CFE MODULE 3 FLASHCARDS

ETHICS FOR FRAUD EXAMINERS, FRAUD RISK ASSESSMENT

Define Ethics

• Ethics is concerned with what is right and what is wrong

• The decisions fraud examiners make are important to the organizations they work for, as well as to the individuals they might be called upon to investigate

• Therefore, fraud examiners are held to a

  high ethical standard.

• Ethics is the study of moral principles and values that govern the behaviour of individuals or groups

• Ethics provides guidelines for distinguishing between right or wrong and for making decisions that are fair, responsible and accountable

• It stresses the standard or code of behaviour expected by the group or profession to which the individual belong

• For fraud examiners, ethics refers to the appropriateness of a decision in light of morality.

List and Explain the three key elements of Ethics

• Decision problems (Questions requiring reflective choices)

• Moral principles (Using right vs wrong as a guide)

• Values/good (Our decisions should protect honesty, fairness and public trust)

What is the purpose of the Code of Ethical conduct?

a. REFERENCE and benchmark for ethical guidance

b. CRITERIA for conduct particular to the profession

c. Provides direct SOLUTIONS not available from general ethics theories

d. Enables individuals to know what the profession EXPECTATIONS

e. Makes practical ENFORCEMENT and profession wide internal discipline easier because members are put on notice of the standards

Define ‘The Law’

The law is the lowest reference level for moral decisions.

Define Morality

Morality refers to the underlying codes of right and wrong

Define Legality

Legality refers to lawfulness by conformity to a legal statute.

List the Eight elements of the ACFE Code of Professional Ethics

1. Commitment to Professionalism and Diligence

2. Legal and Ethical Conduct and Avoid Conflict of Interest

3. Integrity and Competence

4. Comply with Court Orders and Testimony

5. Have Reasonable Evidential Basis for Opinions

6. Keep Confidential Information

7. Complete Reporting of Material Matters

8. Professional Improvement

When was the ACFE code of professional Ethics adopted?

Jan 01, 1989 by the Board of Regents of ACFE

What is professional skepticism?

• ‘Something is wrong mindset’

• Fraud examiners should only relax their attitude of skepticism only when the evidence shows no signs of fraudulent activity.

• At no time is a fraud examiner entitled to assume a fraud problem does not exist.

• Professional skepticism can be dispelled only by evidence.

• Opinions or attestations about a fraud-free environment are absolutely prohibited for ACFE members

Opinions or attestations about a fraud-free environment are absolutely prohibited for ACFE members

TRUE -
Opinions or attestations about a fraud-free environment are absolutely prohibited for ACFE members

Define professionalism

Refers to the standing, practice, methods, character, qualities, or typical features of a professional or a professional organization

How do you exhibit professionalism?

Exhibited by continually striving to honor the recognition granted by the public

How can diligence be excercised?

Exercised by

• PROPER PLANNING of assignments

• Supervising and ASSISTING colleagues

• Avoiding CONFLICTS of interest

• Performing with COMPETENCE

• Obtaining sufficient EVIDENCE to establish a basis for opinions

• Maintaining CONFIDENTIAL relations, and

• Avoiding DISTORTION of facts

How many hours of CPE is required?

20 hours

The Fraud Triangle was created by who and in what year?

The Fraud Triangle was created by a Criminologist named DONALD Cressey in the 1950’s

For a fraud to happen, three sides must be present. List them

• Pressure/Motivation (‘I need’)

• Oppurtunity (‘I can’)

• Rationalization (‘I deserve’)

The ‘need of the hour’ is described as?

Pressure is described as the ‘need of the hour’ which can either be Non-shareable or Financial need.

Non-shareable e.g loss in gambling, affair debt

Using 6 solid points, explain ‘Opportunity’ as described in the fraud triangle

1. Employee believes they CANNOT GET CAUGHT

2. by using GENERAL INFORMATION and TECHNICAL SKILLS

3. Opportunity is prone to environments where there are:
   - Weak Internal Controls
   - No segregation of duties
   - Too much trust
   - Poor TONE AT THE TOP

4. Weak or Bad ‘Tone at the top’ is the BIGGEST RED FLAG’ of opportunity fraud.

5. Fraudsters use it to RATIONALIZE

Explain what you understand by RATIONALIZATION

1. Takes place before the crime and not after the crime

2. The fraudster makes the fraud look okay in their head and see themselves as a good person

Define Fraud Risk

The VULNERABILITY that an organization FACES from individuals capable of combining all the three elements of the FRAUD TRIANGLE

Types of Fraud Risk

Inherent (Before management action)
Residual (After management action)

List out the factors that influences Fraud Risk in an organization

1. Nature of the business

2. The environment in which the business operates

3. The Values and Ethics of the COMPANY and it’s EMPLOYEES

4. The effectiveness of the INTERNAL CONTROLS

In Fraud, What is FRA?

Fraud Risk Assessment

Define Fraud Risk Assessment

The CONTINUOUS ONGOING process TAILORED to a company/business to help them PROACTIVELY IDENTIFY & ASSESS both INTERNAL and EXTERNAL VULNERABILITIES

What are the red flags or considerations to look for when assessing Internal control?

1. Control ELIMINATED due to restructuring efforts, or downsizing

2. Control ERODED over time due to reengineering of business processes

3. Management Override (Inherent limitations of internal control)

4. New opportunities for collusion

5. Lack of Internal control in a vulnerable area

List the 8 elements of a good FRA

1. Collaborative effort

2. Right Sponsor

3. Independence/Objectivity

4. Knowledge of the business

5. Access to people

6. Endengered Trust

7. Think the Unthinkable

8. Plan to keep it alive

What are the techniques used in conducting Fraud Risk Assessments

• Survey

• Interviews

• Focus groups

• Anonymous Feedback mechanism

What are the steps in Preparing a company for FRA?

• Assemble the right team to lead and consult

• Determine the best technique to use

• Educate the employees openly

What determines the size of the team to assemble?

• The size of the team to assemble should depend on the size of the organization and methods used to assess the assessment

• The team can include both Internal and External resources

Do you think the process of FRA be kept secret?

No, the process should be visible and communicated throughout the business

List the seven (7) processes in carrying out a FRA

1. Identify potential INHERENT Fraud Risk

2. Assess the LIKELIHOOD of occurrence

3. Assess the Fraud Risk SIGNIFICANCE to the organization

4. Evaluate which PEOPLE are most likely to commit the fraud and which METHOD they are most likely to use

5. Map out existing Preventive and Detective controls

6. Evaluate the effectiveness and efficiency

7. Identify and evaluate residual risk

Preventive controls

Intended to prevent fraud before occurrence

Detective controls

Intended to detect fraud if it occurs e.g Performing surprise audits

When assessing the significance of a fraud risk, what should be considered?

When assessing the significance, consider qualitative and quantitative factors, including:

i. Financial statement and monetary significance.

ii. Financial condition of the organization.

iii. Value of the threatened assets.

iv. Criticality of the threatened assets to the organization.

v. Revenue generated by the threatened assets.

vi. Significance to the organization’s operations, brand value, and reputation.

vii. Criminal, civil, and regulatory liabilities.

To assess the likelihood of occurrence of the identified fraud risks, what should first be considered?

First consider fraud risks to the organization on an inherent basis, without consideration of known controls.

Whistle blower hotline is a Preventive or Detective control?

Detective control

No system of internal controls can fully eliminate the risk of fraud. True or FALSE?

TRUES. No system of internal controls can fully eliminate the risk of fraud, but well-designed and effective internal controls can deter the average fraudster.

How can a well-designed and effective internal controls can deter the average fraudster?

By reducing the opportunity to commit the fraud and increasing the perception of detection reducing the organization vulnerability to fraud

Three methods of addressing identified Fraud Risks

• RESPOND (Avoid, Transfer, Mitigate, or Assume)

• REPORT

• Make an Impact/Take an action

How to avoid an identified Risk

1. By eliminating an asset
   OR

2. Discontinuing an activity
   
   —- if the control measures required to protect the organization against an identified threat are too expensive.

How to Transfer the risk

By purchasing fidelity insurance or a fidelity bond.

How to Mitigate the risk

By implementing appropriate countermeasures, such as prevention and detection controls.

The success of FRA depends upon ?

The success of the fraud risk assessment process depends upon how effectively the results are reported and what management then does with those results.