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

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

Albrecht, Albrecht, 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  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, Albrecht, 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  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, Albrecht, 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  Hiring Honest People  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, Albrecht, 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…  The costliness of fraud  The effects of fraud on pay and benefits  The nontolerance of fraud  Actions to take if fraudulent activity is suspected

Albrecht, Albrecht, 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  Create a positive work environment by:  Setting expectations about honesty  Having a code of conduct  Conveying those expectations  Having open-door or easy access policies  Having positive personnel and operating procedures.

Albrecht, Albrecht, 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  Setting Expectations  The Pygmalion effect:  People generally perform according to a leader’s expectations “What you expect is what you’ll get”.

Albrecht, Albrecht, 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  Code of Conduct  Sarbanes-Oxley Act of 2002  SEC – Code of Conduct for all employees  Must be visible  Must be communicated frequently  Example:  Hormel Foods Code of Conduct

Albrecht, Albrecht, 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  Open-Door or Easy Access Policies  Helps prevent fraud by:  Allowing employees share feelings  Allow management to know of employees’ pressures, problems, and rationalizations

Albrecht, Albrecht, 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  Personnel and Operating Policies  Related to high- or low-fraud environments  Examples producing high-fraud environments  Inadequate pay  Lack of recognition for job performance  Perceived inequalities in the organization  Inadequate expense accounts  etc.

Albrecht, Albrecht, 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)  Help employees reduce pressure by helping employees deal with:  Substance abuse  Gambling  Money management  Health, family, and personal problems

Albrecht, Albrecht, 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)  Provide support systems with programs like:  Wellness  Team building  Coaching  Conflict resolution  Critical incident response  Assessment  Counseling  Referral

Albrecht, Albrecht, 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, Albrecht, 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  Five ways to eliminate fraud opportunities: 1.Have good internal controls 2.Discourage collusion 3.Monitor employees and provide a whistle- blowing system 4.Create an expectation of punishment 5.Conduct proactive auditing

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

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

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

Albrecht, Albrecht, 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  Effective systems have the following: 1.Anonymity 2.Independence 3.Accessibility 4.Follow-up

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

Albrecht, Albrecht, 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  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, Albrecht, 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  Statement on Auditing Standards No. 99  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, Albrecht, 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, Albrecht, 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, Albrecht, 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