Chapter 11 Introduction to Business Ethics and Fraud - PowerPoint by zzz22140

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									        Chapter 11:
Introduction to Business
    Ethics and Fraud




          IT Auditing & Assurance, 2e, Hall &
   IT Auditing & Assurance, 2e, Hall & Singleton
                     Singleton
                     ETHICS
Pertains to the principles of conduct that
 individuals use in making choices and
 guiding their behavior in situations that
 involve the concepts of right and wrong.
            Business Ethics
   How do managers decide on what is right
              in conducting business?
   Once managers have recognized what is
    right, how to they achieve it?
   The necessity to have an articulate
    foundation for ethics and a consistent
    application of the ethical standards.
            IT Auditing & Assurance, 2e, Hall & Singleton
           BUSINESS ETHICS
              Basis of Ethical Standards
                Religious
                Philosophical
                Historical
                IBM combination of all three
   Ethical Issues in Business [Table 11-1]
 Equity                                Honesty
    Exec. salaries                           Conflicts of interest
    Pricing                                  Security of data & records
 Rights                                      Foreign practices [FCPA]
    Health (screening)                       Accurate F/S reporting
    Privacy                            Exercise of Corp. Power
    Sexual harassment                        PAC, and politics
    Equal opportunity                        Workplace safety
    Whistleblowing                           Downsizing, closures
                  IT Auditing & Assurance, 2e, Hall & Singleton
IMPLEMENTING BUSINESS ETHICS
             1990 Business Roundtable
      Greater commitment of top management
      Written codes (policy) that clearly
       communicate standards and expectations
      Programs to implement ethical guidelines
      Techniques to monitor compliance
   Boeing
      Uses line managers to lead ethics training
      Toll-free number to report violations
   General Mills
      Published guidelines with vendors, competitors, customers
   Johnson & Johnson
      Creed integral to its culture
      Uses surveys to ascertain compliance
   SAIC
      Toll-free number, required training, separate dept.

                   IT Auditing & Assurance, 2e, Hall & Singleton
IMPLEMENTING BUSINESS ETHICS
                 Role of Management
  Create and maintain appropriate ethical atmosphere
  Limit the opportunity and temptation for unethical
   behavior
  Management needs a methodology for including
   lower-level managers and employees in the ethics
   schema
     Many times, lower-level managers responsible to uphold
      ethical standards
     Poor ethical standards among employees are a root cause of
      employee fraud and abuses
  Managers and employees both should be made
   aware of firm’s code of ethics
  What if management is unethical? e.g., Enron

                  IT Auditing & Assurance, 2e, Hall & Singleton
IMPLEMENTING BUSINESS ETHICS
                  Reported Abuses
    Typically junior employees (Wall Street Journal)
    Half of American workers believe the best way
     to get ahead is politics and cheating
    One-third of a group of 9,175 surveyed had
     stolen property and supplies from employers
    Ethics Resource Center: 1994 study
       41% falsified reports
       35% committed theft

                Ethical Development
  Most people develop a personal code of ethics from
   family, formal education, and personal experience
  Go through stages of moral evolution [Figure 11-2]

                 IT Auditing & Assurance, 2e, Hall & Singleton
IMPLEMENTING BUSINESS ETHICS
                Making Ethical Decisions
  Business schools can and should be involved in ethical
   development of future managers
  Business programs can teach students analytical techniques to
   use in trying to understand and properly handle a firm’s conflicting
   responsibilities to its employees, shareholders, customers, and
   the public
  Every ethical decision has risks and benefits. Balancing them is
   the manager’s ethical responsibility:

                      Ethical Principles
  Proportionality: Benefits of a decision must outweigh the
   risks. Choose least risky option.
  Justice: Distribute benefits of decision fairly to those who
   share risks. Those who do not benefit should not carry any
   risk
  Minimize Risk: Minimize all risks.
                     IT Auditing & Assurance, 2e, Hall & Singleton
      COMPUTER ETHICS
The analysis of the nature and social impact
       of computer technology and the
 corresponding formulation and justification
    of policies for the ethical use of such
                  technology.
           Levels of Computer Ethics
 POP: the exposure to stories and reports in popular media
 PARA: taking a real interest in computer ethics cases and
  acquiring some level of skill and knowledge
 THEORETICAL: multi-disciplinary researchers who apply the
  theories of philosophy, sociology, and psychology to computer
  science, intending to bring some new understanding to the field.
  That is, ethics research.

                IT Auditing & Assurance, 2e, Hall & Singleton
   COMPUTER ETHICS
A new problem or just a new twist to an old
                problem?

 Although computer programs are a new type of
    asset, many believe that they should not be
     considered as different form other forms of
 property; i.e., intellectual property is the same as
  real property and the rights associated with real
                        property.




            IT Auditing & Assurance, 2e, Hall & Singleton
COMPUTER ETHICAL ISSUES
1. Privacy:
     Ownership of personal information
     Policies
2. Security:
     Systems attempt to prevent fraud and abuse of
      computer systems, furthering the legitimate
      interests of firm
     Shared databases have potential to disseminate
      inaccurate info to authorized users
3. Ownership of Property:
     Federal copyright laws
4. Race:
     African-Americans and Hispanics constitute 20%
      of population but 7% of MIS professionals
               IT Auditing & Assurance, 2e, Hall & Singleton
COMPUTER ETHICAL ISSUES
 5. Equity in Access:
       Some barriers are avoidable, some are not
       Factors: economic status, affluence of firm,
        documentation language, cultural limitations
 6. Environmental Issues:
       Should firms limit non-essential hard copies?
       What is non-essential?
       Disposal of equipment and supplies (toner)
 7. Artificial Intelligence:
       Who is responsible for faulty decisions from
        an Expert System?
       What is the extent of AI/ES in decision-making
        processes?
                IT Auditing & Assurance, 2e, Hall & Singleton
COMPUTER ETHICAL ISSUES
8. Unemployment & Displacement:
      Computers and technology sometimes replace jobs
       (catch-22, productivity)
      Some people unable to change with IT, get displaced
       and find it difficult to obtain new job
9. Misuse of Computer:
      Copying proprietary software
      Using a firm’s computers for personal benefit
      Snooping through firm’s files
10. Internal Control Responsibility:
      Unreliable information leads to bad decision, possible
       financial distress
      Management must establish and maintain a system of
       appropriate internal controls to ensure integrity and
       reliability of data (antithetical)
      IS professionals and accountants are central to
       adequate internal controls
                IT Auditing & Assurance, 2e, Hall & Singleton
      FRAUD & ACCOUNTANTS
The lack of ethical standards* is fundamental to the occurrence of
    business fraud.
No major aspect of the independent auditor’s role has caused more
    difficulty for public accounting than the responsibility for detection of
    fraud during an audit. [article]
This issue has gathered momentum outside the accounting profession to
    the point where the profession faces a crisis in public confidence in
    its ability to perform independent attest functions. [SAS 82]
     Fraud denotes a false representation of a material
       fact made by one party to another party with the
        intent to deceive and induce the other party to
      justifiably rely on the fact to his/her detriment, i.e.,
                       his/her injury or loss.
         Synonyms: White-collar crime, defalcation,
                   embezzlement, irregularities.
                       IT Auditing & Assurance, 2e, Hall & Singleton
                       FRAUD
A fraudulent act must meet the following
               5 conditions:

1.   False representation
2.   Material fact
3.   Intent
4.   Justifiable reliance
5.   Injury or loss




              IT Auditing & Assurance, 2e, Hall & Singleton
                      FRAUD TREE
 Asset misappropriation fraud
   1.   Stealing something of value – usually cash or inventory (i.e.,
        asset theft)
   2.   Converting asset to usable form
   3.   Concealing the crime to avoid detection
   4.   Usually, perpetrator is an employee

 Financial fraud
   1.   Does not involve direct theft of assets
   2.   Often objective is to obtain higher stock price (i.e., financial fraud)
   3.   Typically involves misstating financial data to gain additional
        compensation, promotion, or escape penalty for poor performance
   4.   Often escapes detection until irreparable harm has been done
   5.   Usually, perpetrator is executive management

 Corruption fraud
   1. Bribery, etc.

                      IT Auditing & Assurance, 2e, Hall & Singleton
         FRAUD SCHEMES
 Fraudulent financial statements {5%}
 Corruption {10%}
   Bribery
   Illegal gratuities
   Conflicts of interest
   Economic extortion
 Asset misappropriation {85%}
   Charges to expense accounts
   Lapping
   Kiting
   Transaction fraud

              IT Auditing & Assurance, 2e, Hall & Singleton
      EMPLOYEE FRAUD

 Employee Theft

  1) Theft of asset
  2) Conversion of asset (to cash, to
     fraudster)
  3) Concealment of fraud



            IT Auditing & Assurance, 2e, Hall & Singleton
     MANAGEMENT FRAUD
 Special Characteristics:

  1. Perpetrated at levels of management above the
     one where internal controls relate
  2. Frequently involves using the financial statements
     to create false image of corporate financial health
  3. If fraud involves misappropriation of assets, it
     frequently is shrouded in a complex maze of
     business transactions, and often involves third
     parties. [e.g., ZZZZ Best fraud]



                IT Auditing & Assurance, 2e, Hall & Singleton
          FRAUD TRIANGLE
 People engage in fraudulent activities as a result of forces
  within the individual (their ethical system) and without (from
  temptation and/or stress from the external environment)
  1. Situational Pressures
  2. Opportunity
  3. Rationalization
 A person with a high level of personal ethics and limited
  pressure and opportunity to commit fraud is most likely to
  behave honestly [Figure 11-2]
 A person with low level of integrity, and moderate to high
  pressures, and moderate to high opportunity is most likely
  to commit fraud
 Auditors can develop a “red flag” checklist to detect
  possible fraudulent activity
 A questionnaire approach could be used to help auditors
  uncover motivations for fraud
                 IT Auditing & Assurance, 2e, Hall & Singleton
       POSSIBLE QUESTIONNAIRE
Do key executives have unusually high personal debt?
Do key executives appear to be living beyond their means?
Do key executives engage in habitual gambling?
Do key executives appear to abuse alcohol or drugs?
Do key executives appear to lack personal codes of ethics?
Do key executives appear to be unstable (e.g., frequent job or residence
    changes, mental or emotional problems)?
Are economic conditions unfavorable within the company’s industry?
Does the company use several different banks, none of which sees the
   company’s entire financial picture?
Do key executives have close associations with suppliers?
Do key executives have close associations with members of the Audit
    Committee or Board?
Is the company experiencing a rapid turnover of key employees, either
     through quitting or being fired?
Do one or two individuals dominate the company?
Does anyone never take a vacation?
                     IT Auditing & Assurance, 2e, Hall & Singleton
    FINANCIAL LOSSES FROM
            FRAUD
   1996, 2002, and 2004 study by Association of CFE (“Report to the
    Nation”) estimated losses from fraud and abuse at 6% of annual
    revenues! Based on GDP in 2002, that would be $600B, and in
    2004 $660B in losses.
   Actual cost is difficult to quantify because:
    1. All fraud is not detected
    2. Of ones detected, not all are reported
    3. In many cases, incomplete information is gathered
    4. Information is not properly distributed to management or law
        enforcement authorities
    5. Too often, business organizations decide to take no civil or
        criminal action against the perpetrator of fraud
   Organizations with 100 or fewer employees were the most
    vulnerable to fraud
     SEC fraud violations reported in COSO “Landmark Study” 1998
                    IT Auditing & Assurance, 2e, Hall & Singleton
   FINANCIAL LOSSES FROM
           FRAUD
 Profile of perpetrator:
      By position – Table 11-3
      By gender – Table 11-5
      By age – Table 11-6
      By Education – Table 11-7
      Conclusions about profile?
        Fraudsters do not look like crooks!
 Collusion – Table 11-4
   1. Significant reason to adhere to segregation of
      duties
   2. Risks associated with a key position held by a
      trusted employee who unknowingly has weak
      ethics
                 IT Auditing & Assurance, 2e, Hall & Singleton
 UNDERLYING PROBLEMS

 Lack of auditor independence
 Lack of director independence
 Questionable executive
  compensation schemes
 Inappropriate accounting practices




          IT Auditing & Assurance, 2e, Hall & Singleton
  SARBANES-OXLEY ACT
 PCAOB
 Auditor independence
   List of services considered non-
     independent
 Corporate governance
 Issuer and management disclosure
 Fraud and criminal penalties



          IT Auditing & Assurance, 2e, Hall & Singleton
ANTI-FRAUD PROFESSION
 Fraud auditors
 Forensic accountants
 Association of Certified Fraud Examiners
   Certified Fraud Examiner certification
   – http://www.acfe.org
         Forensic Accounting
 Investigation
 Evidence for court
 Litigation
 CFE – Association of Certified Fraud
  Examiners
 See newsletter sample at ACFE web site
           IT Auditing & Assurance, 2e, Hall & Singleton
       Chapter 11:
Introduction to Business
    Ethics and Fraud




         IT Auditing & Assurance, 2e, Hall &
   IT Auditing & Assurance, 2e, Hall & Singleton
                    Singleton

								
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