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Fraud Examination, 4E

Chapter 4: Preventing Fraud. Fraud Examination, 4E. Learning Objectives. Understand how to create a culture of honesty, openness, and assistance. Know how to eliminate opportunities for fraud. Understand how to set up an effective organization to minimize fraud.

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Fraud Examination, 4E

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  1. Chapter 4: Preventing Fraud Fraud Examination, 4E © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  2. Learning Objectives Understand how to create a culture of honesty, openness, and assistance. Know how to eliminate opportunities for fraud. Understand how to set up an effective organization to minimize fraud. Understand the importance of proactive fraud auditing. Understand the importance of creating a comprehensive approach to fighting fraud. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  3. Organizational Culture • Create a culture of honesty, openness, and assistance by… • Hiring honest people and providing fraud awareness training • Creating a positive work environment • Providing an employee assistance program (EAP) that helps employees deal with personal pressures © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  4. Studies have indicated that Nearly 30 percent of Americans are dishonest 40 percent are situationally honest Only about 30 percent are honest all the time Organizational Culture © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  5. Organizational Culture • Hiring Honest People • Recommendations: • Verify applicant’s résumé and application • Require applicant endorsement • Train interviewers to conduct thorough and skillful interviews • Use industry-specific approaches as deemed necessary © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  6. Organizational Culture © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fraud Awareness Training Train on… The costliness of fraud The effects of fraud on pay and benefits The nontolerance of fraud Actions to take if fraudulent activity is suspected

  7. Organizational Culture Positive Work Environment • Create a positive work environment by: • Setting expectations about honesty • Having a code of conduct • Conveying those expectations • Having open-door or easy access policies • Having positive personnel and operating procedures. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  8. Organizational Culture Positive Work Environment • Setting Expectations • The Pygmalion effect: • People generally perform according to a leader’s expectations “What you expect is what you’ll get”. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  9. Organizational Culture Positive Work Environment • Code of Conduct • Sarbanes-Oxley Act of 2002 • SEC – Code of Conduct for all employees • Must be visible • Must be communicated frequently • Example: • Hormel Foods Code of Conduct © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  10. Organizational Culture Positive Work Environment • Open-Door or Easy Access Policies • Helps prevent fraud by: • Allowing employees share feelings • Allow management to know of employees’ pressures, problems, and rationalizations © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  11. Organizational Culture Positive Work Environment • Personnel and Operating Policies • Related to high- or low-fraud environments • Examples producing high-fraud environments • Inadequate pay • Lack of recognition for job performance • Perceived inequalities in the organization • Inadequate expense accounts • etc. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  12. Employee Assistance Programs (EAP) Help employees reduce pressure by helping employees deal with: Substance abuse Gambling Money management Health, family, and personal problems Organizational Culture © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  13. Organizational Culture Employee Assistance Programs (EAP) • Provide support systems with programs like: • Wellness • Team building • Coaching • Conflict resolution • Critical incident response • Assessment • Counseling • Referral © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  14. Organizational Culture © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  15. Eliminate Opportunities For Fraud • Five ways to eliminate fraud opportunities: • Have good internal controls • Discourage collusion • Monitor employees and provide a whistle-blowing system • Create an expectation of punishment • Conduct proactive auditing © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  16. Internal Controls © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  17. Internal Controls • COSO’s Internal Control Framework • A good control environment • A good accounting system • Good control activities • Monitoring • Good communication and information © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  18. Internal Controls © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  19. Discourage Collusion • Collusive frauds have increased probably because of… • Increased complexity of business • Increased frequency of supplier alliances • Suggested method of discouraging collusion: • Have a “right-to-audit” clause on the back of all purchase invoices © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  20. Monitoring Employees • Section 307 of the Sarbanes-Oxley Act of 2002 requires all public companies to have a whistle-blower system • 33 percent of all frauds are detected through tips • A good whistle-blowing program is one of the most effective fraud prevention tools • Not only companies in the US have whistle-blowing systems but also government agencies and foreign companies in major countries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  21. Effective systems have the following: Anonymity Independence Accessibility Follow-up Whistle-Blower System © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  22. Expectation of Punishment • “One of the greatest deterrents to dishonesty is fear of punishment.” • “Real punishment involves having to tell family members and friends about the dishonest behavior.” • “A strong prosecution policy that is well publicized lets employees know that dishonest acts will be harshly punished.” © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  23. Proactive Fraud Auditing • Good fraud auditing involves four steps: • Identify fraud risk exposures • Identify the fraud symptoms of each exposure • Build audit programs to proactively look for symptoms and exposures • Investigate fraud symptoms identified © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  24. Proactive Fraud Auditing • Statement on Auditing Standards No. 99 • Consideration of Fraud in a Financial Statement Audit • Brainstorming the risks of fraud • Discussing with management about awareness of fraud • Using unpredictable audit tests • Requiring on every audit procedures responsive to detecting management override © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  25. Preventing Fraud – A Summary © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  26. Preventing Fraud Current Model © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

  27. Preventing FraudSuggested Model © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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