forensic accounting courses. Furthermore, this paper applies a qualitative method to forensic accounting curricula, handbooks, and syllabi. These educational documents were retrieved from Australian universities. The findings report learning objectives under core content knowledge distributed over Bloom’s cognitive areas. This study also provides a unified set of learning objectives to harmonize forensic accounting courses’ teaching and learning processes. The most promising contribution of the paper is to provide a set of learning objectives in all forensic accounting subtopics. The main implications of this paper are relevant to forensic accounting educators, students, standard setters, researchers, regulators, and curricula designers.

A Three-Tiered Analysis of the Factors Influencing the Adoption of Forensic Accounting Field in Saudi Arabia

Purpose: The study shows how several perceptionistic, environmental, and economic aspects can be systematically assessed in advance of investment decisions to launch a proposed Master's program in Forensic Accounting. Theoretical framework: Since the final decade of the twentieth century there has been increasing global interest in adopting and applying forensic accounting, fraud detection methods, and financial fraud examination . However, there are no specialized postgraduate programs in this field at either the local (Saudi) or regional (Middle Eastern) level, despite its importance to meeting the needs of accountancy and judicial employers. Design/methodology/approach: An inductive and analytical approach evaluates the proposed program using a three-stage model that can be adopted by any higher education institution (HEIs) wishing to develop an educational program. Findings: The results show that the vast majority of the program's beneficiaries support its implementation due to its novelty both locally internationally. The program gives the University of Tabuk, its initiator, a sustainable competitive advantage over other local and regional universities through supplying the labor market with graduates qualified in financial criminal investigation. Finally, the financial analysis indicates that the program will be strong financially and have a high level of operational efficiency and expected demand. Research, Practical & Social implications: The findings are beneficial for HEIs seeking to achieve a competitive advantage over their rivals by offering attractive academic programs that meet the demands of the labor market. Originality/value: The study is the first that it uses a three-stage assessment model to show how several perceptionistic, strategic, and economic aspects can be systematically assessed in advance of investment decisions related to launching new academic programs in HEIs.