External Auditor versus Internal Whistleblower: Who is More Effective in Deterring Fraud?
Fraud and financial improprieties occur in all businesses: private, public, governmental agencies, and not-for-profit organizations. Fraud leads to a loss of company properties through illegal means that cost companies nearly a billion dollars annually (KPMG Peat Marwick LLP).
(#9) The Center for Audit Quality published a report identifying the key players responsible for the mitigation of fraud risk to the investing public and other stakeholders as the board of directors and audit committee, the internal and external auditors, and the company’s management. (Elizabeth Radar 6). (#6) While many players share in the role to mitigate fraud risk, the position
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There are numerous forms of fraud, and it is far more sinister than raiding the petty cash drawer or the physical theft of inventory from the warehouse. The three classifications of fraud are fraudulent financial reporting, asset misappropriation, and corruption (Hedley). (#8). Reporting financial fraud is typically executed by managerial employees who deliberately misrepresent the company’s financial information by doctoring the financial statements. Asset misappropriation usually occurs on an employee level and involves embezzlement. Corruption includes any unethical conduct, such as bribes and extortion, which may result in an illegal act or a law violation (Hedley). …show more content…
It may occasionally happen, but this is the exception rather than the rule. However, this does not absolve the auditor of assessing the risk of fraud of material misstatements in audits. Quite the opposite is true. The audit team must remain alert for any potential fraud (Placeholder2). (#5). However, despite the intense training auditors complete, as well as the outlined procedures they adhere to, a survey by professional services firm KPMG Peat Marwick, LLP, reported that external auditors were the source of reporting fraud only five percent of the time while 58 percent of all fraud detected was brought to management’s attention by employees. (KPMG Peat Marwick LLP). (#9) These employees who disclose evidence of fraud within the company are referred to as
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
This paper is designed to examine a few ways in which people commit fraud. Specifically, it will look at a recent complaint filed by the Securities and Exchange Commission (“SEC”) with the United States District Court for the Central District of California (“CDCA”). The complaint alleges that five executive of iPayment (the “Company”), a New York City headquartered credit and debit card processor, defrauded iPayment of approximately $11.6 million. Their alleged actions defrauded the company of millions of dollars and, in turn, caused the Company to file multiple false reports with the SEC. The three ways the alleged fraud took place was through:
The term “fraud” is commonly used to describe the use of deception to deprive, disadvantage or cause loss to another person or party. This can include theft, the misuse of funds or other resources, or more complicated crimes such as false accounting and the supply of false information. This case study of Mountain State Sporting Goods is an excellent example of individuals acting on the opportunity to financial benefit by committing what they thought was harmless adjustments, but in reality was fraud. In this case study there are is just so much wrong with this company and how it operates. We noticed multiple areas of concern before even seeing the financial statements and my concerns were confirmed upon further investigation.
Combating fraud in the private sector is a difficult task. Trying to combat fraud in the public sector is daunting. In 1999 15.7% of the American workforce were employed by a government entity (federal, state, and local).[1] Mirroring society, government will have its share of perpetrators. The difference from the private sector is in the scope of the fraud committed, the loss of the public trust, the blaring headlines from news media, and difficulty in making necessary changes to combat the problems.
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
Embezzlement may cost companies as much as $90 billion each year.” The current trend of economic decline has shown an increase in the number of arrests made for embezzlement. The following data shows that increase. Estimated arrests of all persons in the United States: 1994 - 2008 1994 1995 1996 1997 1998 1999 2000 Embezzlement 14,300 15,200 15,700 17,400 17,100 17,100 19,000 2001 2002 2003 2004 2005 2006 2007 2008 Embezzlement 20,200 18,600 16,800 17,300 19,000 20,000 22,400 21,400
2.Some common types of expense account fraud employees commit are payroll fraud, using business money for your personal expenses and
Like most things there is a fraud triangle, which shows what has to be present for fraud to occur. The fraud triangle consists of motive or pressure, opportunity, and desire or rationalization. There are many times of fraud but the one Mr. Carr talked about was occupational fraud. Occupational fraud is when individuals defraud their employers. This type of fraud is usually found in small organizations because of weak or anti-fraud controls.
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues.
The principle territory we are planning to address is accounting fraud and how it could impact an organization by answering, the who, what, when and how. Its goal is to increase the awareness of accounting fraud and fraud counteraction. The intriguing thing about accounting fraud is that little disclosure as a rule usually leads to an enormous increase in fraud. A number of categories and sub-categories can be divided up for fraud.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the This includes but is not limited to; check forgery, inventory theft, cash or check theft, payroll fraud or service theft.
Fraud is defined as someone try to act with intention to cheat other people in order to acquire an unfair or illegal advantage. The fraud happens due to management override the internal control of the organisation and fraud will affect the financial reporting. The main categories of fraud that can affect financial reporting are fraudulent financial reporting and misappropriation of assets.
For those who do not know what fraud is, it’s basically deception by showing people what they want to see. In business it’s the same concept, but in a larger scale by means of manipulating figures that will be shown to shareholders and investors. Before Sarbanes Oxley Act there was “Enron Corporation”, a fortune 500 company that managed to falsify their statements claiming revenues over 101 billion in a span of 15 years. In order for us to understand how this corporation managed to deceive the public for so long, the documentary or movie “Smartest Guys in the Room” goes into depth by providing viewers with first-hand information from people that worked close with or for “Enron”.
The complete destruction of companies including Arthur Andersen, HealthSouth, and Enron, revealed a significant weakness in the United States audit system. The significant weakness is the failure to deliver true independence between the auditors and their clients. In each of these companies there was deviation from professional rules of conduct resulting from the pressures of clients placed upon their auditors (Goldman, and Barlev 857-859). Over the years, client and auditor relationships were intertwined tightly putting aside the unbiased function of auditors. Auditor careers depended on the success of their client (Kaplan 363-383). Auditors found themselves in situations that put their profession in a questionable time driving them to compromise their ethics, professionalism, objectivity, and their independence from the company. A vital trust relationship role for independent auditors has been woven in society and this role is essential for the effective functioning of the financial economic system (Guiral, Rogers, Ruiz, and Gonzalo 155-166). However, the financial world has lost confidence in the trustworthiness of auditor firms. There are three potential threats to auditor independence: executives hiring and firing auditors, auditors taking positions the client instead of the unbiased place, and auditors providing non audit services to clients (Moore, Tetlock, Tanlu, and Bazerman 10-29).