Chapter 2 - Why People Commit Fraud Flashcards
3 Sides of the Fraud Triangle
- Perceived pressure
- Perceived opportunity
- Attitude/Rationalization
Types of Pressures
- Financial
- Vice
- Work-related
- Other e.g. keeping up with the joneses, want to present that you’re successful
What is perceived opportunity
Why I can do it without being caught
what is attitude/rationalization?
Why people tell themselves that it’s OK to steal. if someone has low ethics or integrity they will need little to no rationalization of their actions
what is the perceived pressure
why you feel that you have to do it. perceived because it’s real to the person, even if it’s not a factual pressure
what is COSO Framework?
- control environment
- Risk assessment
- control activities
- information and communication
- monitoring
COSO - explain control environment
- tone at the top
- attitude of the company management and staff regarding controls
COSO - explain Risk Assessment
- a systematic approach to managing risk
- considers the potential for fraud and how to prevent it
- also monitoring external factors that could render internal controls ineffective
COSO - explain control activities
policies and procedures that ensure managements directives are carried out
COSO - explain information and communication
-understanding managements info technology, accounting systems, communication systems and processes
COSO - explain monitoring
- How does management monitor its controls to see if they are working
- Do they make changes when they realize something isn’t working?
things that increase the likelihood of fraud…
-weak internal controls
strong internal controls help because…
they help to prevent fraud. fraudsters are less likely to try because they know they’ll eventually get caught
types of control activities or procedures for preventing fraud
- segregation of duties
- physical safeguard (locks)
- passwords and authorization
- independent checks
- good documents and record keeping to help you detect
5 aspects of the control environment
1 .managements role and example
- management communication
- appropriate hiring
- clear organizational structure
- effective internal audit department
what is management’s role in the control environment?
setting the tone at the top
explain management communication in the control environment?
code of conduct, training, communication regarding acceptable behaviors
explain appropriate employee hiring in the control environment
screen for honest and competent employees. hiring people who are appropriate for the job
explain clear organizational structure’s role in the control environment?
everyone knows who is responsible for what. e.g. 5 people using the same till in one day–no way to track who money from it
explain effective internal audit department’s role in the control environment?
perform independent checks
for the 5 elements of the control environment, what parts of the fraud triangle do they relate to?
- management’s role/tone at the top - rationalization
- management communication - rationalization
- appropriate hiring - rationalization
- clear organization structure - opportunity
- effective internal audit department - opportunity
characteristics of a target that make it easier to commit fraud…
- asymmetric info or the inability to judge the quality of what you’re getting e.g. can’t tell if your car is fixed or not by looking at it
- failure to discipline fraudsters , which emboldens them to do it again
- person having lack of access to information. e.g. stockholders limited knowledge
- ignorance, apathy, incapacity. e.g. hospital patience, old people
- lack of an audit trail.
what accounts are most susceptible to be utilized in a fraud and why?
income statement or expense accounts because they’re closed out to RE at the end of the month
name 6 financial pressures
- greed
- living beyond means
- inability to pay bills/personal debt
- poor credit
- personal financial losses
- unexpected financial needs
what is dual custody?
- requires 2 individuals to work together at the same task
e. g. having 2 people verify and sign off on a deposit
ways to rationalize fraud
- the organization owes me
- nobody will get hurt
- I deserve more
- it’s for a good purpose
of the 3 elements of the fraud triangle, what do most companies focus on?
what are frequently overlooked?
focus on: opportunity
overlook: pressure and rationalization
what are internal controls that prevent or detect fraud?
COSO
what pressure is most commonly associated with fraud?
financial pressure
what is the control environment
the work atmosphere that an organization establishes for its employees
