CHAPTER 1: INTERNAL CONTROLS
Fraud has four characteristics that are present in nearly all fraud situations: 1. Perceived Opportunity (allows) 2. Perceived Pressure (motive) 3. Rationalization (justification) 4. Capability
Many monumental fraud cases have involved this fourth element—the capability of the person(s) involved in the fraud. The degree of capability affects the size of the fraud. for example, fraud by a corporate officer is generally of greater magnitude than that by a cash receipt specialist. But all fraud is costly and can occur as a result of the combination of the right person in the right place. INTERNAL FRAUD Employee fraud can be the most difficult to deal with since those committing the fraud are known and often trusted fellow employees. The ACFE studies occupational fraud extensively and has developed the “Fraud Tree,” which identifies and classifies the types of occupational fraud.
The three main branches of the tree are: 1. Asset misappropriation 2. Corruption 3. Financial statements
ACFE further indicates that asset misappropriation is, by far, the most common type of occupational fraud. Losses due to collusion – whether among employees or between employees and outsiders – tend to be higher in terms of dollar value than losses perpetrated by a single employee. Remember also that while cash is the most frequently targeted asset, non-cash assets are also at risk. The existence and enforcement of internal controls, particularly those controls aimed at deterring fraud, is likely to result in smaller losses and frauds of shorter duration. This is because the fraudulent activities will be prevented or discovered sooner. Other employees uncover the majority of frauds, and the implementation of an anonymous tip line increases the number of alerts the organization is likely to receive since concern about backlash is alleviated by anonymity. The whistleblower protection included in Sarbanes-Oxley is designed to protect lower-level employees from repercussions of reporting misconduct. WHAT TYPES OF FRAUD MIGHT EMPLOYEES INVOLVED WITH AR COMMIT OR UNCOVER? Customer Involved: At certain times, companies might motivate sales representatives by offering bonuses or exotic trips for two to the top sales reps of the month, quarter, or year. Unscrupulous sales reps will ask customers to place orders so they can win the prize and then tell them to cancel the order. This can overstate projected revenue and cause excess inventory to fill those orders, not to mention the cost of processing fake orders. The customer may alert the AR department of these circumstances and AR should report these findings.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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