Fraud occurs when individuals purposely materially misstate facts with the intent of coercing someone to believe these misrepresentations. Upon believing the misrepresentation, individuals will act upon them and suffer a loss or damages.
Fraud occurs in various forms: 1. Misappropriation of assets 2. Fraudulent financial reporting 3. Employee fraud 4. Management fraud
The Fraud Triangle * Motive/Incentive: a reason to commit the fraud * Opportunity: the chance for an individual to violate a trust. * Attitudes/Rationalizations: an individual has a lapse in ethical and moral values. When combined with motive and an opportunity, fraud occurs
Corporate Governance and Reducing Fraud Risks * Management and the board of directors are responsible for implementing control procedures and corporate governance to minimize or prevent fraud. * Therefore, programs implemented by management include:
Creating a Culture of Honesty and High Ethics: * Embraces its core values. * Tone with management * Positive workplace environment * Hire and promote appropriate employees * Train all new employees on ethical conduct * Reconfirm that employees understand their responsibilities * Discipline
Responsibility to Manage Risks of Fraud: * An effective fraud risk management process should include the following principles: 1. Written policy clarifying board of directors/management’s expectations regarding fraud risk 2. Fraud risk exposures should be assessed 3. Establish controls and actions to prevent or mitigate fraud risks 4. If prevention or mitigation fails, controls and actions to detect fraud are present 5. Communication, reporting and monitoring used to update the fraud management process organization-wide and on a timely basis. * Senior managers and the board of directors are responsible for oversight; management must identify, measure