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Chpt_7_outline_-_fraud_and_EM

Chpt_7_outline_-_fraud_and_EM - • Incentive to show...

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CHAPTER 5 Internal controls – why are they important? Sarbox – o Increases responsibility and accountability of CEO’s and directors Section 302: Section 404: o Increases white-collar crime penalties o Auditors and consulting What does this do to the accounting profession? Exposure Exposure – risks borne by the company due to weak internal controls Sources of exposure Active and deliberate threats Passive and unintentional threats Fraud -
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Two types of fraud: 1. Misappropriation of assets Misuse of company resources for personal gain Theft or embezzlement of assets 2. Fraudulent financial reporting Most common methods:
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How does misstating the financial statements provide a benefit to managers? Earnings Management What is earnings management? Firms manage earnings when there are: 1. Stock market motivations Incentive to MBE Incentive to not report a loss
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Unformatted text preview: • Incentive to show growth • Incentive to smooth earnings 2. Contractual obligations 3. Debt-related issues The consequences of managing earnings are: • Personal benefits to managers • Corporate benefits Ways to manage earnings: Places where earnings are managed: What is the difference between fraud and earnings management? Source: Dechow and Skinner, 2000, Accounting Horizons And now, back to fraud… Implementing fraud: Types of fraud: Detecting fraud: The Fraud Triangle – how and why fraud occurs Auditor’s Responsibility to Detect Fraud SAS 99 Auditors must: Reasonable assurance Reporting fraud to upper management Situational Pressures an employee is experiencing financial difficulties Available Opportunities poor internal controls Personal Characteristics personal morals of individual employees...
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