1. Part III. Ethics, Fraud & Internal Controls
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2. 3.1 ETHICS

3. 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
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4. 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
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5. 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
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6. 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
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7. 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
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8. 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
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9. 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
Section 3.1 Full Websites
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10. Section 3.2 FRAUD
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11. 3.2 FRAUD
The Fraud Triangle
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12. 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”
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13. Asset Misappropriation Financial Statement Fraud
Fraud Tree
The Fraud Tree
Corruption
Asset Misappropriation
Financial Statement Fraud
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14. 3.2 FRAUD Corruption Conflict of Interest Purchasing Schemes
Sales Schemes
Bribery
Invoice Kickbacks
Bid Rigging
Illegal Gratuities
Economic Extortion
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15. 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
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16. 3.2 FRAUD Theft of Cash Receipts Skimming Sales Unrecorded Unstated
Receivables
Write-Off Schemes
Lapping Schemes
Unconcealed
Refunds and Others
Cash Larceny
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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
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18. 3.2 FRAUD Inventory and All Other Assets Misuse Larceny
Asset Requisition and Transfers
False Sales and Shipping
Purchasing and Receiving
Unconcealed Larceny
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19. 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
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20. 3.2 FRAUD Section 3.2 Source www.acfe.com/fraud-tree.aspx
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21. 3.3 internal controls

22. 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
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23. 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
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24. 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
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25. 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
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26. 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
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27. 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
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