This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Frauds are defined as "the on purpose misleading presentation of financial information by one or more persons, who are member of the company's personnel or management, as a consequence of manipulation, creation or falsification of documents or files, withholding assets, registration of fictive transactions, false appraisals & valuations, etc."(I.B.R.1998).
According to the First Public Sector Survey conducted by Saiga Advancing Auditing and Accountability, The Southern African Institute of Government Auditors, fraud is seen by both private and public sector as a very serious aspect. The problem of fraud is viewed more seriously in the public sector; however the private sector is expecting a larger increase in the occurrence of fraud. This seems to indicate a stance that fraud levels in the public sector cannot rise above the levels currently experienced.
There are different types of fraud such as investment fraud, bribery and corruption, corporate fraud and public sector fraud. According to Serious Fraud Office, an independent Government department that investigates and prosecutes serious or complex fraud, and corruption, public sector fraud is where criminals seek to exploit Government grant and compensation schemes for their personal gain. This type of fraud affects all taxpayers by stealing public money. The criminals will produce fake documents and applications to deliberately deceive and exploit certain schemes which are in place to provide help to genuine applicants.
Example of fraud case
Enron fraud is one of the largest securities fraud scandals in history. Enron was forced to file for bankruptcy in December 2001. Enron is an energy company based in Houston, Texas that deals with the energy trade on an international and domestic basis. It was formed in 1985 when Houston Natural Gas merged with InterNorth. After several years of international and domestic expansion involving complicated deals and contracts, Enron was billions of dollars into debt. All of this debt was concealed from shareholders through partnerships with other companies, fraudulent accounting, and illegal loans. There are a few of the partnerships that allowed Enron to hide debt and the SEC has uncovered several instances of financial fraud committed by high-ranking executives at Enron. Many of the executives have been charged with wire fraud, money laundering, securities fraud, mail fraud, and conspiracy.
Reasons contribute to fraud
According to KPMG Forensic Fraud Survey 2009, experience suggests that periods of economic downturn can bring about elevated conditions for fraud and misconduct. Typically referred to as a "fraud triangle," these conditions include pressures, opportunities, and rationalizations for committing fraud. In the current environment, these increased risks may manifest themselves in the financial statement in multiple ways.
David Lehmann, the Head of Deloitte Malaysia's forensic practice, in his article "Deloitte Insight: Fraud and corruption risk - Is the risk higher in tough economic times?" said that here are three elements that have a direct impact on the incidence of fraud and corruption: Financial pressure, opportunity and rationalization. A 2008 research study (Research Advisory Board Study) conducted of a sample of the Securities and Exchange Commission's (SEC) Accounting and Auditing Enforcement Releases (AAER) filed from 1982 to 2005, found that most financial statement manipulations occurred in 1999 and 2000, during the economic downturn, partly caused by the burst of the dot- com bubble. In an environment of rationalisation and cost cutting to preserve profit, resources can often be diverted away from prevention and detection initiatives, such as effective implementation of internal controls. Quite often there is a lack of appropriately qualified and experienced accounting personnel to allow for adequate segregation of duties or to conduct fundamental tasks such as regular bank account reconciliations.
Management's efforts to prevent, detect, and respond to fraud must be informed not only by its prevalence and nature, but also by the root causes of such misconduct. According to KPMG Forensic Fraud Survey 2009, the most commonly cited were inadequate internal controls or compliance programs. Similarly, almost half of executives surveyed cited management override of controls, inadequate director oversight over management, and collusion between employees and third parties. A lower number of respondents, almost a third, cited collusion between management and third parties or between employees and management.
How to prevent or reduce fraud
David (2005) states that fraud is not a possibility but a probability. It also explains that fraud can be better prevented if decisions are made by a group and not an individual. However, this is not the case if the group has the same interest in mind. Then fraud may not be prevented. Conversely, the group is influence by the dominant decision maker who ends up deciding everything.
To minimize fraud, Coram and others (2007) suggested that internal audit adds value through improving the control and monitoring environment within organizations to detect fraud.
David Lehmann highlighted the importance of having whistleblower systems by using the data from the Association of Certified Fraud Examiner's Report to the Nation in 2008 (US) to support his statement. According to the report, 46.2% of fraud incidents examined were detected by tips, an increase from 34.2% in 2006. In 2006, the next highest means of detection was by 'accident' at 25.4%, decreasing to 20% in 2008. In 2008, detection by 'internal controls' at 23.3% took over from 'accident' as the second highest means of detection. So, in 2008, fraud detected by tips was almost double that of the next detection method. Best practice suggests that the most cost effective and successful whistle blowing services are operated independently, offer multiple reporting avenues, including a dedicated phone number, email, internet, freepost and free facsimile, operate 24/7 and have trained, multilingual response centre analysts to receive calls.
The effect of fraud
The National Fraud Authority estimates that in 2008 alone, fraud cost the UK ?30 billion. On average, it costs every adult member of the population ?621 per year- both through direct impacts of frauds and recovered indirectly through taxation and the increased costs of products and services. This shows the how great of the magnitude of the impact of fraud.
According to the International Auditing and Assurance Standards Board (IAASB) Handbook 2009, Glossary of Terms, audit risk is defined as "the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated" (Martyn Jones, 2009). Of less concern is the situation where the auditor states that the financial statements do not meet the standard of fair presentation, when in fact they do. This view is consistent with the European Court of Auditors (Opinion NÂ°2/2004), where audit risk also refers to acceptable audit risk which indicates the auditor's willingness to accept that the financial statements may be materially misstated after the audit is completed and an unqualified (clean) opinion was issued. If the auditor decides to lower audit risk, it means that he wants to be more certain that the financial statements are not materially misstated. Whereas, according to International Standards on Auditing (ISA), materiality defines as "the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement" (Messier, 2007).
On the other hands, audit risk is fundamental to the audit process because auditors cannot and do not attempt to check all transactions and no one would be prepared to pay for the auditors to do so, hence the importance of the risk‑based approaches toward auditing. K. H. Spencer Pickett (2006) stated that a risk-based approach gives new auditors principles and methodologies which they can apply effectively and helps experienced auditors enhance their skills for success in the rapidly changing business world.
Traditionally, auditors have used the risk-based approach in order to minimize the chance of giving an inappropriate audit opinion, and audits conducted in accordance with ISAs must follow the risk-based approach, which should also help to ensure that audit work is carried out efficiently, using the most effective tests based on the audit risk assessment. Auditors should direct audit work to the key risks (sometimes also described as significant risks), where it is more likely that error in transactions and balances will lead to a material misstatement in the financial statements. It would be inefficient to address insignificant risks in a high level of detail, and whether a risk is classified as a key risk or not is a matter of judgment for the auditor (Martyn Jones, 2009).
In operating audit risk, ISA 6 (1991) breaks the concept of audit risk into three component risks which are inherent risk, control risk and detection risk (Janet L., 1996). In this context, ISA 315 stated that audit risk can be expressed as a multiplicative probability function as below:
Audit Risk = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)
According to International Standards on Auditing (ISA 400), inherent risk is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. If the auditor concludes that there is a high likelihood of such a misstatement, ignoring internal controls, he would assess the inherent risk as being high. An example of inherent risk is that the valuation of inventory is inherently more risky when the type of inventory is difficult to value due to its nature, so the valuation of diamonds are inherently much more risky than, say, tennis balls.
While, control risk is the risk that a misstatement could occur in an assertion about a class of transaction, account balance or disclosure, and that the misstatement could be material, either individually or when aggregated with other misstatements, and will not be prevented or detected and corrected, on a timely basis, by the entity's internal control. To return to the example of an entity having an inventory of diamonds, this is inherently risky in terms of valuation where if the entity has competent, experienced values valuing its inventory, the control risk will be lower as compared to a situation where incompetent people are tasked with performing that function.
Furthermore, detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements (Messier, 2007). It is important to note that if the detection risk is high, the auditor is willing to accept a high detection risk, and will do less substantive testing as compared to a situation where the detection risk is lower. In short, auditor assesses inherent risk and control risk and manages detection risk for assertions for individual accounts and classes of transactions. Audit risk and the three component risks may either be quantified or dealt with qualitatively (Janet L., 1996).
Public sector, sometimes referred to as the state sector is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal. The public sector overlaps with the private sector in producing or providing certain goods and services. Composition of the public sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity.
The role and scope of the public sector and state sector are often the biggest distinction regarding the economic positions of socialists, liberals and libertarian political philosophy. In general, socialists favor a large state sector consisting of state projects and enterprises, at least in the commanding heights or fundamental sectors of the economy (although some socialists favor a large cooperative sector instead). Social democrats tend to favor a medium-sized public sector that is limited to the provision of universal programs and public services. Economic libertarians and monarchists favor a small public sector with the state being relegated to protecting property rights, creating and enforcing laws and settling disputes, a "night watchman state". Anarchists favor no public sector at all, with these powers enforced by voluntary associations or private organizations which are hired to provide these services.
The organization of the public sector (public ownership) can take several forms, including:
I. Direct administration funded through taxation; the delivering organization generally has no specific requirement to meet commercial success criteria, and production decisions are determined by government.
II. Publicly owned corporations (in some contexts, especially manufacturing, "state-owned enterprises"); which differ from direct administration in that they have greater commercial freedoms and are expected to operate according to commercial criteria, and production decisions are not generally taken by government (although goals may be set for them by government).
III. Partial outsourcing (of the scale many businesses do, e.g. for IT services), is considered a public sector model.
A borderline form is complete outsourcing or contracting out, with a privately owned corporation delivering the entire service on behalf of government. This may be considered a mixture of private sector operations with public ownership of assets, although in some forms the private sector's control and/or risk is so great that the service may no longer be considered part of the public sector.
Local government refers collectively to administrative authorities over areas that are smaller than a state. The term is used to contrast with offices at nation-state level, which are referred to as the central government, national government, or (where appropriate) federal government. "Local government" only acts within powers delegated to it by legislation or directives of the higher level of government and each country have some kind of local government which will differ from those of other countries.
In modern nations, local governments usually have some of the same kind of powers as national governments do. The institutions of local government vary greatly between countries, and even where similar arrangements exist, the terminology often varies. Common names for local government entities include state, province, region, department, county, prefecture, district, city, township, town, borough, parish, municipality, shire and village.
Local government so important to local people and communities because bringing decision-making close to the people affected can both produce decisions better attuned to local circumstances and help build people's sense of ownership and pride in the area and communities in which they live. It is because local authorities are charged not just with delivery of a defined set of services but with shaping the overall future of their areas and securing their economic, social and environmental well-being. This boils down to helping people making a better life for themselves, their families and the communities in which they live, making communities safe and pleasant places to live and work in, where good quality public services are readily available. The passion and pride that drives many involved in local government must not be lost in the debates that will take place in the months ahead.
As stated above, one form of the organization of public sector is direct administration funded through taxation and the purpose of public sector and local government is to help people making a better life for themselves, their family and the communities to which they live, making communities safe and pleasant places to live and work in, where good quality public services are readily available.
However, based on the Auditor-General's report and the newspaper article wrote by Yeng Ai Chun on October 22, 2009, we found that there was a on purpose misleading presentation of financial information by one or more persons, who are member of the government management, as a consequence of manipulation, creation or falsification of document or files, withholding assets, registration of fictive transaction, false appraisal and valuation. This incident happens every year.
Kolej Kemahiran Tinggi Mara Balik Pulau had spent 20-35% more of the market price to purchase computers and laser printers for the college used. Besides that, millions of ringgit had been spend on wasted teaching manuals supplied and equipments. Audits also found that many discrepancies in prices paid for the same equipments and some of the purchases didn't meet the agreed specifications in the agreement. Thus, it is to be believed that there is a probability of corruption or material misstatement in this case. The criminals seek to exploit public fund for their personal gain by overstating the amount of purchases and falsify the related documents.
Furthermore, Audit found that the approach taken by MARA in the purchase of equipments do not fulfill the criteria set by the Finance Ministry, which is to negotiate for the lowest prices. People are questioning whether there is a potential fraud occur in all these cases due to the lack of government internal control.Â The lack of internal control has increase the inherent risk and control risk of the audit when the Auditors plan for their audit program. Thus, the auditors will set a lower level of detection risk in order to meet the planned level of audit risk. They will also conduct more detailed examination of account throughout the audit program.
According to the Malaysia Anti-Corruption Commission (MACC) on the "The Malaysian Insider", March 23, 2010 state that they are studying the Auditor-General's Report 2008 to see if there are elements of corruption, misconduct and abuse of power in the management of public fund.Â MACC would proceed with the necessary actions when it finds any irregularity.
In conclusion, public sector frauds will reduce the public confidence toward our government and also influence the quality of life. Thus, it is advised that actions have to be taken on the criminals. Besides, more transparency in the spending of public fund have to be disclosed, upgrading accounting standards and monitoring should be implement along with improved access to information in order to mitigate the impact of public sector fraud.