The Fraud Disease”
LAW001 Business Law 1
Week 6 Forum
The Fraud Disease”
Read the following:
Understanding the fraud disease: As described by J.K Loebbecke, M.M. Eining, and J.J. Willingham, Jr., in “Auditors’ experience with material irregularities: Frequency, nature, and detectability” (Auditing: A Journal of Practice & Theory, Fall 1989), the fraud recipe contains three ingredients: incentive, opportunity, and attitude/rationalization.
The first ingredient, incentive, addresses whether executives have a reason to commit accounting fraud. Common reasons include compensation factors (stock options, bonus targets), strong pressure to perform, and expectations analysts place on the company. Putting pressure on executives certainly is a good motivator, but it is important to recognize when the pressure becomes so intense that people resort to fraud to make the numbers.
The second ingredient is the opportunity to commit accounting fraud. The main deterrent to opportunity is strong internal controls, the focus of section 404 of the Sarbanes-Oxley Act. Controls should address routine transaction processing and asset safeguarding, as well as estimates and assumptions used in preparing the financial statements. If section 404 work improves internal controls, the side benefit should be a reduced risk of accounting fraud.
The third ingredient in the fraud recipe is attitude/rationalization. In other words, can someone with a reason to commit fraud and the opportunity to do so explain away such behavior? Is the fraud okay because it saved jobs? Is it okay because it happened only once and will be corrected in the future? Is it okay because the CEO said “make the numbers or else”
Executives should view the organization through this lens of incentive, opportunity, and attitude/rationalization. In addition, the appendix to SAS 99, “Management Antifraud Programs and Controls,” may be a helpful resource to those seeking to understand and prevent fraud (see http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf (Links to an external site.) ) Conducting regular, honest assessments of the organization’s fraud risks can go a long way toward preventing fraud.
http://abogado.pbworks.com/w/page/106550535/sarbanes-fraud
Now discuss the following:
1. What are the three ingredients of fraud?
2 How do they apply to every day business?
3. Do you think there is less fraud now that we have the Sarbanes Oxley law in force?
4. How can we improve the “fraud disease” – any thoughts or suggestions?
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