Techniques and strategies for understanding fraud



The book I chose to review for this assignment is entitled Fraud 101 : techniques and strategies for understanding fraud -3rd edition by Pedneault Stephen (1966). In this book Stephen Pedneault conclude that fraud has became the common activity in the corporations. I chose this book simply because I agree. If you ask me if society has become less honest and more accepting of individuals who are trying to beat the system my answer again would be yes. I believe that fraud is everywhere in the corporations at a smaller and larger scales and demolishing most of the financial and operational strength of businesses at local regional and international level. According to author the personal characteristics that were likely found within individuals living a socially responsible life things like ethics, morals and pride have been replaced by greed, self-promotion, and the “what's in it for me” mentality.

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Pedneault Stephen (1966) provides an in-depth look at the fraud in a practical manner introducing general business professionals and non accountants to this specialized sphere of operations. The book is about preventing, spying or probing fraud. Throughout its study Pedneault‘s causes and reasons show that fraud is a genuine issue impacting every organization and societal programs. Grounded in current research regarding fraud and its effects the book is suitable for working adults seeking to better understand the causes reasons and measures to control fraudulent activities in the work place.


The author state that ‘' fraud activities we agrue has become the risk for any size corporations ( Stephen Pedneault , 1966 p. xxi ). The author points out that although fraud is the most common activity these days but by proper communication, policies and procedures, internal controls, employee's screening and work verification it can be majorly controlled.

The book starts out by describing what is fraud which describes it as “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” Major types of frauds have also came under consideration like WorldCom, Enron, Adelphia , Arthur Enderson have more than a common place regarding fraud and there are two main areas of fraud exist in the world of accounting: management fraud which is commonly known as financial statement fraud and employee fraud or embezzlement. Many of the absolute frauds of this and past decades fall into one of these two categories. He further explains wire fraud, mail fraud, bank fraud and  tax fraud which can be carried out by any business, organization or individual at the federal or state level. Financial institutions have their share of fraud as well.

Stephen defines how great the fraud enigma and estimating losses and problems generated by fraud. Not only the losses but the costs one has to bear and some financial areas commonly mistreated by fraud are also catered. He portrayed that fraud can and does occur in all places and both for-profit and nonprofit organizations and that all company's and workplaces are at greater risk from the fraud activities. Major types of fraud are accessed where Pedneault notified that fraud is not only limitized to white-collar crimes such as financial disclosures and reports issued to investors and lenders but also includes political malfeasance and embezzlement and individuals invent new plots on daily basis.

The author is of the view that fraud is committed not only for the financial gain or incentives but sometimes the specific fraud may be generated where there is no monetary objective ( Stephen Pedneault , 1966 p. 19 ).

It further shows that there are many high-profile cases of fraud or abuse at local, state, and national levels have resulted in little to no consequence to the person responsible, diminishing the perception or threat of any real consequences if anyone else is caught doing the same thing.

If given the right opportunity, more people today would be willing to commit fraud and could rationalize their behavior if they were caught. It is an allusion yet more and more people follow this way of thinking especially if they believe that no one will get effected and that there will be no actions taken if they are caught. The same holds true with fraud. Fraud occurs every day in many different ambience and most of the perpetrators are not caught that day. Some will limit their fraudulent behavior to a single act and never be detected others will continue acting fraudulently each and every day unless or until their scheme is revealed ( Stephen Pedneault , 1966 p. 22 ).

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Book further goes on to describe the huge frauds involving companies such as Enron, WorldCom, Tyco, American International Group (AIG) and Adelphia have had an immeasurable impact on investors and the entire financial market. Common schemes include recognizing revenue prematurely, capitalizing operating costs, failing to record or disclose liabilities, related party transactions, special interest entities, fictitious inventory and inappropriately recognizing costs have also covered.

Author states that different types of business have different motivations for fraud and in any case at the end the employer suffers a financial loss often involving a significant amount of money that may or may not be recovered. The organization usually loses an employee frequently a key person who performed critical functions and then find, hire, and train a replacement. In addition employee morale is negatively impacted, reducing employee productivity. The whole process results in lost efficiencies, adding to the costs provoked by the employer.

Financial Statement Fraud shows how the management which is responsible for preparing the financial statements, footnote disclosures and all aspects of the financial reporting still find fraudulent activities within the organization. The auditors who perform detailed procedures to ensure the organization's financial statements are reasonably prepared in accordance with all professional standards and are free of any material misstatements that could cause the financial statements to be ambiguous.

Procedures performed include independent verification of the amounts and details, recalculations and other objective measures to corroborate management's balances, results, and disclosures but the study shows the frauds are still detected at a large level.

Stephen feels that by trend analysis which is one of the most common means of detecting fraudulent issues within financial statements the reasonably complete, accurate and reliable information can be received.Unfortunately in today's business environment, no organization with employees can afford to let its guard down when it comes to preventing and detecting employee thefts and abuses.

One goal of this book is to introduce and explain examples of fraud schemes in which two of the common areas for fraud schemes are

  1. Financial statement frauds
  2. Employee embezzlements

Author defines different types of fraud includes Duplicate Payment Fraud, Multiple Payee Fraud, Shell Fraud, Defective Delivery Fraud, Defective Delivery of Services, Defective Delivery of Labor, Defective Delivery of Goods, Defective Delivery of Building Construction, Defective Receipt Fraud, Defective Pricing Fraud.

The second half part of the book looked for the accounting and financial industry's resolution to fraud as new fraud plots are targeted. Fraud responses reviewed and inspected include US Sarbanes-Oxley legislation, development of audit committees, establishment of codes of ethics, internal controls and internal audits, creation of the Public Company Accounting Oversight Board (PCAOB), new professional credentials, training and other industry responses.

Defenses and measures against fraud are covered in details with the primary basic defense being an organization's system of internal controls and is followed by education to address the growing frequency of fraud.  Pedneault defines the details of different plots, signs and symptoms of each plan to increase the chances that disclosures will occur.

Up to this point in the book Stephen has discussed how large the fraud problem has become, estimated fraud losses and costs associated with various schemes and discussed in detail different financial areas commonly exploited by fraud. He has further explained how was Government's Response to Fraud , Sarbanes-Oxley Legislation, Audit Committees, Code of Ethics , Internal Controls , Internal Audit, Public Company Accounting Oversight Board.

Stephen mentioned that during early 2006 eight more new auditing standards were issued with an effective date of December 2006 to address internal controls, fraud issues and the ever-changing business environment. Those new auditing standards were as follows

  • SAS No. 104, Amendment to Statement on Auditing Standards
  • SAS No. 105, Amendment to Statement on Auditing Standard
  • SAS No. 106, Audit Evidence
  • SAS No. 107, Audit Risk and Materiality in Conducting an Audit
  • SAS No. 108, Planning and Supervision
  • SAS No. 109, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
  • SAS No. 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained SAS ( Stephen Pedneault , 1966 p.132 ).
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The last section discussed investigative issues and alternatives in response to fraud schemes that are detected. In the battle on fraud it is dominant that every fraud scheme be detected and stopped as early as possible to minimize a victim's loss. Once detected the victim and the investigator must review the known facts and causation of the scheme and collectively decide if the matter is worth investigating and prosecuting. The investigation decision will be made on a case by- case basis depending on factors such as available evidence and resources as well as the potential cost versus the benefit associated with a complete investigation. In some cases a fraud scheme may not be investigated or prosecuted at all.

The last part also states that there is one organization in particular, the National Association of Certified Valuation Analysts (NACVA) is a professional membership organization focusing on business valuation and appraisal areas of specialization. Today NACVA provides fraud-related training within its Financial Forensics Institute and offers the Certified Forensic Financial Analyst (CFFA) designation with five areas of specialization as follows: ( Stephen Pedneault , 1966 p.135 ).

  • Financial Litigation
  • Forensic Accounting
  • Business and Intellectual Property Damages
  • Business Fraud-Deterrence, Detection and Investigation
  • Matrimonial Litigation

The author goes on to state the measures to detect and investigate fraud :

  1. Internal control
  2. Documentation

Based upon my personal experience, I have found that fraud investigations fall into three general categories:

  1. Proactive fund investigations
  2. Discovery investigations
  3. Supportive investigations

In general the author of this book indicated detecting fraud is difficult whereas investigating fraud can be even more difficult as well as costly. Individuals responsible for investigating fraud must be resourceful and innovative, creative and imaginative. But in reality not every fraud will be investigated. In some cases of potential or even known fraud the matter will be addressed without completing a full investigation. Lastly he states that the fraud will be allowed to continue but will be monitored closely.


Based on author's personal experience as a fraud examiner specializing in preventing and investigating employee embezzlements for the past 20 years he believes employee fraud and theft is higher today than when he started in this field. He also predict fraud schemes will only continue to increase at least into the near future due to the declined state of the global economy, the diminished real estate market, the growing unemployment figures, and the overall state of society.Coupled with the perception of no real consequences beyond termination of employment and perhaps probation if criminally prosecuted employee fraud and peculation has become a genuine risk to every employer, regardless of the workforce employed. More individuals today have the ability to rationalize their behavior rather than choosing right versus wrong and this practice is trickling down to future generations. Lastly individuals today deny their involvement even when it is obvious and take no responsibility for their actions. Instead they focus on ways to divert blame to others. At least these are my impressions based on my first-hand experiences.

Recommendations :

The following recommendations will aid auditors in discovering issues outside a client's records and reports:

  • Rely on your observation skills
  • Don't let clients or targets dictate how and where you work
  • Talk with the workers
  • Corroborate what you learn

The following recommendations helps to minimize fraud :

  • Communicate management's philosophy
  • Document policies and procedures
  • Implement internal controls
  • Conduct employee screening
  • Verify all work performed
  • Review adequacy of insurance coverage


It is concluded that fraud affects everyone. Although you may not have been personally exploited through a direct loss of funds by each scheme committed the costs of fraud schemes are always passed along to consumers in the form of higher insurance premiums, higher medical costs, higher taxes and higher costs of goods and services consumed. We all must remember that we have a personal role in preventing and detecting fraudulent activity. Remain observant or risk becoming a victim to fraud due to complacency and gratification.

In the words of the late Ronald Reagan

“Trust, but verify”