2012 Ronald R.

Tidd Ethics, Fraud, & IC

ACCT 455-
Accounting Information Systems
Ronald R. Tidd, Ph.D., CPA (inactive)
www.cwu.edu/~tiddr/Index.html
acct@rrtidd.com
2012 Ronald R. Tidd Ethics, Fraud, & IC
ACCT 455
Ethics, Fraud, & Internal Control
Objectives & Todays Outline

1. Objective
Discuss Ethics, Fraud, & Internal Control

2. Outline
1. Homework 1
2. WebQuest 2
2012 Ronald R. Tidd Ethics, Fraud, & IC
AIS
Ethics, Fraud, & Internal Control
Facts

Ethics define the principles that humans use to
guide them in distinguishing between right and
wrong and taking appropriate actions.

The focus in business is on the ethical behavior
of those who control, access, and make
decisions about organizational resources.
2012 Ronald R. Tidd Ethics, Fraud, & IC
AIS
Ethics, Fraud, & Internal Control
Issues

1. Why is business ethics important?
2. What guidelines do we have for ethical
behavior?
3. Where does fraud fit in?
4. Why do internal controls matter?
5. Why do accountants care?
2012 Ronald R. Tidd Ethics, Fraud, & IC
1. Why is Business Ethics Important?
Employees
Investors
Andersen
YOU!
2012 Ronald R. Tidd Ethics, Fraud, & IC
1. Why is Business Ethics Important?
Ethical Behavior Trust

What if no trust
(think online and international commerce)

What if no trusted business adviser


2012 Ronald R. Tidd Ethics, Fraud, & IC
2. Guidelines About Ethical Behavior
Key Questions

1. How do managers decide what is right?






2. How do they achieve it?

8
2. Guidelines About Ethical Behavior
(Table 3-1)
2012 Ronald R. Tidd Ethics, Fraud, & IC
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)
2012 Ronald R. Tidd Ethics, Fraud, & IC
2. Guidelines About Ethical Behavior
Technologys Impact?
Production/Information Technologies
Through History

Agricultural Age

Industrial Age

Information Age


2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
3. Where Does Fraud Fit?
The Basics
How does it occur

By management
Above internal
controls
Use of financial
statements
Complex
transactions

How does it occur

By employees
Misappropriate
asset
Convert to cash
Conceal crime
2012 Ronald R. Tidd Ethics, Fraud, & IC
3. Where Does Fraud Fit?
The Basics
Why does it occur?

Rationalization/Attitude
Predisposition (weak personal characteristics)

Need (situational pressure, a.k.a., Life)

Opportunity

No Fraud
Fraud
Pressure Opportunity
Ethics
Ethics
Opportunity Pressure
15
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
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 with
policies &
procedures

2012 Ronald R. Tidd Ethics, Fraud, & IC
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

Modifying Assumptions

Management
responsibility
Reasonable
assurance
Methods of data
processing
Limitations
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
Program
maintenance
2012 Ronald R. Tidd Ethics, Fraud, & IC
Authorization
Authorization
Authorization
Processing
Custody
Recording
Task 1 Task 2 Task 2 Task 1
TRANSACTION
Control
Objective 1



Control
Objective 2




Control
Objective 3
Custody
Recording
Pg. 116
2012 Ronald R. Tidd Ethics, Fraud, & IC
4. Why Do Internal Controls Matter?
Physical Controls
Authorization-
Used to ensure that employees are carrying
out only authorized transactions.
May be general (everyday procedures) or
specific (non-routine transactions).

Supervision-
Compensation for lack of segregation; some
may be built into computer systems

2012 Ronald R. Tidd Ethics, Fraud, & IC
4. Why Do Internal Controls Matter?
Physical Controls
Accounting Records-
Provide an audit trail

Access Controls-
Help to safeguard assets by restricting physical
access to them

Independent Verification-
Reviewing batch totals or reconciling subsidiary
accounts with control accounts
2012 Ronald R. Tidd Ethics, Fraud, & IC
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 technical
knowledge required
2012 Ronald R. Tidd Ethics, Fraud, & IC
4. Why Do Internal Controls Matter?
Computer-Based Information Systems
Segregation of Duties
Program may perform many tasks that are
deemed incompatible;
Separation between program coding, program
processing and program maintenance
becomes very important
Accounting Records
Ledger accounts and sometimes source
documents are kept magnetically, and no
visible audit trail is readily apparent
2012 Ronald R. Tidd Ethics, Fraud, & IC
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 so
need for an independent check is not necessary
However, the programs themselves are checked
2012 Ronald R. Tidd Ethics, Fraud, & IC
4. Why Do Internal Controls Matter?
Strategies
Prevent
Costly, so used where greatest risk

Detect
Less costly, so used where lesser risk

Correct / Recover
2012 Ronald R. Tidd Ethics, Fraud, & IC
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 audit
procedures
2012 Ronald R. Tidd Ethics, Fraud, & IC
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 control
structure
Audit risk
Audit procedure
2012 Ronald R. Tidd Ethics, Fraud, & IC
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
2012 Ronald R. Tidd Ethics, Fraud, & IC