In this advanced world, in which technology is taking a big role among big companies and corporations, many creative and interesting ways have been developed and used by people in their trials to access to those companies. Fraud has been introduced through centuries in different ways, beginning from theft of assets, manipulating accounts, collusions among employees, and a lot of fraudulent acts that were used for achieving peoples' criminal goals.
Firms have developed many internal controls to prevent and detect fraud, in this research am going to introduce some of the controls used to do so, comparing the difference between the American controls & those used in the international approach.
Fraud means various things to various people under various circumstances. The most popular fraud scandal in this century is Enron in San Francisco U.S, where there was a total control of personal interests over the Enron's management and their auditor company Arthur Anderson. Enron collapsed in 2001 as a result of the absence of professional ethics.
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Companies must keep everything transparent and preserve integrity, as looking through a clean glass you can see the picture all so clear. Professional ethics has to be the flame companies must maintain to protect the whole organization from fraud.
In my research I'll present many topics, starting with definition of fraud from Americans and international standards' point of view and their regulations, address financial statement fraud, elements of fraud, auditors' roles in preventing and detecting frauds, corporate governance, forensic accounting, fraud prevention and detection, and fraud triangle to explain more about fraudsters behaviors, how they think, and why they commit fraud.
What is Fraud?
Fraud is any deliberate act used by management, current or ex-employees, whether insiders or outsiders to misappropriate the firms' assets, manipulating, and misrepresenting the firms' accounts to their best interest. Fraud has several potentially ambiguous definitions, and is categorized in various ways.
Ways of fraud are unnumbered, but there are types of fraud within the company that can be categorized into two groups. First, management fraud that includes financial statement fraud, misrepresentation of material facts, theft of assets, concealment of material facts, illegal acts, bribery, and conflict of interest. Second, Employees fraud which involves larceny of money or property, violation of representative duty, theft of companies trade secrets of intellectual property, and illegal acts.
Fraud is one type of the risks that firms are exposed to during its day to day operations. Typically, the degree of risk exposures differs according to frequency of occurrence, vulnerability to theft, and the size of the monetary value. For example, cash in banks have high degree of risk exposure because of it vulnerability to theft.
Fraud was introduced historically in the manuals systems. But the development of technology and the use of computerized systems have taken fraud into very seriously spots, such as theft of computer hardware and software, unauthorized use of computer facilities for personal use, and fraudulent modifications or use of data and programs  . If companies didn't notice how significant those risks are, and developed major and efficient controls to prevent and detect them, it will face major collapsing and disastrous results. Computer fraud and cybercrime is fast expanding global wide than ever, where technology is the backbone of many firms and corporations. For example, the hacking of e-commerce, information can easily be known since availability of information changed the way business is conducted and how the decisions are made by management. This changing to the business environment introduce companies to the technological advances and globalization, new rules have been revealed to keep up the rapid development of technology where as globalization is the most broad and deep challenge facing all types of companies around the world in the perspective of international competitions, outsourcing and opportunities.
Since monitoring is a critical component of both the IC and ERM Frameworks. Absence of the monitoring control can lead to sufficient Fraud acts that can lead to material weakness in the internal control structure, which leads to material unreliable financial statements. Since any corporation goal is to accomplish a reliable financial statement presented fairly according to the standards used, whether it's GAAP or IFRS.
Always on Time
Marked to Standard
Monitoring can be done through management, board of directors or audit committees either on a daily basis supervision of employees or periodically separate monitoring activities.
External auditors and Fraud auditors can help in the monitoring process in their job of auditing the financial statement and understanding the internal control over financial reporting, or reporting deficiencies. Auditors play a significant role in detecting the firms unintentional and deliberate errors, they can apply several procedures to fathom the business they are auditing and its major risks, in their work of discovering any mistakes have been done to the financial statements accounts they can reveal any fraudulent actions, communicate it with management or audit committee to take critical actions to solve those frauds and develop new controls to prevent repeating them.
Fraud auditors are recommended in many areas such as compliance with new governmental regulations, financial crime, and bankruptcy fraud. Fraud auditors require knowledge of the fraud planning, red flags, and the ones associated with identified frauds, the fraud triangle, and fraud research.
Fraud triangle or "Cressey's Triangle" is a model for understanding why fraudsters commit frauds and crimes. Fraud triangle is a thesis designed by Donald Cressey to understand why a trustee person would commit a crime and become violator of that trust. Cressey made two hundred interviews with previous fraudsters in prison. And from his study conclude three elements to commit fraud  , (1) Financial pressure, motivation or incentive, happening in the fraudster personal life that create a stress and affect his work, and provide the motivator to make him think of solutions to solve this pressure. (2) Rationalization, results revealed from Cressey's research that most fraudsters don't have a criminal record; According to the Association of Certified Fraud Examiners "ACFE" report 93% of the reported fraudsters hadn't have any prior criminal convictions. (3) Opportunity. The last element of the Fraud Triangle, back to Cressey's study fraudsters have the knowledge and opportunity to commit their crime, Due to their long term tenure they become attentive to the weaknesses in the internal controls and have acknowledged how to plan and commit the fraud successfully. When motivation is accompanied with the right opportunities, the potential for fraud is increased.
Fraud auditing is different from financial statement auditing in that fraud auditors have to focus on exceptions and oddities, and is learned basically from experience rather than from auditing books. Also, they have to apply professional skepticism in a more focused manner.
Financial Statement Fraud
Financial statement fraud is an important type that companies are trying to prevent it in this century, because it's becoming a serious problem. Financial statement fraud is any intentional misstatements or omissions of proceeds or disclosures of financial statements to mislead financial statement users, specially investors and creditors  . And can be classified into two categories: detected "reported" and undetected.
Elements of fraud involve  :
A false representation of a material nature.
Knowledge that the disclosures is false disregard for the truth.
Dependence on the false representation by the victim.
Financial damages are incurred.
An act that was intentional.
As SOX required companies should prepare quarterly reviews of their financial statements; files them with the SEC "Security Exchange & Commission" beside the annual audited financial statements. In a result of the reviewed and audited financial statements companies can minimize the fraud opportunities and maximize its controls over the reporting of financial statements.
Fraud, American and international Regulations
Many regularity bodies in the U.S have found new regularities and rules in their tries to control and prevent the fraud actions. Securities Act of 1933, section 24 stated that any person makes any dishonest statements of a material fact or omits to provide any material fact required to be disclosed therein or important to make the statements therein not misleading, shall upon conviction be fined not more than ten thousand dollar or jailed not more than five years, or both. While Securities Exchange Act 1934, section 32 (a) stated that any person who willfully and knowingly makes, or causes to be made, any conviction be fined not more than a million dollar, or jailed not more than ten years, or both. Also, Sarbanes- Oxley Act of 2002 exposed to talk about fraud and consequences on those who commit such acts.
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In international standards "IFRS", the same definition of fraud is introduced as the Americans' GAAP "Any purposed act by one or more persons among management, those charged with governance, employees, or third parties, involving the use of delusion to obtain an unfair or illegal advantage". The International Standards on Auditing 240 describe characteristic of fraud of which "Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between fraud and error is whether the essential action that results in the misstatement of the financial statements is deliberate or unintentional. Two types of deliberate misstatements are relevant to the auditor - misstatements resulting from fraudulent financial reporting and misstatements resulting from theft of assets  ."
Whether the laws are under Americans or international standards, the main point is to create punishments on those who commit frauds, because whenever there's law there's a clear picture.
Fraudulent financial reporting; includes omission or false disclosures in the financial statements to deceive the users, which results in unfairly presented financial statements. Also, it includes manipulation of accounting records or misrepresentation or intentional misapplication of accounting principles. Management can also commit fraud by overriding controls. Misappropriation of assets involves as mentioned previously the theft of assets.
Fraud & Corporate Governance
The new term sweeping to the business world is "Corporate Governance", which means the system by which firms are directed, controlled, and monitored.Â It involves the roles and relationships between the firm's management, board of directors, shareholders and otherÂ stakeholders, and the goals for which the corporation is governed.Â So, corporate governance helps the companies to prevent and detect fraud through utilizing all those charged with governance and stakeholders in the control and monitoring process.
Corporate governance is about two factors: Control and Monitoring. Within a company, the monitoring role inside the public corporation falls on the board of directors who oversees management and are supposed to represent shareholders' interest and outside the firm like auditors, analysts, bankers, credit agencies, attorneys, and government agencies as SEC & IRS. More recently, the government has impacted corporate governance in the firms asking for financial help during the economic recession  .
Sarbanes- Oxley act emphasizes on the corporate governance that fraud auditors have to be well familiar with its regulations, to help in assisting the audit committee overseeing function.
The market forces monitor management besides the directors and government agencies. If a manager is not doing a good job, either because he is bad at managing or because he is abusing his managerial discretion, then his firm might get taken over and he is subsequently fired.
Some fraudulent acts faced by corporations can be due to the agency problem, because of the lack of personal interest in running the company operations by independent managers. New solutions for this problem have been introduced in the form of incentives, relating the commissions and bonuses to achieving the goals planned. Each firm must develop a documented code of conduct, communicate, and generalize it through all departments and sections in the organizational structure, where management has to be a model in implementing the ethical standards of the company to lead employees to the correct direction of ethical behaviors.
Forensic accounting & Fraud:
The increased business complexity in this century requires firms to be more careful in setting and adopting its controls, people brain can get a hundred ways to commit a crime. Therefore, now the modern companies' life and its litigious environment enhanced the need for the Forensic Accounting, which means existence of accountants having the skills, abilities including identification of fraud, and knowledge "of evidence, findings, and investigative techniques" in the fraud field. Forensic accounting can be applied in many areas such as  :
Corporate investigations. Through forensic accounting companies can reveal any anonymous phone calls or emails initiated from inside or outside the company, whether current employees or disgruntled ones. So, it can assist allegations of management or disgruntled employees.
Litigation support. Assisting the legal counsel in investigating the fault in the questionable areas. E.g. loss of profits and construction claims.
Criminal matters. Such as arson, scams, vendor frauds, and investment scams, forensic accountants and auditors can help to prevent those white- collar crimes.
Insurance claims. Helps and assist the insurance claims, the insurer may require the assistance of a forensic accountants in its investigation of the validity of the insured claim.
Government/ Regulation/ Compliance. Ensuring that companies follow the appropriate regulations and laws.
Antifraud programs have been designed and developed to prevent and detect frauds. The most important thing in preventing frauds is to make sure that the firm's culture is safe and try to look after the controls specially the control activities. Management's style is very critical in setting the internal controls procedures as they set the tone for the organization. Management should communicate antifraud programs through the organizational levels to develop an antifraud culture. Also, Management should sit first realistic goals and avoid the overoptimistic ones, as unrealistic goals are set employees will do anything just to satisfy their bosses' desires as manipulating accounts, second management sets policies and procedures to make sure their objectives are achieved and how to treat violations to those procedures.
Prevention can be through inspection, surveillance, and supervision. For example, the most important and valuable assets must be kept in a safe place and only authorized people can have the permission to access. Cameras can also be used as a sort of monitoring.
Companies must always be aware of the needed controls to detect any irregularities or exceptions to the policies and procedures, recognizing signs of fraud even if bit's hard to do that. Also, companies have to be aware of the financial auditor recommendations about internal control weakness or any mistaken accounts; because whenever there's an opportunity increases the chances detect fraud. Common detection methods used in companies are tips, internal auditors, internal controls, external auditors, and notified by police, and sometimes by accident. Sarbans-oxley Act (SOX 404) results can give more identification of internal control weaknesses that increase the fraud risk in the business process. There are specific detection methods that are focused on detecting financial statement schemes and asset misappropriation schemes as cash larceny or billing schemes.
Measures Companies can use to prevent and detect fraud  : "adapted from AICPA,2002"
Creating and maintaining a culture of honesty and high ethics
Creating an effective organizational environment.
Hiring and reinforcement appropriate employees.
Evaluating anti-fraud processes and controls: organizations should be preemptive in reducing the chances of committing fraud by: identifying and measuring fraud risks.
Developing appropriate supervision:
Audit committee or board of directors, management, and internal auditors.
Companies have to build a strong organizational culture, control activities, policies, and procedures where honesty and the value of ethics is the backbone. Using as much as effective controls that are fully communicated through the organization, fraud can be eliminated and misbehaving by any person inside or outside the entity can be reduced. So the most important thing is to build clear and clean bridges between the organizational levels and among employees having management to be a strong model.