FRAUD – is an intentional act involving the use of Misrepresentation or omission of events,
deception that results in a Material Misstatement transaction, or the other significant
of the financial statement. information
Intentional Misapplication of accounting
TWO TYPE OF MISSTATEMENT
principles.
1. Misstatement arising from misappropriation of
asset
2. Misstatement arising from fraudulent financial THE FRAUD TRIANGLE – Characterizes incentives,
reporting opportunities and rationalizations that enable fraud to
exist.
3 ELEMENTS OF FRAUD TRIANGLE
1. Incentive to commit fraud
1. MISSTATEMENT ARISING FROM
2. Opportunity to commit and conceal the fraud
MISAPPROPRIATION OF ASSET
3. Rationalization- The mindset of the fraudster to
ASSET MISAPPROPRATION justify committing the fraud.
- Occurs when a perpetrator steals or misuses an
organization’s asset.
1. Incentive to commit fraud
Asset Misappropriation can be accomplished in
various ways: INCENTIVES OR PRESURES TO COMMIT FRAUD
o Incentives relating to asset misappropriation
Embezzling
include:
Cash Receipts
Personal factors, such as severe financial
Stealing Assets
considerations
Causing the company to pay for goods
Pressure from family, friends or the culture
or services that were not received
to live a more lavish lifestyle than one’s
Asset Misappropriation occurs when personal earnings allow for
employees: Addiction to gambling or drugs
Gain access to cash and manipulate
accounts to cover up cash thefts.
o Incentives include the ff. for fraudulent
Manipulate cash disbursements
financial reporting:
through fake companies.
Management compensation schemes
Steal inventory or other assets and
Other financial pressures for either
manipulate the financial records to
improved balance sheet
cover up the fraud.
Debt Covenants
Pending wealth tied to either financial
2. MISSTATEMENT ARISING FROM FRAUDULENT
results or survival of the company.
FINANCIAL REPORTING
Greed
- The intentional manipulation of reported financial
results to misstate the economic condition of the
organization.
2. Opportunity to commit fraud
3 Common ways in which fraudulent financial Significant related-party transactions
reporting can take place include: A company’s industry position, such as
the ability to dictate terms or conditions
Manipulation, falsification, or alteration of
to supplier or customers that might allow
accounting records or supporting documents.
individuals to structure fraudulent
transaction
Management inconsistency involving Misappropriation of asset
subjective judgments regarding assets or
- involves the theft of an entity’s asset and is often
accounting estimates
perpetrated by employees in relatively small and
Simple transactions that are made
immaterial amounts.
complex through an unusual recording
process -However, it can also involve management who are
Complex or difficult to understand usually more able to disguise or conceal
transactions, such as financial derivatives misappropriations in ways that are difficult to detect.
or special-purpose entities.
Ineffective monitoring of management by Misappropriation of asset can be accompanied
the board, either because there is a in a variety of ways including:
domineering manager Embezzling receipts
Complex or unstable organizational Stealing physical assets or intellectual
structure property
Weak or nonexistent internal controls. Causing an entity to pay for goods and
services not received
3. Rationalizing the Fraud Using an entity’s assets for personal use
o For Asset Misappropriation:
Fraud is justified to save a family
member or loved one from financial A. INCENTIVES/PRESSURES
crisis. - Personal Financial obligations may create pressure
We will lose everything if we don’t take on management or employees with access to cash
the money. or other assets susceptible to theft to
No help is available outside. misappropriation those asset.
This is “borrowing”, and we intend to B. OPPORTUNITIES
pay the stolen money back some point. - Certain characteristics or circumstances the
Something is owed by the company susceptibility of asset to misappropriation.
because others are treated better. C. ATTITUDES/ RATIONALIZATION
We simply do not care about the - Disregard for the need for monitoring or reducing
consequences of our actions or of risks related to misappropriation of asset.
accepted notions of decency and trust; - Disregard for internal control over
we are for ourselves. misappropriation of the asset by overriding
o For Fraudulent Financial Reporting: existing control or by failing to correct known
This is one-time thing to get us through internal control deficiencies.
the current crisis and survive until things - Behavior indicating displeasure or dissatisfaction
better. with the entity or its treatment of the employee.
Everybody cheats on the financial - Changes in behavior or lifestyle that may indicate
statements a little; we are just playing assets have been misappropriated.
the same game. - Tolerance of petty theft.
We will be in violation of all of our debts
covenants unless we will find a way to
get this debt off the financial statements RISK FACTOR CONTRIBUTORY TO FRAUDELENT
We need a higher stock price to acquire FINANCIAL REPORTING
company XYZ, or to keep our employees
through stock options, and so fourth FRAUDELENT FINANCIAL REPORTING
- Involves international misstatement including
omission of amounts or disclosures in financial
RISK FACTORS CONTRIBUTORY TO MISAPPROPRIATION statements to deceive statement users.
OF ASSETS
