Fraud, Ethics and Internal Control

Study Objectives (SO)

  • SO1 – Understand need for code of ethics & internal controls
  • SO2 – Recognize accounting-related fraud when ethics/controls are weak
  • SO3 – Nature of management fraud
  • SO4 – Nature of employee fraud
  • SO5 – Nature of customer fraud
  • SO6 – Nature of vendor fraud
  • SO7 – Nature of computer fraud
  • SO8 – Policies for avoiding fraud & errors
  • SO9 – Maintenance of a code of ethics
  • SO10 – Maintenance of accounting internal controls
  • SO11 – Maintenance of IT controls
  • SO12 – SOX 2002 internal-control requirements

Introduction – Why Ethics & Internal Controls? (SO1)

  • Early 2000s: major scandals (Enron, WorldCom, Global Crossing, Adelphia, Xerox) ➔ billions lost, audit failures, market crash
  • Unethical leadership + weak controls = high fraud risk
  • Ethical tone at top & robust controls reduce fraud likelihood
  • Real-World anchor: Phar-Mor drugstore chain
    • Losses ≈$1 billion\approx\$1\text{ billion}, thousands of layoffs
    • Falsified inventory & separate, unapproved bank acct