Accountants' Handbook Volume Two: Special Industries and Special Topics, Eleventh Edition

Chapter 49. DETECTING FRAUD

W. Steve Albrecht

Brigham Young University

Conan C. Albrecht

Brigham Young University

INTRODUCTION

Fraud is different from most crimes in that it is seldom observed. Traditional crimes usually leave evidence that can be seen. For example, if a bank is robbed, there are usually witnesses, physical money is missing, and the entire episode is often captured on video. Similarly, the discovery of a body that is obviously the victim of murder leaves little question about whether a crime has been committed. With fraud, however, it is not usually obvious that a crime has been committed. Only fraud symptoms or indicators, called red flags, are observed. In addition, these red flags can often be caused by nonfraud factors, such as unintentional control weaknesses or missing documents, so significant investigation is required before investigators can know for certain that fraud has occurred.

To detect fraud, managers, auditors, employees, and examiners must learn to recognize these red flags and pursue them until sufficient evidence has been collected. Investigators must discover whether the symptoms resulted from actual fraud or were caused by other factors. Unfortunately, in many cases, many fraud symptoms go unnoticed, and even symptoms that are recognized are often not vigorously pursued.

TYPES OF FRAUD

Before discussing the detection of fraud, it is important to discuss the different types of frauds. Statement on Auditing Standards (SAS) No. 99 discusses two types ...