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Chapter 10 Identifying and preventing fraud
Qiang JiangSchool of Business
Sichuan University, [email protected]
Topic list
1 What is fraud2 Potential for fraud3 Implications of fraud for the organisation4 Systems for detecting and preventing fraud5 Responsibility for detecting and preventing
fraud6 Money laudering
1 What is fraud
• Fraud may be generally 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
• Two main categories of fraud – Removal of funds or assets from a business– Intentional misrepresentation of the financial
position of the business
1 What is fraud
• Removal of funds or assets from a business– Theft of cash– Theft of inventory– Payroll fraud– Teeming and lading– Fictitious customers– Collusion with customers– Bogus supply of goods or services– Paying for goods not received– Meeting budgets /target performance measures– Manipulation of band reconciliations and cash books– Misuse of pension funds or other assets– Disposal of assets to employees
1 What is fraud
• Intentional misrepresentation of the financial position of the business– Over-valuation of inventory– Irrecoverable debt policy may not be enforced– Fictitious sales– Manipulation of year end events– Understating expenses– Manipulation of depreciation figures
2 Potential for fraud
• Prerequisites for fraud– Dishonesty– Motivation– Opportunity
2 Potential for fraud
• Assessing the risk of fraud– External factors– Business risks– Personnel risks
2 Potential for fraud
• Potential for computer fraud– Computer hackers– Lack of training within the management team– Identifying the risks– Need for ease of access and flexible systems
3 Implications of fraud for the organisation
• Removal of funds or assets from a business– Immediate financial implications• Profits are lower than they should be• Less cash or fewer assets• Returns to shareholders are likely to fall
– Long term effects on company performance• The reduction in working capital makes it difficult to
operate effectively• Ultimately result in the collapse of successful business
3 Implications of fraud for the organisation
• Intentional misrepresentation of the financial position of the business– If results are overstated• Retained profits will be lower than believed• Incorrect decisions will be made
– If results are understated• Returns to investors may be reduced • Share price fall and market strength may be eroded• Assess to loan finance may be restricted• Negative publicity can damage the business• Legal consequences
4 Systems for detecting and preventing fraud
• Reasons for fraud– Factors specific to the industry– Factors specific to the business– Changes in circumstances– Certain areas
4 Systems for detecting and preventing fraud
• Reason for poor controls– Lack of emphasis on compliance or lack of
understanding of why ,how and who the controls are required
– Staff problems: understaffing, poor quality or poorly motivated staff
– Changes in senior personnel lead to lack of supervision
– Emphasis on the autonomy of operational management lead to control be bypassed
4 Systems for detecting and preventing fraud
• General prevention policies– Emphasising ethics– Personnel controls– Training and raising awareness
4 Systems for detecting and preventing fraud
• Prevention of fraud in specific business areas– Segregation of duties– Appropriate documentation be required – Limitation controls– Certain actions be prohibited – Internal audit work concentrate on these areas
4 Systems for detecting and preventing fraud
• Detection and prevention• Internal controls• Physical controls• Segregation of duties• authorisation policies• Customer signatures• Using words rather than numbers
4 Systems for detecting and preventing fraud
• Documentation• Sequential numbering• Dates• Standard procedures• Holidays• Recruitment policies• Computer security
4 Systems for detecting and preventing fraud
• Manager and staff responsibilities– Operational managers be alert for sings of petty fraud– finance staff be alert for signs of unusual items or trends – Personnel staff be alert for signs of discontent or low morale, also
aware of close personal relationships between staff– Internal audit staff ensuring systems and controls reviewed– External audit staff assess the risk of fraud – Non-executive directors act on signs of dishonesty by senior executive
management– Audit committee review the organisation performance in fraud
prevention and report any suspicious matters.
4 Systems for detecting and preventing fraud
• Availability of information to fraud– Cost and management accounting systems
provide promptly information with sufficient detail
– Personnel procedures – Lines of reporting should be clear
• Whistleblowing
4 Systems for detecting and preventing fraud
• Investigation of fraud– Establishing the extent of the loss– Establishing how the fraud occurred– Considering who else be implicated in the fraud– Assessing why the fraud was not detected
• Evloving control systems
5 Responsibility for detecting and preventing fraud
• The responsibility of directors• The role of the auditor
6 Money laudering
• Money laundering constitutes any financial transactions whose purpose is to conceal the origins of the proceeds of criminal activity.
6 Money laudering
• Risks associated with a company’s products and services
• The effects of regulation• UK legislation• Categories of criminal offence• Penalties• Money laundering process• The role of the Financial conduct autority• The costs of compliance
6 Money laudering
• Financial Action Task Force• International Monetary Fund (IMF)
