Chapter 14

Internal Control, Corporate

Governance, and Ethics

IntroductionReasons for increased risk of fraud:

The size of corporationsGlobalizationReduced stability in the workforceReduction in corporate loyaltyIncreased computerization of accounting systemsGrowing reliance on the Internet

FraudDefined as a knowingly false representation of a material fact made by a party with the intent to deceive and induce

another party to justifiably rely on the

representation to his or her detriment.

Fraudulent Financial Reporting

Intentional misstatement of or omission of material, very significant information from a company’s financial statements.

Management FraudTypically the result of pressure on management to report good operating results. Commonly involves improper revenue recognition overstating assets understating liabilities

Misappropriation of AssetsInvolves the theft of a company’s assets.Usually committed by lower-level employees.Usually involves small amounts that do not

impact the financial statements.Usually involves cash, inventory, fixed assets.

KitingLapping

Expense Accounts

The Fraud TriangleSituational Pressures

& Incentives

Opportunities Personal Characteristics& Attitudes

Internal Control Internal Control: The policies and

procedures thatprovide reasonable assurance that a

company’sgoals and objectives will be achieved.Comprised of five elements:1. The control environment.2. Risk assessment3. Control activities4. Information and communication5. Monitoring

Control ActivitiesSegregation of Duties

Transaction Authorization

Safeguarding of Assets

Independent Reviews of Work

The Impact of Information Technology on Internal

Control Threats in an E-Information

Technology- Intensive Environment

Internet-basedbusiness

False Web sites posing as selling

agents

Insider perpetrators

Perpetrators interceptingcredit card

information,e-mail messages,

company data

Perpetrators sending false messages

Data destruction, viruses, rerouting

messages, altering data

Fictitious customers posing as legitimatecustomers

Denial-of-serviceattacks

Corporate Governance

Embodied in the processes that companies use to promote:Corporate fairnessComplete and accurate financial disclosuresManagement accountability

The Need for EthicsEthics ProgramsCodes of Ethics

Purposes of codes of ethicsWriting codes of ethics

Responding to Ethics Violations

End of Chapter 14