F1 Fraud and fraudulent behaviour and their prevention in business

1. What is fraud? Definition Fraud is defined as :deprivation by deceit”. In a court case, fraud was defined as “a false representation of fact made with the knowledge of its falsity, or without belief in its truth, or recklessly careless, whether it be true or false”.

1. What is fraud? Removal of funds or assets from a business a. Theft cash b. Theft of inventory c. Payroll fraud d. Teeming and lading e. Fictitious customers f. Collusion with customers g. Bogus supply of goods or services h. Paying for goods not received i. Meeting budgets performance measures

1. What is fraud? Removal of funds or assets from a business j. Manipulating of bank reconciliations and cash book k. Misuse of pension funds or other assets l. Disposal assets to employees

1. What is fraud? International misrepresentation of the financial position of the business a. Over-valuation of inventory b. Irrecoverable debt policy may not be enforced c. Fictitious sales d. Manipulation of years end events e. Understating express f. Manipulation of depreciation figures

1. What is fraud? Example question What is the term given to a method of fraud in the accounts receivable area, by which cash or cheque receipts are stolen, and the theft concealed by setting subsequent receipts against the outstanding debt? A. Collusion B. Misrepresentation C. Teeming and lading D. Fictitious sales

2. Potential for fraud Prerequisites for fraud a. Dishonesty b. Motivation c. Opportunity

2. Potential for fraud Assessing the risk of fraud a. External factors The general environment in which the business operate Whether the industry is particularly exposed to certain types of fraud

2. Potential for fraud Assessing the risk of fraud b. Internal factors Changing operating environment; Rapid growth; New personnel; New technology; New MIS; New products and processes; Restructuring c. Business risks Profit levels deviating significantly from the industry norm; Market opinion; Complex structures

2. Potential for fraud Assessing the risk of fraud d. Personnel risks Secretive behaviour; Expensive lifestyles; Long hours or untaken holidays; Automatic management style; Lack of segregation of duties; Low staff morale

2. Potential for fraud Example question Which of the following would most clearly present a personnel risk of fraud? A. Segregation of duties B. High staff morale C. Staff not taking their full holiday entitlements D. Consultative management style

2. Potential for fraud Potential for computer fraud a. Computer hackers b. Lack of training within the management team c. Fail to keep up with the pace of development of computer technology d. Easy access and flexible systems

2. Potential for fraud Example question Which of the following is not a key risk area for computer fraud? A. Hackers B. Lack of managerial understanding C. Inability to secure access to data D. Integration of data system

3. Implications of fraud for the organization Removal of funds or assets from a business a. Immediate financial implications The net asset position is weakened; The profits are lower; The business has less cash; Returns to shareholders fall as a result b. Long term effects on company performance Fraud makes it difficult for company to operate effective. Fraud can even result in the collapse

3. Implications of fraud for the organization International misrepresentation of the financial position of the business a. Overstated results Dividends are too much and retained earning will be lower leading to shortfalls in working capital. Investors and suppliers will make incorrect decisions based on the fraudulent financial statements

3. Implications of fraud for the organization International misrepresentation of the financial position of the business b. Understate results The returns to the investors reduces. The share price of the company might fall. Access to loan finance may be restricted.

3. Implications of fraud for the organization Example question All of the following, with one exception, are potential impacts on a business of removal assets from business. Which is the exception? A. Fall in the return to shareholders B. Reduction in profit C. Increase in working capital D. Reputational damage

4. System for detecting and preventing fraud General prevention policies a. Emphasizing ethics b. Personnel controls c. Training and raising awareness

4. System for detecting and preventing fraud Specific prevention policies a. Physical control b. Segregation of duties c. Authorization policies d. Customer signatures e. Documentation f. Sequential numbering g. Standard procedures h. Manager and staff responsibilities i. Availability of imformation

5. Responsibility for detecting and preventing fraud The responsibilities of directors a. Ensure the activities of the business are conducted b. Establish arrangements to prevent and detect fraud c. Ensure reliable financial information

5. Responsibility for detecting and preventing fraud The role of the auditor The responsibility of external auditor is to express an opinion on whether the financial statements give a true and fair view of the company’s financial situation and results. It is the responsibility of the directors to take reasonable steps to detect and prevent fraud and error.

6. Money laundering Definition Money laundering constitutes any financial transactions whose purpose is to conceal the origins of the proceeds of criminal activity.

6. Money laundering Risks associated with a company’s operation Some businesses such as business dealing with luxury items are at a higher risk than others of money laundering.

6. Money laundering Money laundering process a. Placement The initial disposal of the proceeds of illegal activity into legitimate activity. For example, small amounts are banked with number of institutions b. Layering Transfer of money from business to business. For example, over/under valuing invoices c. Integration

6. Money laundering Assess the risk of money laundering a. Assessing risk— the risk-based approach b. Assessing your customer base c. Applying customer due diligence d. Ongoing monitoring of business e. Maintaining full and up to date records

6. Money laundering Relevant laws and regulations a. UK legislation (laundering, failure to report, tipping off) b. the Financial Services Authority c. Financial Action Task Force (FATF) d. International Monetary Fund (IMF)

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