17. Fraud, fraudulent behaviour and their prevention in business

Question 1

Define fraud.

Answer 1

Intentionally and dishonestly obtaining an advantage causing a loss to another party.

Question 2

Courts conclude behaviour to be fraudulent if there has been (3)

Answer 2

• Deliberate falsification of documents/records.
• Deliberate ignorance of error
• Deliberate exclusion of information

Question 3

What are the three prerequisites of fraud? Explain them.

Answer 3

• Dishonesty
• Opportunity
• Motivation

Question 4

Factors that might indicate increased risk of fraud include, but are not limited to (8)

Answer 4

• Small management
• Unnecessary complex corporate structures
• Poor staff morale
• Personnel who do not take leave/holdings
• Lavish lifestyle of employees
• Lack of monitoring of control systems
• Unusual transactions
• Payments for services disproportionate to efforts

Question 5

Example frauds by management (4)

Answer 5

• Financial statement fraud
• Misappropriation of assets
• False insurance claims
• Using the company’s assets for personal use

Question 6

Example frauds by employees (4)

Answer 6

• Sales ledger fraud
• Purchase ledger fraud
• Skimming schemes
• Payroll fraud

Question 7

Example fraud by third parties (4)

Answer 7

• False billing fraud
• Bank account fraud
• Advance fee fraud
• Ponzi schemes

Question 8

What are the four types of creative accounting?

Answer 8

• window dressing
• delayering a company’s expenses
• manipulation of revenue recognition
• off-balance sheet accounting

Question 9

What is money laundering?

Answer 9

Money laundering is the process of concealing criminal property into a legitimate business.

Question 10

The four main offences in money laundering legislation are:

The penalties for them are:

Which act outlines this?

Answer 10

The Proceeds of Crime Act 2002

• Laundering: explained above. Maximum 14 year prison sentence along with fines.
• Failure to report: failure to disclose proof or suspicion of money laundering. Maximum 5 year prison sentence along with fines.
• Tipping off: disclosure of information which may prejudice a money-laundering investigation. Maximum 2 year prison sentence.
- inciting another to launder

Question 11

Money laundering usually follows three distinct phases:

Answer 11

• Placement: placing illegal cash into a legitimate business
• Layering: transferring money between businesses or locations to conceal the original source.
• Integration: the money now appears to have come from a legitimate source.

Question 12

In which circumstances are the minimum government requirements for businesses to be customer due diligent? (5)

Answer 12

• When establishing a new business relationship
• When dealing with an occasional transaction of £15,000 or more
• When there are doubts about credentials
• When a customers circumstances change
• When money laundering is suspected

Question 13

The reporting process for money laundering is as follows: (3)

Answer 13

• Employees reporting suspicious activity to the MLRO
• The MLRO reporting further
• MLRO should report to the relevant authorities

Question 14

What are some of the possible impacts of fraud to a company? (5)

Answer 14

• Loss of shareholder confidence
• Loss of assets
• Financial difficulties
• Collapse of the company
• Fines

Question 15

What happens after fraud? (3)

Answer 15

• try to blame external auditors
• employees involved fired
• internal auditors make recommendations to improve internal control in that area

Question 16

measures to prevent and detect fraud (5)

Answer 16

• Management
• Risk assessment process
• Information systems
• Segregation of duties
• Internal audit.

Question 17

What are the duties of different groups in preventing fraud? (3)

Answer 17

• The duties of the board of directors: to maintain a sound system of internal control
• The duties of the audit committee: to monitor and review internal control and risk
• The duties of employees: fraud prevention and detection

Question 18

What are the four main offences within the UK Bribery Act 2010?

Answer 18

• Bribing a person so that they perform a function improperly (active bribery).
• Requesting, accepting or receiving a bribe as a reward for performing a function improperly (passive bribery)
• Using a bribe to influence a foreign official to gain a business advantage.
• Failing to prevent bribery on behalf of a commercial organisation.

Question 19

What are the main components of the Money Laundering Regulations 2017? (3)

Answer 19

• customer due diligence
• internal control
• record keeping

Question 20

What do we not consider when assessing money laundering?

Answer 20

Materiality