Fraud Examination Study Set 4
Quiz 3 :
1. Positive work environment is an important aspect with respect to fraud prevention activities in an organization. Hiring of the right kind of employees is one of the most important factors which should be done after appropriate background verification. The top management needs to be involved in structuring the compensation and salary of every employee, which should be reviewed on annual basis. Appropriate promotion should happen for every employee based on respective performance. Care, good behavior and apposite attitude should be shown to every employee by the higher management and these aspects should be reciprocated. Recognition of work done by an employee needs to be done. Appreciation for commendable performance needs to happen. There should not be any kind of inequality; every individual should have sincere respect and regards for each other. 2. The communication of the top management should be understood and followed by every employee of the organization. High standard of ethics should be maintained and the top management should set a standard which everyone needs to appreciate and perform accordingly. Every employee should work with sincerity, honesty, trust and integrity. Training of employees on relevant fields should be conducted. Fraud reporting tool should be implemented through which employees can report about any suspicious activity to the higher management. Whistle blowing system needs to be established in the company. Monitoring on the performance of every employee should also be done. Independent, external auditors should audit on the accounts and the quality of work being delivered on quarterly basis. Fraud mitigation strategies should be available and exercised properly if fraud occurs.
(1)(a) Potential pressures for "C" to commit fraud: The two potential pressures for "C" to commit fraud are: (i) There was no hike in the salary of the "C". (ii) His family required his support and he put himself to the school. (b) Potential opportunities for "C" to commit fraud: The potential opportunities for "C" to commit fraud were that "C" was the trusted employee and he got a team under him who cannot keep a check on "C". (c) Analysis: Since "C" was a trusted Member and he was a technology savvy that rationalization he would had used to commit the fraud. (2) Major symptoms for existence of fraud: List the major symptoms that fraud potentially exists: (i) His Computer screen was repositioned so that it cannot be seen to other Co-workers. (ii) He almost had latest technological innovations like new laptop, MP3 Player, Play Station etc. (iii) He was frequently going out for the lunch. (iv) He was frequently using fake usernames and passwords for testing purposes. (3) "J" should have segregated the duties and should have implemented an authority system as that would have allowed keeping a check over "C".
Fraud: Fraud is defined as a crime done by any person for some personal gain rather than the gain of the organization as a whole. Fraud is an illegal act done to deceive the other person by misrepresenting the facts. Fraud can be done in both monetary and non-monetary items. It can be committed by persons both internal and external to the organization. Fraud is a void act. A mistake is not treated as fraud. Fraud is basically an amalgamation of opportunity, rationality and pressure. A combination of these leads to the commencement of fraud in the organization. Opportunity: The first factor is apparent pressure. Financial pressure is one of the most discussed pressures. People commit fraud due to their greed for possession and for better life-style and lack of money. Pressure: The second factor is apparent opportunity to commend and hide fraud. People will commend fraud if they get chances. Rationalization: According to the fraud scale, when the apparent pressure and apparent opportunity is high, an individual require less rationalization to commend fraud and when the apparent pressure and apparent opportunity is low, he/she requires high rationalization to commend fraud. Organizations try to take considerable steps to avoid frauds by creating a healthy environment in the work place. They try to sustain a moral and sincere traditions and assessing the fraud-risk and reduce the chances to commend fraud. Fraud prevention: Fraud prevention is an act of impeding fraud in the organization. Fraud is an inevitable act. It cannot be eliminated, rather it can be reduced with certain preventive steps. Generally, the management and the governing body i.e. the auditor, is responsible for prevention and detection of fraud. It is a continuous process which needs to be regularly updated. Fraud prevention is done to reduce the losses which will occur from fraud. If no preventive steps should be taken, it will lead to encouragement of fraud and related activities in the organization. Preventive steps are taken to aware the management that such activities will not be tolerated in the organizational culture. Importance of fraud prevention is described below: 1. To reduce large catastrophic losses: Catastrophic losses are those losses which are large and inevitable in nature. The consequences of these losses are very harsh. Such losses can cost the reputation, brand image of the company. Thus, it is necessary to prevent such type of losses occurring from fraudulent activities. 2. Creates trust factor among investors: No one wants to invest in a company where fraudulent activities are common. Fraud prevention activities creates a trust level among the people investing in the organization. It creates a safe environment for the investors. If the investors are not satisfied with the reputation of the company relating to its work culture, they will not invest and thus, creating huge losses to the company. 3. Decreasing the occurrence of fraud and related activities: High internal controls will help in minimizing the thoughts of committing fraud in the organization. Continuous surveillance will create fear of being caught among the employees and thus, the fraud activities will be reduced. 4. Gaining competitive advantage over others: Fraud prevention acts increases the brand image. Companies with installed fraud prevention and detection measures are more recognized than the companies who doesn't have such measures in their work culture. In this way, they gain competitive advantage over others.