Table of Contents

Innovation of Fraud Deterrence System in the Organization
using Forensic Accounting and Data Mining Techniques
Pornchai Naruedomkul, Chulalongkorn University, Thailand
Pannipa Rodwanna, Chulalongkorn University, Thailand
INTRODUCTION
It is undeniable that corporate fraud is one of the
critical issues for the businesses around the world including
Thailand. The 2010 Association of Certified Fraud Examiners
(ACFE) Report stated that the loss due to fraudulent activities
in the businesses was about 5-7% of the annual revenues in
the U.S.A. (Table 1). The amount of loss due to occupational
fraud and abuse did not decrease after the enacted of
Sarbanes-Oxley Act and Statement of Auditing Standard
(SAS) No.99 in 2002.
Description
1995-1996 2002 2004 2006 2008 2010
Gross Domestic Products 6.67 10.00 11.00 13.04 14.20 58.00
Loss to occupational fraud and abuse 0.40 0.60 0.66 0.65 0.99 2.90
Loss to gross domestic products (%) 6.00 6.00 6.00 5.00 7.00 5.00
Table 1: Estimated loss due to occupational fraud and abuse in U.S.A.
Source: Adapted from [1] [2] [3] [4] [5] [6]
In Thailand, KPMG Forensic conducted the fraud
survey in 2005 and 2007 and it appeared that fraud risk was
a major concern for businesses in Thailand [15]. The estimated
financial loss in case of fraud detected in Thailand from
2005 to 2007 is shown in Table 2. While the percentage of
fraud less than a million baht (Thailand currency) has come
down, fraud above a million baht has gone up. The survey
also indicated that the fraud issues found in Thailand are
also found in other countries [15].
Table 2: Estimated financial losses in cases of fraud detected
in Thailand
Source: Adapted from [14]
After Enron and WorldCom collapsed, many
organizations had established the policy and regulations to
detect the internal fraud e.g. Sarbanes-Oxley Act, Statement
of Auditing Standard (SAS) No.99 and International Standards
on Auditing No. 240. In Thailand, Thai Standards Auditing
No. 240 states that the auditor should ensure that the
financial statements audited are free from fraud or error
which is in line with International Standards on Auditing
Year
Amount 2005 2007
Baht 10 million and above 11% 16%
Baht 5 million to less than 10 million 5% 8%
Baht 1 million to less than 5 million 15% 18%
Baht 100,000 to less than 1 million 31% 27%
Less than Baht 100,000 38% 31%
No. 240. The Securities and Exchange Act 1992 of Thailand
clearly defines that if the auditor finds any false supporting
documents and/or incorrect recording in the accounts of a
listed company, the auditor shall disclose the effects on the
financial statement in the audit report.
These regulations are used to detect the frauds
which have already occurred in the business resulting in the
loss or damage. It would be beneficial to the business if there
was a system in place where fraud can be detected early so
that it can be prevented or loss can be minimized as much as
possible.
Deterrence is the best way to prevent fraud before
it happens which should reduce the loss or damage to the
organization [31] [33]. To develop this system, it is important
to understand the behavioral factors influencing a fraudster
[26].
RESEARCH OBJECTIVE
This research identifies the risk factors causing the
fraudulent activities in the organization. A risk model to
identify potential fraud and a fraud deterrence system are
developed in the paper.
LITERATURE REVIEW
FRAUD DEFINITION
Fraud can be defined in many ways. Reference [12]
defined fraud as “Fraud (false pretense) involves intentional
and material misrepresentation of one or more material
facts with the intent of taking of property from a victim. The
misrepresentation must be more than mere sales hyperbole.”
Albrecht (2003) defined fraud as “a representation
about a material fact which is false and intentionally or
recklessly so, which is believed and acted upon by the
victim, to the victim’s damage” [cited in 27].
Oxford, dictionary of law (2003) defined fraud as
“a false representation by means of a statement or conduct
made knowingly or recklessly in order to gain a material
advantage. If the fraud results in injury to the deceived
party, he may claim damages for the tort of deceit. A
contract obtained by fraud is voidable on the grounds of
fraudulent misrepresentation” [17].
American heritage dictionary (second college edition)
defined fraud as “a deception deliberately practiced in order
to secure unfair or unlawful gain” [cited in 14].
Black’s law dictionary describes fraud as “the
intentional use of deceit, a trick or some dishonest means to
deprive another of his/her/its money, property or a legal
right” [cited in 18].
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