Fraud – deprivation by deceit. Or a false representation of its falsity, without belief in its truth recklessly careless whether it be true or false.

1. Removal of fund or assets from a business	Example, outright theft – cash or assets, overstatement of claim.	
2. Intentional misrepresentation of the financial position of the business.	Example, omission or misrecording	

Removal of fund or assets from a business
1. Theft of cash	Steal of petty cash. Because of unnoticed	
2. Theft of inventory  	Pilfer item of inventory. Because of immaterial	
3. payroll fraud	Internal to payroll department
-	Deliberately miscalculate payslips, altering the hours.
-	Factitious employees.
External to payroll dept.
- falsify timesheets; by claiming overtime not really work.
	
4. Teeming and lading	The thief of cash or cheque receipts.	
5. Fictitious customer	Bogus orders are set up and goods are dispatched on credit and the customer fails to pay and made bad debt.	
6. Collusion with customers	-  manipulating of price
- written off a debt
- issue credit notes
- Record quantity of dispatch goods on delivery notes. 
	
7. Bogus supply of goods or services	Falsely invoice the firm for goods or services that never supplied.	
8. Paying for goods not receives	Staff colludes with supplier and split between them.	
9. Meeting budget or target performance measure.		
10. Manipulation of cash reconciliation and cash books.		
11.Misuse of pension funds or other assets 	Company asset may be transferred to the fund at significant over-valuation	
12. Disposal of assets to employees	Employee pays below market value for it by over depreciation.	

2. Intentional misrepresentation of the financial position of the business.

1. Over valuation of inventory	- Record, return, delivery written off	
2. Irrecoverable debt policy may not be enforced	- Effect on profit and net assets.	
3. Fictitious sales	- Generating false sale.
- Overcharging 
- Selling goods to friends and return inwards.	
4. Manipulation of year end events	-Window dressing.	
5. Understating expenses	- to increase profit	
6. Manipulation of depreciation figures		

Potential for fraud;-Pre-requisition for fraud
1. Dishonesty- 
-Individual’s pre-disposition or tendency to act in ways which contravene accepted ethical, social organizational and legal norms for fair and honest dealing.
	- Personality factors
	- Cultural factors

2.  Motivation- Weight up cost and benefit
Potential rewards Vs Potential sanctions
	- Financial needs or wants
	- A desire to exercise negative power over those in authority.
	- A desire to avoid punishment

3. Opportunity- Loophole in the law or control system
	- Allows fraudulent activity to go undetected
	- Makes the risk of detection acceptable, give the rewards available.

Assessing the risk of fraud
1.	External factors
-     Decentralization make potential for risk of fraud.
-	The type of industry the firm operates. Example, Building industry(theft of material)
2.	Internal factors.
-	changed operating environment
-	New personnel
-	New oversea operation
-	Rapid growth
-	New technology and New product Develop
3. Business Risks
a. Profit levels/ margins deviating significantly from industry norms.
 Example, Overtrading
- Cash sales
b. Market opinion
c. Complex structures
- Organizations with complex group structures
- The sheer size of the group
- Vast staff number.
4. Personnel risk
- A person’s behavior gives clues in fraud.
- Secretive behavior
- Expensive life styles, beyond earning
- Long hours or untaken holidays to prevent fraud.
5. Autocratic management style; Sole management with exclusive control and little independent review of its activities.
6. Segregation of duties.
7. Low staff morale.

Potential for computer fraud
1.	Computer hackers
2.	Lack of training within the management team, junior staff can secure access to vast amount of financial information and find ways to alter it.
3.	Identifying the risks; lack of resources to update. So difficult to check loopholes in controls.
4.	Need for ease of access and flexible systems make easy to fraud.

Implication of fraud for the organization
1.	Removal of funds or assets from a business; immediate financial implications.
-	Lower profit, less cash or fewer assets, net asset reduce and fall in shareholder returns.
-	 Long term effect on company performance; reduce working capital and then become difficult to operate business.
2.	Intentional misrepresentation; financial statement do not give True and Fair View because enhanced/ under reported.
If reports are overstated;
-	Distribute too much dividend
-	Reduce retain profit, working capital fall and difficult to operate business.
-	Result in incorrect decision making; Investor; Wrongly investment. Supplier; risk of credit.

If result are understated
-	Fall in dividend result in fall in share price
-	Difficult to achieve lone finance because secured assets are not sufficient.
-	Legal consequences; possibility of arrest.

System for detecting and preventing fraud
Preventing of fraud must be an integral part of corporate strategy. Control should be designed to detect and investigate fraud.
Reason for poor controls; because of lack of compliance.
-	Lack of understanding of why place internal control.
-	Staff problem (insufficient)
-	Changes in senior personnel
-	Autonomy.
General preventing policies
-	Ethics
-	Personnel control
-	Training and raising awareness, fraud awareness education in important area.
Specific business area
-	Segregation of duties
-	Appropriate documentation, example, sale invoice, GRN, GDN.
-	Limitation control. Example, pass ward, signature, ID.
-	Internal audit work.
Detection and prevention; Internal control system should operate effectively.
Internal control
-	Physical control
-	Segregation of duties
-	Authorization policies
-	Customer signatures- inspect sign for receipt.
-	Using words rather than numbers.(It is difficult to change text than to alter figures)
-	Documentation – sale order, dispatch, invoice, GRN etc…
-	Dates; for cut off
-	Sequential numbering; to prevent missing.
-	Standard procedures for normal business operation.
Examples,      - Independent checks an existence of new customer
•	Investigate before credit is grant.
•	All payment by unauthorisation
•	Wages/pay-slips must be collected in person.
•	Holidays
•	Recruitment policies; as honest as possible
•	Computer security.

	Manager and staff responsibilities to detect fraud
1.	Operational manager; alert for signs of petty fraud, check who do what and what have done.
2.	Finance staff; aware of unusual items or trends in accounting data, incomplete financial information.
3.	 Personnel staff; signs of discontent or low morale, aware of relationship between them.
4.	Internal audit staff; review system and controls, surprise check.
5.	External audit staff; assess the material risk and fraud when planning audit work. Report fraud found, to management. Report about material weakness in accounting and internal control system.
6.	Non-executive directors; be aware of sign of dishonesty by executives officers.
7.	Audit committee; Review organizational performance in fraud prevention. Report suspicious to the Board of Directors.

Fraud officer in large organizations.
•	Overseeing fraud investigations.
•	Implementation of fraud respond plan and follow up action.
•	Talk to staff confidentially and giving advice.

Availability of possible information about fraud and error
•	Cost and management accounting systems; it provide information about business performance and variance and control can be taken.
•	Personal procedure; staff meetings, appraisal and exit interviews. (Indicate about low moral, under undue pressure)
•	Line of reporting for report about suspicious of fraud.

Whistle blowing; An action taken by employee who report to the appropriate authority about his/her employer who convict an offence, failure to comply with legislation, endangering health and safety regulation etc… 
-	Employment protection legislation protect employee who are whistleblowers.
-	Some employers introduce formal procedure to report about protected information.

Investigation of fraud
There should be a fraud response plan, a strategy for investigating and dealing with the consequences of fraud.
-	The security of the investigated records.
-	Securing of vulnerable assets. Example, share certificate, cheques and cash etc...
-	Suspending staff, changing pass wards.

Considering the following when designing Investigation procedures
1.	Establishing the extent of the loss and how the fraud occured.
2.	Who may be involved
3.	Assessing existing controls whether it is still effective.
o	Defined who will carry out the investigation and under cover.
o	Required strategy and willingness to enforce control.

Responsibility for detecting and preventing fraud
The directors
1.	To ensure activities are honest and assets are safeguarded
2.	Arrangements to deter and detect fraud
3.	Ensure reliable information is used.

The role of External Auditor
1.	Main responsibility; - Report on financial statement.
Audit procedures should be design to detect fraud reasonably.
If they aware of the fraud, they should report to management (those charge with governance) 
If fraud relate to public interest, then reported to an appropriate authority. 
In this situation, first – request director to report, if they did not, then, second, report by themselves.
If financial statements are affected by fraud or error, qualified audit report.
Remember, Directors do have responsibility to detect and prevent fraud and error.

End of chapter……..Good luck, my students.