Chapter 6 Fraud (Task 2) Flashcards
2 main types of fraud
misappropriation of assets (monetary or inventory)
misstatement of financial statements
risk of error
Collusion
agreement between two or more parties, sometime illegal and secretive, to:
limit open competition by deceiving, misleading or defrauding others of their legal rights, or
to obtain an objective illegally by defrauding, or gaining an unfair advantage
It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities.
example - related party transactions
misstatement of financial assets
This could be destroying, altering, concealing or falsifying any account, record or document that is needed for accounting purposes.
This can be a one-off or something that goes on for a long period of time.
The main aim is to present the results and affairs of the business in a better light than reality
This can be done by overstating assets or understating liabilities by:
Using fictitious transactions, or
Time based fraud (putting transactions in the wrong period).
Commercial pressures usually lead to businesses reporting an unrealistic level of earnings.
Systemic weaknesses
Lack of controls (no controls)
Poor implementation of internal controls (controls dont work)
Lack of monitoring (work no check)
Lack of leadership (management override)
reducing risk
identify
evaluate
respond
ensure compliance
monitor, review and report
Evaluating risk
3 methods
Simple grading (subjective), low medium or high
numerical grading (subjective) - risk given a numerical grade where number increases the risk becomes more serious
Risk matrix - Likelihood and severity
low severity and low likelihood (monitor)
high severity and high likelihood (take action)
implications of fraud
financial impact - theft of assets affects profitability and level of reinvestment
Reputation - internal and external reputation adversely affected
Employees - morale can be damaged by reduction in trust
Teeming and lading
involves the allocation of one customers remittance to another customers account. This is done to hide a shortfall or theft on a customers account.
What is fraud?
Fraud is a deception of some sort which in the commercial organisation will involve the misappropriation of assets (theft / loss) or the misstatement of financial statements (incorrectly recorded).
Fraud Triangle
This is a framework commonly used to explain the reason behind someone’s decision to commit fraud.
It is made up of 3 elements that increase the risk of fraud:
Opportunity
Motive/pressure
Rationaliastion
Fraud Triangle - Opportunity
The change to commit fraud without being caught.
Absent
-Where there is a lack of supervision/ controls
Ineffective
-If supervision / controls are there but not very effective.
Unenforced
-If any violations are not monitored or if there are no consequences.
Unmonitored
-The controls are unlikely to pick it up.
Fraud Triangle - Motive/pressure
Employees who are otherwise trustworthy, might be tempted with the right motivation.
Survival
-They cannot afford to put food on the table (cost of living crisis).
Status pressure
-They try to keep up with their peers’ earnings or spending.
Sudden changes in circumstances
-A large bill or sudden unemployment for their partner.
A sense of being wronged
-Being passed over for a promotion or denied a pay rise.
Fraud Triangle - Rationalisation
Even with motivation and opportunity, most employees will not commit fraud.
This is unless they can justify it to themselves or convince themselves that it is OK.
Perhaps an employee sees another employee being able to travel and claim subsistence and they think it is fine to skim a few quid here and there.
Perhaps an employee see lots of stock sat in the warehouse and thinks “nobody would miss a few of those if I took them”.
Perhaps the company is making such large profits that the employees feels they are entitled to do so because of all the hard work they put in.
How does the fraud triangle affect internal controls?
The fraud triangle helps a business to identify why people might commit fraud.
It also helps them to identify the steps they must take to minimise the risk.
Opportunity is the element that the business can directly influence.
They can do this by strengthening existing controls or putting new controls in places where they were previously lacking.
However, the business should not ignore motive or rationalisation.
A good corporate culture where everyone feels valued, are treated fairly and remunerated adequately will help to reduce motive or rationalisation.
Monitor, review and report!!!!!
Individual stages
Monitor the risk:
Collect data to keep track of the issue.
For example:
If staff expense claims have been identified as a fraud risk, we should monitor the number of claims made, the amount of each claim and what the claim has been made for.
Review the risk
Once the data has been collected, it should be reviewed to see if there are any potential problems.
For example:
The expense data should be checked by a manager for any unusual amounts or types of expenditure.
Report on the risk
Any issues identified should be reported to the highest level of management.
You should think about how this is to be reported.
For example:
It could be in the form of a report form the accounting software.
You may present your findings in a table or chart.
