Chapter 14 Internal Control, Corporate Governance, and Ethics

Introduction Reasons for increased risk of fraud:  The size of corporations  Globalization  Reduced stability in the workforce  Reduction in corporate loyalty  Increased computerization of accounting systems  Growing reliance on the Internet

Fraud Defined as a knowingly false representation of a material fact made by a party with the intent to deceive and induce another party to justifiably rely on the representation to his or her detriment.

Fraudulent Financial Reporting Intentional misstatement of or omission of material, very significant information from a company’s financial statements.

Management Fraud Typically the result of pressure on management to report good operating results. Commonly involves  improper revenue recognition  overstating assets  understating liabilities

Misappropriation of Assets  Involves the theft of a company’s assets.  Usually committed by lower-level employees.  Usually involves small amounts that do not impact the financial statements.  Usually involves cash, inventory, fixed assets.  Kiting  Lapping  Expense Accounts

The Fraud Triangle Situational Pressures & Incentives Opportunities Personal Characteristics & Attitudes

Internal Control Internal Control: The policies and procedures that provide reasonable assurance that a company’s goals and objectives will be achieved. Comprised of five elements: 1. The control environment. 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring

Control Activities  Segregation of Duties  Transaction Authorization  Safeguarding of Assets  Independent Reviews of Work

The Impact of Information Technology on Internal Control Threats in an E-Information Technology- Intensive Environment Internet-based business False Web sites posing as selling agents Insider perpetrators Perpetrators intercepting credit card information, messages, company data Perpetrators sending false messages Data destruction, viruses, rerouting messages, altering data Fictitious customers posing as legitimate customers Denial-of-service attacks

Corporate Governance Embodied in the processes that companies use to promote:  Corporate fairness  Complete and accurate financial disclosures  Management accountability

The Need for Ethics  Ethics Programs  Codes of Ethics  Purposes of codes of ethics  Writing codes of ethics  Responding to Ethics Violations

End of Chapter 14