Chpt_7_Outline_-_Part_1 - CHAPTER 5 Internal controls why...

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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: How does misstating the financial statements provide a benefit to managers?
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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 Situational Pressures an employee is experiencing financial difficulties Available Opportunities poor internal controls Personal Characteristics personal morals of individual employees Auditor’s Responsibility to Detect Fraud SAS 99 Auditors must: Reasonable assurance Reporting fraud to upper management...
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  • Fall '08
  • scrowley
  • earnings management

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