Ethics, Fraud, and Internal
Control
Chapter 3
Ethical Issues in Business
• Business
• Information Systems
• Computer Technology
Business Ethics
• Ethics pertains to the principles of conduct that
individuals use in making choices and guiding
their behavior in situations that involve the
concepts of right and wrong.
Making Ethical Decisions
• Proportionality. The benefit from a decision
must outweigh the risks.
• Justice. The benefits of the decision should be
distributed fairly to those who share the risks.
• Minimize risk. Even if judged acceptable by
the principles, the decision should be
implemented so as to minimize all of the risks
and avoid any unnecessary risks.
Computer Ethics
• Computer ethics is the analysis of the nature
and social impact of computer technology and
the corresponding formulation and justification
of policies for the ethical use of such
technology.
A New Problem of Just a New Twist on an
Old Problem?
• Privacy
• Security (Accuracy and Confidentiality)
• Ownership of Property
• Equity in Access
• Environmental Issues
• Artificial Intelligence
• Unemployment and Displacement
• Misuse of Computers
Ethical Issues
• Conflicts of Interest
• Full and Fair Disclosures
• Legal Compliance
• Internal Reporting of Code Violations
• Accountability
Fraud and Accountants
• Fraud denotes a false representation of a
material fact made by one party to another
party with the intent to deceive and induce the
other party to justifiably rely on the fact to his
or her detriment.
– Employee Fraud
– Management Fraud
The Fraud Triangle
• Situational Pressure
• Opportunity
• Ethics
Fraud Schemes
• Fraudulent Statements
• Corruption
• Asset Misappropriation
Fraudulent Statements
• Fraudulent statements are associated with
management fraud. While all fraud involves
some form of financial misstatement, to meet
the definition under this class of fraud scheme,
the financial statement misrepresentation must
itself bring direct or indirect financial benefit
to the perpetrator.
The Underlying Problems
• Lack of Auditor Independence
• Lack of Director Independence
• Questionable Executive Compensation
Schemes
• Inappropriate Accounting Practices
Corruption
• Corruption involves an executive, manager, or
employee of the organization in collusion with
an outsider.
– Bribery
– Illegal Gratuities
– Conflicts of Interest
– Economic Extortion
Asset Misappropriation
• The assets are either directly or indirectly
diverted to the perpetrator’s benefit.
– Skimming
– Cash Larceny
– Billing Schemes
• Shell Company Fraud
• Pass Through Fraud
• Pay-And-Return Scheme
– Check Tampering
– Payroll Fraud
– Expense Reimbursements
– Thefts of Cash
– Non-Cash Misappropriations
– Computer Fraud
Internal Control Concepts and Techniques
• To safeguard assets of the firm.
• To ensure the accuracy and reliability of
accounting records and information.
• To promote efficiency in the firm’s operations.
• To measure compliance with management’s
prescribed policies and procedures.
Modifying Assumptions
• Management Responsibility
• Reasonable Assurance
• Methods of Data Processing
• Limitations
Exposures and Risk
• Destruction of Assets
• Theft of Assets
• Corruption of Information or the Information
System
• Disruption of the Information System
The Preventive-Detective-Corrective Internal
Control Model
• Preventive Controls
• Detective Controls
• Corrective Controls
Internal Control Framework
• Control Environment
• Risk Assessment
• Information and Communication
• Monitoring
• Control Activities
– IT Controls
– Physical Controls
• Transaction Authorization
• Segregation of Duties
• Supervision
• Accounting Records
• Access Control
• Independent Verification
IT Application Controls
• Input controls
– Check Digit
• Transcription Errors
• Transposition Errors
– Missing Data Check
– Numeric-Alphabetic Check
– Limit Check
– Range Check
– Reasonableness Check
– Validity Check
• Processing Controls
– Batch Controls
– Run-To-Run Controls
• Audit Trail Controls
– Transaction Logs
– Log of Automatic Transactions
• Master File Backup Controls
– Batch Processing Using Sequential Files
– Batch Processing Using Direct Access Files
– Real-Time Processing Systems
• Output Controls
– Hard-Copy Output
• Output Spooling
• Print Programs
• Waste
• Report Distribution
• End-user Controls
– Digital Output
