corporate ethics & internal control
TRANSCRIPT
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ACCT 455-
Accounting Information Systems
Ronald R. Tidd, Ph.D., CPA (inactive)
www.cwu.edu/~tiddr/Index.html
http://www.cwu.edu/~tiddr/Index.htmlhttp://www.cwu.edu/~tiddr/Index.html -
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ACCT 455
Ethics, Fraud, & Internal Control
Objectives & Todays Outline
1. ObjectiveDiscuss Ethics, Fraud, & Internal Control
2. Outline
1. Homework 12. WebQuest 2
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AIS
Ethics, Fraud, & Internal Control
Facts
Ethics define the principles that humans use toguide them in distinguishing between right and
wrong and taking appropriate actions.
The focus in business is on the ethical behaviorof those who control, access, and make
decisions about organizational resources.
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AIS
Ethics, Fraud, & Internal Control Issues
1. Why is business ethics important?
2. What guidelines do we have for ethicalbehavior?
3. Where does fraud fit in?
4. Why do internal controls matter?5. Why do accountants care?
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1. Why is Business Ethics Important?
Employees
Investors
Andersen
YOU!
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1. Why is Business Ethics Important?
Ethical BehaviorTrust
What if no trust
(think onlineand international commerce)
What if no trusted business adviser
http://en.wikipedia.org/wiki/File:Internet_dog.jpghttp://www.forbes.com/sites/jackperkowski/2012/04/18/protecting-intellectual-property-rights-in-china/http://clientsolutions.cpa2biz.com/http://clientsolutions.cpa2biz.com/http://www.forbes.com/sites/jackperkowski/2012/04/18/protecting-intellectual-property-rights-in-china/http://en.wikipedia.org/wiki/File:Internet_dog.jpg -
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2. Guidelines About Ethical Behavior
Key Questions
1. How do managers decide what is right?
2. How do they achieve it?
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8
2. Guidelines About Ethical Behavior
(Table 3-1)
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2. Guidelines About Ethical Behavior
What Are They? How do we address them?
Role of management-
Establish ethical environment
Ethical development-
Continuous
Ethical decision criteria
Proportionality (benefits > risks) Justice (benefits to those who take risks)
Minimize (mitigate?) risk (minimize risks & avoid
unnecessary risk)
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2. Guidelines About Ethical Behavior
Technologys Impact?
Production/Information Technologies
Through History
Agricultural Age
Industrial Age
Information Age
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2. Guidelines About Ethical Behavior
Technologys Impact?
Areas of concern
Misuse Privacy
Security
Theft
Property Rights
Areas of concern
Equity in Access
Race Gender
Socio-economic
Environmental
Unemployment &
Displacement
http://community.seattletimes.nwsource.com/archive/?date=19970409&slug=2533005http://earth911.com/recycling/electronics/e-waste-harmful-materials/http://earth911.com/recycling/electronics/e-waste-harmful-materials/http://community.seattletimes.nwsource.com/archive/?date=19970409&slug=2533005 -
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3. Where Does Fraud Fit?
The Basics
What is fraud?
Historically:1. False representation
2. Material fact
3. Scienter (intent to deceive)
4. Justifiable reliance
5. Injury or loss
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3. Where Does Fraud Fit?
The Basics
How does it occur
By managementAbove internal
controls
Use of financial
statements Complex
transactions
How does it occur
By employees Misappropriate
asset
Convert to cash
Conceal crime
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3. Where Does Fraud Fit?
The Basics Why does it occur?
Rationalization/AttitudePredisposition (weak personal characteristics)
Need (situational pressure, a.k.a., Life)
Opportunity
http://www.mikecampbell.biz/2009/01/fraud-triangle.html -
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No Fraud
Fraud
Pressure Opportunity
Ethics
Ethics
OpportunityPressure
15
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3. Where Does Fraud Fit?
Computer Fraud/Crime Techniques
Where Can It Occur
Technology Hardware
Software
People
Policies,
Procedures,
Processes
General Concept
Misappropriate
Alter
Destroy
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3. Where Does Fraud Fit?
Computer Crime Techniques
General
Misappropriate
Alter
Destroy
Data Collection
Data Processing
Program fraud Operations fraud
Database Management
Information generation
Scavenging Eaves dropping
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4. Why Do Internal Controls Matter?
Supports Ethical Behavior
Proper Use of and Stewardship over
Organizations Assets
SOX- 202
Auditor independence
Corporate governance and responsibility Disclosure requirements
http://c/Users/TiddR/Documents/!CWU/!!Current/01%20Teaching/Boeing_PS_3-9-12_SECURED.pdf -
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4. Why Do Internal Controls Matter?
What is Internal Control?
Policies, practices, and
procedures that ensure
that the appropriate
actions are taken in
response to identified
risks
Goals
Safeguard
resources Ensure accuracy
Promote efficiency
Measure
compliance withpolicies &
procedures
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4. Why Do Internal Controls Matter?
What is an Internal Control Structure?
Environment
Organizational structure
Board of Directors & Audit Committee Mgmt. Philosophy & style
Delegation procedures
(authority & responsibility)
Performance evaluation
External influences
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4. Why Do Internal Controls Matter?
What is an Internal Control Structure?
Accounting System &General Procedures
Authorizations
Access controls
Accounting records
Functional
segregation Independent
verification
Accounting System &General Procedures
Information
processing controls
Performance
reviews
Physical controls Supervision
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4. Why Do Internal Controls Matter?
Segregation of Functions
Manual System:
Segregation between
Authorizing &
processing a
transaction
Custody of an asset Custody of
accounting records
for asset
Computerized System:
Segregation between
Program coding
Program
processing
Programmaintenance
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Authorization
Authorization
Authorization
Processing
Custody Recording
Task 1 Task 2 Task 2Task 1
TRANSACTION
Control
Objective 1
Control
Objective 2
Control
Objective 3
Custody
Recording
Pg. 116
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4. Why Do Internal Controls Matter?
Physical Controls
Authorization-
Used to ensure that employees are carryingout only authorized transactions.
May be general (everyday procedures) orspecific (non-routine transactions).
Supervision-
Compensation for lack of segregation; somemay be built into computer systems
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4. Why Do Internal Controls Matter?
Physical Controls
AccountingRecords-
Provide an audit trail
AccessControls-
Help to safeguard assets by restricting physicalaccess to them
IndependentVerification-
Reviewing batch totals or reconciling subsidiaryaccounts with control accounts
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4. Why Do Internal Controls Matter?
Computer-Based Information Systems
Transaction Authorization
Rules are often embedded within computer
programs
Supervision
Ability to assess competent employees becomes
more challenging due to the greater technicalknowledge required
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4. Why Do Internal Controls Matter?
Computer-Based Information Systems
Segregation of Duties
Program may perform many tasks that aredeemed incompatible;
Separation between program coding, programprocessing and program maintenancebecomes very important
Accounting Records
Ledger accounts and sometimes sourcedocuments are kept magnetically, and novisible audit trail is readily apparent
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4. Why Do Internal Controls Matter?
Computer-Based Information Systems
Access Control
Data consolidation exposes the organization to
computer fraud and excessive losses from
disaster
Independent Verification
Many tasks are performed by the computer soneed for an independent check is not necessary
However, the programs themselves are checked
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4. Why Do Internal Controls Matter?
Strategies
Prevent
Costly, so used where greatest risk
Detect
Less costly, so used where lesser risk
Correct / Recover
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4. Why Do Internal Controls Matter?
What is Auditing?
The Purpose
Provide attestation
By independent
party
Conformity with
GAAP
The Process
Check system of
IC
Assess audit risks
Conduct auditprocedures
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4. Why Do Internal Controls Matter?
What is Auditing?
The Standards:
Statements on Auditing
Standards(SAS)
Authoritative
pronouncements
Follow or Justify deviation
The Standards:
SAS 99
Internal controlstructure
Audit risk
Audit procedure
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5. Why Do Accountants Care?
1. Audit/Assurance/Attestation (Risk and Reputation)
Systems of Internal Control
Identify Potential Legal Liabilities
Going Concern
2. Consultants/Advisors/Designers
3. Systems Users
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