1.0 Introduction
Fraud, a crime and violation of civil law is usually defined as a form of deception committed for personal gain but ends up being destructive to another person. The main purpose of committing the crime is to obtain money and other valuables although some people commit scientific fraud in order to gain recognition and become popular. It is a serious problem since its frequency and the losses that result from the same are on the increase. Moreover, being a crime that is committed mostly by knowledgeable people, it is very difficult to investigate successfully on crimes committed. Moreover, when the crime is committed, it ends up affecting every citizen as the losses incurred are either paid through taxes or high premium depending on the specific field that the crime has taken place ( Association of Cerified Fraud Examiners).
1.1 Purpose
Fraud is a large topic since it happens in all sections and takes place in many forms.
With that background in mind, this paper shall discuss more about fraud, its seriousness and types as well as criminal and civil prosecution of fraud.
1.2 Background Information
Fraud has been in existence for long in America as it has been in other countries in the world. According to Singleton & Singleton (2010), in America, the vice started in land schemes since farming was the main economic activity. Further studies illustrate that one fraud which was famous by then was the case involving purchasing of the Manhattan Island in which a white man was tricked by Native Americans. As business corporations began to form, fraud incidences in the same sector also increased. Since then, types of fraud have increased and awareness of the same is also increasing. Several factors have contributed to the increase of fraud rates. For example, although media did not create fraud, it increased the public awareness which eventually increased the problem. Since it is a serious problem as highlighted in the introductory part, it is important to discuss the seriousness of the same.
2.0 Results and Findings
2.1 Seriousness of Fraud
Fraud is a problem that is too costly not only due to the money lost to fraudulent activities but also due to the high cost incurred in detecting and investigating cases of fraud. Since it affects the economy, every citizen pays for the crime while purchasing goods and services. The nature of fraud also increases the seriousness of the crime. According to Sparrow (1998), fraud is committed by the most pleasant personalities who are not only competent but also do have the knowledge to avoid any clue that may lead to identification during investigation. Therefore, the most devastating issue is the fact that it is only a few crimes which are discovered during investigation process.
Fraud is usually is usually considered as an embarrassment and as a result, companies and firms shy away from investigating and making their findings public. As highlighted earlier, investigating fraud is costly and therefore companies fear to add an extra cost. Moreover, most companies have not established effective ways of reporting cases of fraud. Consequently, cases of fraud in such companies continue to take root.
Directly or indirectly, cases of fraud have got a severe effect to the economy. For instance, studies of Albrecht, Albrecht & Albrecht (2009) demonstrates a case where a company loses a dollar due to fraud and the same effect ends up reducing the income of the company. The average income is affected by the rate of fraud and the same affects the Gross Domestic Product. Apart from reducing the GDP, fraud also affects economy indirectly by reducing the rate of investment in a country since it causes the investors to lose confidence in investing in a particular company. For example, once investors noticed that there were several cases of fraud in United States, the purchase of shares in the foreign investors in the stock market in the year 2002 decreased to $49.5 billion. Therefore, it is clear that the economy of United States was greatly affected by corporate frauds (Albrecht, Albrecht, & Albrecht, 2009).
2.2 Types of Fraud
Fraud has been classified differently by differently by different people and for different reasons. The crime can be committed for or against the organization. For instance, employee fraud is committed against the organization while fraud of the financial statement is committed on behalf of the organization. Association of Certified Fraud Examiners classifies fraud in relation to someone’s occupation and some types may include mismanagement, misappropriation of assets and fraudulent statements. Lastly, fraud is classified in relation to the victims. In this type of classification there is customer fraud, employee embezzlement and vendor fraud. Having looked at major classifications, it is important to discuss the most common types of frauds (Wells, 2007).
Currently, employee embezzlement fraud is the most common and it is characterized by employees deceiving their employers and taking assets of a company (American Institute of Certified Public Accountants, n. d). It either occurs directly or indirectly. In direct fraud, an employee benefits from the assets of the company and there is usually no involvement of the third party. On the contrary, indirect fraud takes place when an employee takes bribes from the suppliers or customers in order to provide them with favorable terms. Studies of Singleton & Singleton (2010) clearly illustrate an employee fraud which affected Liahona Construction involved in the home repair business. An employee working for the company was able to utilize twenty five thousand dollars belonging to the company to do his own business and benefited greatly from the profits.
Financial management fraud is the most common form of management fraud which involves top management officials who manipulate financial statement for their own benefit. There are various examples of the same which have been observed and are inclusive of Enron, Waste Management, Government Securities, MiniScribe Corporation and WorldCom, to mention just a few. In most cases, the management team inflates the revenues to prevent the price of the share in the stock market from falling. Their main aim is to hide loses in order to maintain the shareholders (Pedneault, 2009).
Customer fraud is also a common type of fraud in which customers get a service or something from an organization and then refuse to pay. Similarly, customers can deceive an organization to give them something they ought not to have. For instance, studies of Albrecht, Wernz, & Williams (1995) indicate that in most cases, banks are defrauded by their customers. This happens when a customer asks for an overdraft and then fails to pay or even changes the bank latter.
Vendor Fraud is a common problem in America as it is in other countries. It can either be carried out by vendors alone or by buyers and vendors. It occurs when goods are overcharged or when goods purchased fail to be delivered. In addition, it also takes place due to the shipment of inferior goods. Several recent vendor cases in United States have been covered in the press. For example, quite recently, a corporation based in Illinois was able to plead guilty to cost overruns as well as expenses of personnel that were charged to the department of defense. Similarly, there were some allegations of vendor fraud involving Halliburton Contractors and the United States government during the rebuilding of Iraq (Gurin n.d. ).
2.3 Criminal and Civil Prosecution of Fraud
Fraud is a crime and perpetrators are prosecuted using civil and criminal law. The case becomes successful when there is enough evidence and data to show that a criminal acted with an intention to defraud a person or organization. In every country, there are statutes that prohibit both fraudulent and corrupt activities. Once a person pleads guilty, they either serve jail sentences or pay fines. Since Fraud cases are sometimes too technical for judges to understand, accountants and fraud examiners are used during prosecution to give the actual amount of damages. In most cases, criminal prosecution which involves crimes committed to the society or public takes place first. Civil prosecution is supported by various civil laws present in a particular country that provides a remedy for violation of rights of an individual. Banks are usually prosecuted in a civil court once they commit fraud against their investors. For instance, Citigroup bank was sued by investors in a civil court after loaning money to WorldCom. The bank agreed to pay investors $ 2.65 billion as the civil claims. Although civil and criminal laws operate with one common goal there, is a difference between criminal and civil cases.
3.0 Conclusion
Studies have indicated that fraud which is theft by a way of deception is a very serious crime in all parts of the world. While it is not even possible to get accurate statistics, studies which have been conducted illustrate that it is on the increase. It has serious consequences on organizations as it can make an organization to be declared bankrupt and it takes sometime before an organization can recover the amount lost due to fraudulent activities. Fraud is a field that is highly fragmented, a condition which adds to the complexity of the same. The condition is attributed by the fact that there are many types of fraud classified in relation to the victim, perpetrator and the method used to achieve the main goal. In the view of the fact that fraud crime is multifaceted, criminal or civil laws are used during prosecution.
Recommendations
It is important for all members of the public and the government to be involved in fraud fighting since the battle cannot be won single handedly (Oldham, 2009). Secondly it is important to note that fighting fraud is a challenge and expensive. Therefore, if the government and all the stakeholders realize the extent of the problem, then they will be in a position to invest in fighting the crime.
References
Association of Cerified Fraud Examiners. (n.d.). Occupational Fraud:A Study of the Impact ofan Economic Recession. Retrieved November 9, 2010, from http://www.acfe.com/documents/occupational-fraud.pdf
Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2009). Fraud Examination. Stamford: Cengage Learning, .
Albrecht, W. S., Wernz, G. W., & Williams, T. L. (1995). Fraud: bringing light to the dark side of business. Chicago: Irwin Professional Pub.
American Institute of Certified Public Accountants . (n.d.). A Snapshot of Workplace Fraud. Retrieved November 9, 2010, from 2010: http://www.journalofaccountancy.com/Issues/2010/Jun/WorkplaceFraud
Gurin, W. (n.d.). Types of Fraud Investigated by the Office of the Inspector General. Retrieved November 9, 2010, from http://www.wcb.state.ny.us/content/main/fraud/WhatIsFraud.jsp
Oldham, J. D. (2009). Avoiding Fraud: Tips for Individuals. Retrieved November December , 2010, from http://theory.stanford.edu/~oldham/publications/financial/fraud-20090730.pdf
Pedneault, S. (2009). Fraud 101: Techniques and Strategies for Understanding Fraud. Hoboken: John Wiley and Sons .
Singleton, A. J., & Singleton, T. W. ( 2010). Fraud Auditing and Forensic Accounting. Hoboken: John Wiley and Sons.
Sparrow, M. K. (1998). Fraud Control in the Health Care Industry: Assessing the State of the Art. Retrieved November 9, 2010, from http://www.ncjrs.gov/pdffiles1/172841.pdf
Wells, J. T. (2007). Corporate fraud handbook: prevention and detection. Hoboken: John Wiley and Sons.
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