cash and internal control

Cash and Internal Control

• A fraud is generally defined as an attempt to deceive others for personal gain. Employee fraud is grouped into three categories:

  • Corruption: involves misusing one’s position for inappropriate personal gain. 

  • Asset Misappropriation: theft and embezzlement; cash is normally the target

  • Financial Statement Fraud: misreporting amounts in financial statements, usull;y to portray more favorable financial results than what actually exist

• Reasons employees commit fraud:

  • Incentive: The employee has a reason for committing fraud. The incentive can be to make the business appear more successful so as to attract investors, bring in new business partners, or meet loan requirements. The loan covenants (terms of a loan agreement that, if broken, entitle the lender to renegotiate loan terms or force repayment) in lending agreements may require the company to achieve financial targets, and if not meant, dishonest managers can misreport the company’s financial statements.

-Opportunity: The employee has a means of committing fraud. Opportunities to commit fraud usually stem from weak internal controls. 

-Rationalization: The employee perceives the misdeed as unavoidable or justified. IN many other cases, fraudsters rationalize their actions through a feeling of personal entitlement, which outweighs moral principles. These employees often feel they are underpaid, so fraud is their way to get even and be paid what they think they deserve. 

Fraud affects all types of companies, but the impact on public companies is a major concern. To reduce fraud in public companies, the U.S. government established laws such as the Sarbanes-Oxley Act.