Part III. Ethics, Fraud & Internal Controls Release: 01.01.17

3.1 ETHICS

3.1 ETHICS Ethics – concerned with right or wrong, good or bad. It is a set of principles held by an individual or group who is tasked with the analysis and evaluation of human actions and practices Ethical responsibilities should be outlined in job descriptions, employee handbooks and company and professional code of conducts A well written code of ethics can: State policies for behavior in particular situations Establish a detailed guide to acceptable behavior Capture what the organization understands ethical behavior to mean - your values Release: 01.01.17

3.1 ETHICS Ethics refer to system of beliefs whereas morality refers to standards of behavior Ethical theories include egoism, utilitarianism, deontology and virtue ethics A fundamental principle of egoism is understanding the difference between selfishness and self-interest Acting in self-interest is doing what is in one's own interest - which benefits one Selfishness is pursuing one's own interest at the expense of another Ethical relativism is where individuals ethical principles are defined by the traditions of their society, their personal opinions, and the circumstances of the present moment Release: 01.01.17

3.1 ETHICS An organization’s values, mission, and policies all help in building an ethical entity All employees are responsible for conducting their work according to expectations, this includes Human Resources, Risk Management Officer, and Internal Auditor In the US, it can be the Ethics and Compliance Officers; in the UK, it can be the Company Secretary's Office The FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong Environmental, Social, and Governance (ESG) practices The Dow Jones Sustainability Index (DJSI) tracks the stock performance of the world’s leading companies in terms of economic, environmental, and social criteria Release: 01.01.17

3.1 ETHICS Business ethics is the application of ethical values to business behavior. It is relevant both to the conduct of individuals and to the conduct of the organization as a whole It applies to any and all aspects of business conduct, from boardroom strategies and how companies treat their employees and suppliers to sales techniques and accounting practices Ethics goes beyond the legal requirements for a company and is, therefore, about discretionary decisions and behavior guided by values Ethical business practice requires, above all else, an active awareness and consideration of the likely long-term consequences of any action Release: 01.01.17

3.1 ETHICS Harassment is any behavior that offends someone, violates their dignity or intimidates or humiliates them This includes bullying, using threatening, abusive or insulting words, physical threats or assault, unwanted physical or psychological contact, or open hostility in the workplace It is also advisable for a company to have a code of conduct, where: it is based on laws, regulations and expected behaviors, and violating the code of conduct can result in serious consequences, including damages to reputation, undermining customer trust, criminal proceedings and employee terminations Release: 01.01.17

3.1 ETHICS Ethics should also be practiced in business contracts A contract is where the offer by the offeror is accepted unconditionally and without changes by the offeree The contract terms need not be in writing nor does it need to benefit both parties equally A contract can also be implied where it is inferred from the acts of conduct of the parties A contract can also be unilateral where the offeror makes a consideration and the offeree accepts it through his or her action without consent either verbally or in writing A void contract is unenforceable; whereas a voidable contract can be either affirmed or disaffirmed at the option of one or more of the contracting parties Release: 01.01.17

3.1 Ethics Section 3.1 Source Ethics in the Hospitality and Tourism Industry 2nd Edition Managing Hospitality Human Resources 5th Edition Hospitality Industry Financial Accounting 3rd Edition Hospitality Industry Managerial Accounting by Schmidgall 8th Edition www.ethicalcorp.com/business-strategy/ethical-indices-how-do-you-measure-ethics www.slideshare.net/alexvenome/final-test-april-2010-with-answer-key-15809643 Section 3.1 Full Websites www.businessdictionary.com www.en.wikipedia.org www.investopedia.com www.pineapplesearch.com Release: 01.01.17

Section 3.2 FRAUD Release: 01.01.17

3.2 FRAUD The Fraud Triangle Release: 01.01.17

3.2 FRAUD Pressure – an individual has a financial need that they believe cannot be solved through legitimate means. E.g. and employee is about to be foreclosed on his or her home and he or she cannot obtain alternative financing Opportunity – the ability of an individual to misappropriate assets by overriding existing controls or because there are lack of controls in place. E.g. if a control is in place that two individuals must prepare and deposit the cash; however, management allows one person to count the cash and make the deposit if the other individual is not present, this creates an opportunity Rationalization – the ability of an individual to legitimize or justify the behavior. E.g. a disgruntled employee may believe that “it is owed to him or her” Release: 01.01.17

Asset Misappropriation Financial Statement Fraud Fraud Tree The Fraud Tree Corruption Asset Misappropriation Financial Statement Fraud Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Corruption Conflict of Interest Purchasing Schemes Sales Schemes Bribery Invoice Kickbacks Bid Rigging Illegal Gratuities Economic Extortion Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Asset Misappropriation Inventory and All Other Asset Cash Theft of Cash on Hand Theft of Cash Receipts Fraudulent Disbursements Inventory and All Other Asset Misuse Larceny Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Theft of Cash Receipts Skimming Sales Unrecorded Unstated Receivables Write-Off Schemes Lapping Schemes Unconcealed Refunds and Others Cash Larceny Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Source: www.acfe.com Fraudulent Disbursements Billing Schemes Shell Company Non-Compliance Vendor Personal Purchase Payroll Schemes Ghost Employee Falsified Wages Commission Schemes Expenses Reimbursement Schemes Mischaracterized Expenses Overstated Expenses Fictitious Expenses Multiple Reimbursements Check Tempering Forged Maker Forged Endorsement Forged Payee Altered Payee Authorized Maker Register Disbursements False Voids False Refunds Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Inventory and All Other Assets Misuse Larceny Asset Requisition and Transfers False Sales and Shipping Purchasing and Receiving Unconcealed Larceny Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Financial Statement Fraud Net Worth/Net Income Overstatements Timing Differences Fictitious Revenues Concealed Liabilities and Expenses Improper Asset Valuations Improper Disclosures Net Worth/Net Income Understatements Understated Revenues Overstated Liabilities and Expenses Improper Assets Valuation Source: www.acfe.com Release: 01.01.17

3.2 FRAUD Section 3.2 Source www.acfe.com/fraud-tree.aspx www.acfe.com/fraud-triangle.aspx www.pineapplesearch.com/file/152005741.pdf www.pineapplesearch.com/file/152005897.pdf Release: 01.01.17

3.3 internal controls

3.3 internal controls The hospitality industry is vulnerable Cash business Many transactions Low skill employees Perception of industry as low social status Items used have “street value” Items used are in demand by the general population Documentation Flowcharting Internal control questionnaire Narrative Release: 01.01.17

3.3 internal controls Job rotation Surveillance Internal audit External audit Management review Mandatory vacation Whistleblower policy Background checks ** when fraud is detected, a preliminary investigation should be the first step Release: 01.01.17

3.3 internal controls The primary focus of an auditor is to increase operational efficiency Cash is the most vulnerable hospitality assets in terms of internal controls From bank reconciliation to cash drawers reconciliation, owners and managers need to make sure that cash is managed properly AICPA objectives of internal control Safeguard assets Check accuracy and reliability of accounting data Promote operational efficiency Encourage adherence to prescribed managerial policies Release: 01.01.17

3.3 internal controls Types of internal control Administrative – how company operates Accounting – impact on financial statements Classification of controls Preventive – controls that are implemented before a problem occurs such as use of locks, segregation of duties Detective – controls designed to discover problems and to monitor preventive controls such as external audits or surprise cash audits Compensating – controls occur after a transaction is complete Release: 01.01.17

3.3 internal controls Management Leadership Organizational Structure Sound Practices Fixed Responsibility Limited Access Competent and Trustworthy Personnel Segregation of Duties Authorization Procedures Adequate Records Procedure Manuals Physical Controls Budgets and Internal Reports Independent Performance Checks Release: 01.01.17

3.3 internal controls Section 3.3 Source USFRC 7th Edition The Uniform System of Accounts for Restaurants 8th Edition Hospitality Financial Accounting by Weygandt, Kieso, Kimmel, and DeFranco Previous Exam www.pineapplesearch.com/file/152005799.pdf Release: 01.01.17