Chapter 6 Flashcards
(42 cards)
Fraud
knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it; the misrepresentation of facts that the individual knows to be false with the intent to deceive
Employee fraud (aka misappropriation of assets)
the use of fraudulent means to take money or other property from an employer. It consists of 3 phases:
1) fraudulent act,
2) conversion of the money/property to fraudster’s use, and
3) cover-up
Management Fraud (financial statement fraud)
deliberate fraud committed by mgmt that injures investors and creditors thru materially misleading information
Errors
unintentional misstatements or omissions of amounts or disclosures in financial statements
Direct-effect illegal acts
violations of laws or govt regs by the company, or its mgmt or employees that produce direct and material effects on dollar amounts in fin stmts
Embezzlement
type of fraud that typically involves an employee wrongfully stealing assets that were entrusted to his/her care, custody, and/or control. In many situations, embezzlement is accompanied by false accting entries or lying to try to cover up the crime.
Employee Fraud Red Flags
Experience sleeplessness Drink too much Take drugs Become irritable easily Can't relax Get defensive, argumentative Can't look people in the eye Sweat excessively Go to confession Find excuses/scapegoats for mistakes Work standing up Work alone Work late frequently
Personality red flags are difficult because:
1) honest people often show them as well,
2) they often are hidden from view,
3) auditors are not in a good position to notice these characteristics.
Thus important for auditors to ask mgmt about changes they’ve noticed in staff.
Characteristics of a typical white-collar criminal:
- Education beyond high school,
- Likely to be married,
- Member of mosque, temple, church
- Ranges in age from teens to over 60
- Is socially conforming
- Employment tenure from 1-20 years (scale of fraud typically increases with tenure)
- No arrest record
- Usually acts alone (70% of the time)
Fraud triangle
The 3 conditions that are likely to be present when fraud occurs: Motivation, Opportunity, and Rationalization.
Motive
In the fraud context, some type of pressure experienced by a person that is believed to be unshareable with friends and confidants
Psychotic motivation
Relatively rare; characterized by the habitual criminal who steals simply for the sake of stealing.
Egocentric motivation
stealing to achieve more personal prestige
Ideological motivation
Held by people who think their cause is morally superior and they are justified in making someone else a victim.
Economic Motivation
Simply the need for money; sometimes intertwined with egocentric and ideological motivations
Opportunity
an open door for solving the unshareable problem by violating some type of trust; violation may be a circumvention of internal control activities, or may simply be taking advantage of an absence/lapse of a control activity.
Examples of opportunity
- inventory is not counted on a regular basis
- proper separation of duties related to cash receipts/payments is compromised because of a termination/retirement
- VP of finance has investment authority w/o any review
- Frequent emergency jobs leave a lot of excess material in a manuf plant just lying around
Rationalization
Describing the act in words that make it acceptable for their self-image
Unimpeachable integrity
the ability to act in accordance with the highest moral and ethical values all the time.
Examples of Rationalization
- I need it more than other people (Robin Hood theory)
- I’m borrowing the money and will pay it back
- Nobody will get hurt
- Company is big enough to afford it
- A successful image is the name of the game
- Everybody is doing it.
- I am underpaid, so this is due compensation.
A ____ ____ ______ and __ __ __ __ can have a pervasive effect on the prevention of fraud at an entity because it can impact all components of an org’s internal control.
strong control environment;
tone at the top
Effective long-run prevention measures are complex and difficult, involving the elimination of the causes of fraud by mitigating the effect of ___, ___, and ____.
Motive;
opportunity;
lack of integrity
Ethics officers
their job is to be available to talk over various ethical dilemmas faced in the workplace and help employees identify legitimate responses; not psychological counselors
Companies that must comply with ____ are req’d to maintain an anonymous employee hotline for fraud reporting.
SOX (2002)
