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Fraud and Internal Control

Fraud and Internal Control - Fraud and Internal Control...

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Fraud and Internal Control Fraud A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer . Examples of fraud reported in the financial press include: A bookkeeper in $750,000 of bill account over a th A shipping clerk with 28 years of service shipped $125,000 of A computer operator embezzled $21 million from Wells Fargo A church treasurer “borrowed” $150,000 of church funds to fi dealings. Why does fraud occur? The three main factors that contribute to fraudulent activity are depicted by the fraud triangle : opportunity, financial pressure and rationalization. in Illustration 7-1 . Illustration 7-1 Fraud triangle The most important element of the fraud triangle is opportunity . For an employee to commit fraud, the workplace environment must provide opportunities that an employee can exploit. Opportunities occur when the workplace lacks sufficient controls to deter and detect fraud. For example, inadequate monitoring of employee actions can create opportunities for theft and can embolden employees because they believe they will not be caught. A second factor that contributes to fraud is financial pressure . Employees sometimes commit fraud because of personal financial problems caused by too much debt. Or they might commit fraud because they want to lead a lifestyle that they cannot afford on their current salary. The third factor that contributes to fraud is rationalization . In order to justify their fraud, employees rationalize their dishonest actions. For example, employees sometimes justify fraud because they believe they are underpaid while the employer is making lots of money. These employees feel justified in stealing because they believe they deserve to be paid more.
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The Sarbanes-Oxley Act What can be done to prevent or to detect fraud? After numerous corporate scandals came to light in the early 2000s , Congress addressed this issue by passing the Sarbanes-Oxley Act of 2002 (SOX) . Under SOX, all publicly traded U.S. corporations are required to maintain an adequate system of internal control. Corporate executives and boards of directors must ensure that these controls are reliable and effective. In addition, independent outside auditors must attest to the adequacy of the internal control system. Companies that fail to comply are subject to fines, and company officers can be imprisoned. SOX also created the Public Company Accounting Oversight Board (PCAOB), to establish auditing standards and regulate auditor activity. One poll found that 60% of investors believe that SOX helps safeguard their stock investments. Many say they would be unlikely to invest in a company that fails to follow SOX requirements. Although some corporate executives have criticized the time and expense involved in following
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