Dr. Mahmoud Nassar

[Mahmoud Nassar Newport]

Accounting Principles 2 First Lesson

Cash and Internal Control

[Mahmoud Nassar Newport]

Fraud

A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Fraud triangle

Opportunity, financial pressure and rationalization

1. Opportunity:

For an employee to commit fraud, the workplace environment must provide opportunities that an employee can take advantage of.

Opportunities occur when the workplace lacks sufficient controls to deter and detect fraud. For example, inadequate monitoring of employee actions can create opportunities for theft and can embolden employees because they believe they will not be caught.

2. Financial pressure:

Employees sometimes commit fraud because of personal financial problems caused by too much debt. Or they might commit fraud because they want to lead a lifestyle that they cannot afford on their current salary.

3. Rationalization:

In order to justify their fraud, employees rationalize their dishonest actions. For example, employees sometimes justify fraud because they believe they are underpaid while the employer is making lots of money. Employees feel justified in stealing because they believe they deserve to be paid more.

What can be done to prevent or to detect fraud?

Failures of Internal Control

• Enron/ WorldCom /Others (led Led to Congress Passing Sarbanes-Oxley Act)

Sarbanes-Oxley Act of 2002 (SOX) (in the early 2000s)

Under SOX, all publicly traded U.S. corporations are required to maintain an adequate system of internal control.