Fraud Examination 4 E Chapter 4 Preventing Fraud

Fraud Examination, 4 E Chapter 4: Preventing Fraud Albrecht, Zimbelman © 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.

Learning Objectives q Understand how to create a culture of honesty, openness, and assistance. q Know how to eliminate opportunities for fraud. q Understand how to set up an effective organization to minimize fraud. q Understand the importance of proactive fraud auditing. q Understand the importance of creating a comprehensive approach to fighting fraud. Albrecht, Zimbelman © 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.

Organizational Culture q Create a culture of honesty, openness, and assistance by… 1. Hiring honest people and providing fraud awareness training 2. Creating a positive work environment 3. Providing an employee assistance program (EAP) that helps employees deal with personal pressures Albrecht, Zimbelman © 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.

Organizational Culture q 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 Albrecht, Zimbelman © 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.

Organizational Culture q Hiring Honest People q 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 Albrecht, Zimbelman © 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.

Organizational Culture Fraud Awareness Training Train on… q The costliness of fraud q The effects of fraud on pay and benefits q The nontolerance of fraud q Actions to take if fraudulent activity is suspected Albrecht, Zimbelman © 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.

Organizational Culture Positive Work Environment q Create a positive work environment by: q Setting expectations about honesty § Having a code of conduct § Conveying those expectations q Having open-door or easy access policies q Having positive personnel and operating procedures. Albrecht, Zimbelman © 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.

Organizational Culture Positive Work Environment q Setting Expectations q The Pygmalion effect: q People generally perform according to a leader’s expectations “What you expect is what you’ll get”. Albrecht, Zimbelman © 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.

Organizational Culture Positive Work Environment q Code of Conduct § Sarbanes-Oxley Act of 2002 § SEC – Code of Conduct for all employees q Must be visible q Must be communicated frequently q Example: § Hormel Foods Code of Conduct Albrecht, Zimbelman © 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.

Organizational Culture Positive Work Environment q Open-Door or Easy Access Policies q Helps prevent fraud by: § Allowing employees share feelings § Allow management to know of employees’ pressures, problems, and rationalizations Albrecht, Zimbelman © 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.

Organizational Culture Positive Work Environment q Personnel and Operating Policies q Related to high- or low-fraud environments q Examples producing high-fraud environments § § § Inadequate pay Lack of recognition for job performance Perceived inequalities in the organization Inadequate expense accounts etc. Albrecht, Zimbelman © 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.

Organizational Culture Employee Assistance Programs (EAP) q Help employees reduce pressure by helping employees deal with: § § Substance abuse Gambling Money management Health, family, and personal problems Albrecht, Zimbelman © 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.

Organizational Culture Employee Assistance Programs (EAP) q Provide support systems with programs like: § § § § Wellness Team building Coaching Conflict resolution Critical incident response Assessment Counseling Referral Albrecht, Zimbelman © 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.

Organizational Culture Albrecht, Zimbelman © 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.

Eliminate Opportunities For Fraud q Five ways to eliminate fraud opportunities: 1. Have good internal controls 2. Discourage collusion 3. Monitor employees and provide a whistleblowing system 4. Create an expectation of punishment 5. Conduct proactive auditing Albrecht, Zimbelman © 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.

Internal Controls Albrecht, Zimbelman © 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.

Internal Controls q COSO’s Internal Control Framework 1. 2. 3. 4. 5. A good control environment A good accounting system Good control activities Monitoring Good communication and information Albrecht, Zimbelman © 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.

Internal Controls Albrecht, Zimbelman © 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.

Discourage Collusion q Collusive frauds have increased probably because of… § Increased complexity of business § Increased frequency of supplier alliances q Suggested method of discouraging collusion: § Have a “right-to-audit” clause on the back of all purchase invoices Albrecht, Zimbelman © 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.

Monitoring Employees q Section 307 of the Sarbanes-Oxley Act of 2002 requires all public companies to have a whistleblower system q 33 percent of all frauds are detected through tips q A good whistle-blowing program is one of the most effective fraud prevention tools q Not only companies in the US have whistleblowing systems but also government agencies and foreign companies in major countries Albrecht, Zimbelman © 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.

Whistle-Blower System q Effective systems have the following: 1. 2. 3. 4. Anonymity Independence Accessibility Follow-up Albrecht, Zimbelman © 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.

Expectation of Punishment q “One of the greatest deterrents to dishonesty is fear of punishment. ” q “Real punishment involves having to tell family members and friends about the dishonest behavior. ” q “A strong prosecution policy that is well publicized lets employees know that dishonest acts will be harshly punished. ” Albrecht, Zimbelman © 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.

Proactive Fraud Auditing q Good fraud auditing involves four steps: 1. Identify fraud risk exposures 2. Identify the fraud symptoms of each exposure 3. Build audit programs to proactively look for symptoms and exposures 4. Investigate fraud symptoms identified Albrecht, Zimbelman © 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.

Proactive Fraud Auditing q Statement on Auditing Standards No. 99 q 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 Albrecht, Zimbelman © 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.

Preventing Fraud – A Summary Albrecht, Zimbelman © 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.

Preventing Fraud Current Model Albrecht, Zimbelman © 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.

Preventing Fraud Suggested Model Albrecht, Zimbelman © 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.