Martinez, Hannah Rita I.

IA05407

AUDICOMP Prof. Virgina Lansagan

Assignment: 1. Bribery and kickbacks Bribery The act of taking or receiving something with the intention of influencing the recipient in some way favourable to the party providing the bribe. It may be any money, good, right in action, property, preferment, privilege, emolument, object of value, advantage, or merely a promise or undertaking to induce or influence the action, vote, or influence of a person in an official or public capacity. Example: A pharmaceutical or medical device company might offer free training or other benefits to doctors who prescribe its drug. Prevention: A. Expertise-as an initial assessment, a company must determine whether it has the in-house expertise to conduct an appropriate risk assessment or whether external professional consultants should be employed to do so. B. Underlying data-each company must choose the most reliable data to form the basis of the risk assessment. Types of data could include annual audit reports, internal investigation reports, focus groups and staff/client/customer complaints; and by analyzing publicly available information on corruption issues in particular sectors or overseas markets and jurisdictions. Kickbacks Portion of an income demanded as a bribe by an official for facilitating the job or order from which the income is realized. Example: A building contractor might kick back part of what he is paid to the government official responsible for selecting his company for the job. Prevention: a.)Conduct searches on unknown tenders and the people behind the businesses. b.) Request references from people who have dealt with these parties in the past and whether there were cost increases or the work was of sufficient quality. c.) At least two people must either make or review a decision involving competitive bidding. The need for collusion will reduce the chances of bribes being effective and therefore used. 2. Conflict of Interest A situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person's self-interest and professional interest or public interest. Example:

A lawyer represents a client in a civic dispute while accepting fees from litigants who hold the opposing point of view. Prevention: a.) taking no further action because the potential for conflict is minimal or can be eliminated by disclosure and effective supervision; b.) where there may be a reasonably perceived conflict of interest or whereby processes are already underway when the perception is raised - appointing an independent third party to oversee the integrity of the process; 3. Cooking the Books Falsification of accounting records to give a misleading picture of a firm's financial position or the results of its operations. Unlike creative accounting, it is an illegal practice. Examples: The techniques used to cook the books involve accelerating revenues, delaying expenses, manipulating pension plans and implementing synthetic leases. 4. Self-dealing and Corruption Self-dealing a.) A situation where a trustee or another foundation member abuses his or her position of power in order to benefit him or herself, as opposed to the trust's beneficiaries. b.) Engagement in a transaction that is intended primarily to benefit one's self or the narrow interests of a few (as corporate insiders) rather than those to whom one owes a duty by virtue of one's position c.) The conduct of a trustee, an attorney, or other fiduciary that consists of taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the beneficiaries of the trust or the interests of his or her clients. Corruption a.) The word Corruption has its origin in a Latin verb corruptus meaning to break . Literally, it means a broken object . In simple words, corruption means the misuse of entrusted power for private benefit. Conceptually, corruption is a form of behaviour which departs from ethics, morality, tradition, law and civic virtue. b.) Wrongdoing on the part of an authority or powerful party through means that are illegitimate, immoral, or incompatible with ethical standards. Example: Accepting or giving anything of material value to get undue favour or to avoid issuing of traffic fines etc. Prevention: Term Limits for politicians would eliminate the entrenchment and corruption of anyone who would want to make politics a profession. After being in office for an extended period, all politicians start looking for supplements to their income. Guess who gets to pay. 5. Defalcation/ Embezzlement

a.) A defalcation is an amount of funds misappropriated by a person trusted with its charge; also, the act of misappropriation, or an instance thereof. b.) Defalcation implies that funds have in some way been mishandled, particularly where an officer or agent has breached his or her fiduciary duty. It is commonly applied to public officers who fail to account for money received by them in their official capacity, or to officers of corporations who misappropriate company funds for their own private use. Example: When a trustee recklessly invests trust funds and loses the money. If the beneficiary successfully wins a judgment against the trustee, and the trustee files for bankruptcy, the debt (the judgment) cannot be discharged in bankruptcy because the debt was the result of a defalcation. Prevention: Adopt a policy of mandatory vacations and mandatory duty rotations. It is not uncommon for the embezzler to interfere with the customary workflow to effect the embezzlement. Establish

a hotline for whistleblowers and train employees how and when to use it. Conduct periodic surprise internal audits. These are most effective after identifying high risk areas and designing procedures to achieve the desired objectives.
6. Fictitious Revenues or Expenses Revenue recognized on a nonexistent sale or service transaction. Examples: Recording sales for shipments for which orders are not expected, or worse, recording sales for nonexistent shipments. 7. Identity Theft a.) Obtaining a person's personal and financial information through criminal means. A thief uses this information for illegal purposes, such as to make purchases using the victim's name. Thieves can find information through discarded credit card or bank statements that are not destroyed, and can find the information online in customer databases. b.) Identity theft is a form of fraud or cheating of another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name. Example: The thief pretends to be the victim, calls the credit card company and changes the mailing address on an existing account. Prevention: Use a disposable email account. Keep your business or personal email account just for business or personal communication. If you are going to be making purchases online, joining newsgroups, or subscribing to mailing lists and ezines use a disposable email account. 8. Industrial Espionage a.) Industrial espionage is an attempt to gain access to information about a company s plans, products, clients or trade secrets. b.) The theft of trade secrets by the removal, copying or recording of confidential or valuable information in a company for use by a competitor.

Example: Ghost Net was a 'vast surveillance system' reported by Canadian researchers based at the University of Toronto in March 2009. Using targeted emails it compromised thousands of computers in governmental organisations, enabling attackers to scan for information and transfer this back to a 'digital storage facility in China'. Prevention: Education is the first line of defence. While prevention of espionage includes physical security controls such as intrusion systems, CCTV, access control, physical barriers, and patrolling by a professional campus security and or police force. The best and first line of defence is to be alert to the signs of espionage through the behaviour of employees and students. 9. Intentionally Violating GAAP The GAAP guidelines have been implemented so that a standard is maintained in the preparation of financial statements. The norms (GAAP) are formed by a combination of standards laid down by various policy boards. Although, GAAP financial statements are compiled using GAAP standards, there is every possibility of violating GAAP standards. However, a financial statement, which is not done as per GAAP standards may not be very dependable. Example: A corrupt accountant can always deviate from the GAAP standards. 10. Kiting a.) Check kiting is the illegal act of taking advantage of the float to make use of non-existent funds in a checking or other bank account; it is a form of check fraud. b.) It is commonly defined as intentionally writing a check for a value greater than the account balance from an account in one bank, then writing a check from another account in another bank, also with non-sufficient funds, with the second check serving to cover the non-existent funds from the first account. Example: A check kiter might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the bank A account and deposits it in the bank B account. If the kiter has good credit at bank B, he will be able to draw funds against the deposited check before it clears, that is, is forwarded to bank A for payment and paid by bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days and then deposit it in the bank A account before the $50,000 check drawn on that account clears. Prevention: To prevent kiting, geographical banking areas have adopted restricted policies regarding depositors' use of uncollected funds. They also place holds on deposits for the maximum time limit allowed by Federal regulations. 11. Lapping a.) An accounting method that involves altering the accounts receivable section of the balance sheet when cash that is intended for the payment of a receivable is stolen. The method

involves taking the first receivable collected and using that to cover the theft, while the second receivable collected is accounted to the first, the third receivable to the second, and so on. b.) a fraud that may be committed by an employee to conceal a misappropriation of funds, usually funds paid by a customer of the employer. Example: Lapping occurs when a cashier or clerk steals cash from one customer s payment and covers it up by stealing cash from the next customer's payment. 12. Larceny a.) Unlawful actual or 'in effect' (constructive) taking away of goods or property without the consent, and against the will, of the owner or possessor with the intention of permanently depriving him or her of those items. The terms petty larceny' and 'grand larceny' refer to the value of items so taken. b.) The unauthorized taking and removal of the Personal Property of another by an individual who intends to permanently deprive the owner of it; a crime against the right of possession. Example: If a person stole the Coca-Cola formula, the crime would be larceny but the grade of the offense would be determined by the value of the paper on which the formula was recorded not the value of the recipe. Prevention: Challenge unknown people. Check the identities of any strangers who are in your office. Ask whom they are visiting and if you can help them find that person. Don't forget to request identification from service or utility workers, as well. If this makes you uncomfortable, inform your supervisor or contact security about your suspicions. 13. Breach of Fiduciary Duty a.) Fiduciaries must frequently deal with potential conflicts of interest. These can arise when a fiduciary has clients whose interests are at odds with one another. When such causes arise, the fiduciary must make a choice between or among clients, but cannot attempt to provide services to clients with conflicting needs, so that fulfilling the duty to one would harm the interest of another, thus breaching fiduciary duty. Attempting to maintain the fiduciary relationship with clients whose conflicts are in conflict is a breach of fiduciary duty. b.) Placing anyone's interests above those of a principal is also a breach of fiduciary duty. Example: A financial adviser with a fiduciary duty to clients, for instance, might invest a client's funds in a security because it will generate a commission for a friend. Whether the investment proves to be beneficial to the principal is immaterial; the fact is that the fiduciary duty was breached because the principal's interest was made subordinate to some other interest. 14. Misrepresentation of Material Facts Deliberate hiding or falsification of a material fact which, if known to the other party, could have aborted, or significantly altered the basis of, a contract, deal, or transaction. Example:

Under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation. Prevention: To prevent or reduce the payment of benefits to any individual entitled to benefits, or to avoid becoming or remaining subject to this chapter, or to avoid or reduce any premium or other payment required from an employing unit under this chapter, or who wilfully fails or refuses to make the premiums or other payments, or to furnish any reports required or to produce or permit the inspection or copying of records as required. 15. Money-Laundering a.) The process of taking the proceeds of criminal activity and making them appear legal. b.) Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. Prevention: The BSA requires financial institutions to engage in customer due diligence, which is sometimes known in the parlance as know your customer. 16. Conspiracy An agreement between two or more persons to engage jointly in an unlawful or criminal act, or an act that is innocent in itself but becomes unlawful when done by the combination of actors. 17. Sham Entity A "sham" entity is an entity that is not formed for bona fide business purposes, and does not engage in actual business. The sole purpose of a business entity cannot be to avoid income tax. Example: An existing real estate broker and an existing title insurance company form a joint venture title agency. Each participant in the joint venture contributes $1000 towards the creation of the joint venture title agency, which will be an exclusive agent for the title insurance company. The joint venture is located in the title insurance company's office space. 18. Round Tripping An action that attempts to inflate transaction volumes through the continuous and frequent purchase and sale of a particular security, commodity or asset. Round-trip trading can be used to refer to the practice of a business selling an unused asset to another company while agreeing to buy back the same asset for about the same price. Example: A selling company pretends to sell to a fictitious company with the intend of inflating revenues. 19. Forgery a.) The process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and wilful misrepresentations. b.) The act of criminally making or altering a written instrument for the purpose of fraud or deceit.

Example: Signing another person's name to a check. To write payee's endorsement or signature on a check without the payee's permission or authority. The 'payee' of a check is the true owner or person to whom the check was payable. 20. False/Manipulated T and E Reimbursement Claims a.) False expense reimbursement fraud is the making of improper claims for the reimbursement of business expenses allegedly paid by the employee. b.) False expenses are purely fictitious expenses made up by the employee to obtain a reimbursement when there has been no expenditure, business related or not. Receipts can be generated or stolen by the employee. 21. Theft of Trade Secrets A trade secret may consist of commercial or technical information that is used in a business and offers an advantage over competitors who do not know or use such information. Example: A former employee of The Smoothie Shoppe takes a job with a competitor and reveals the secret recipe for the Shoppe s best-selling smoothie flavor to his new boss, who in turn begins marketing the flavor as his own. Prevention: Many stamp trade secrets documents confidential and keep them in locked compartments after business hours, limit the number of people who know the secret, and use only secure computer systems to store information. 22. Topside Journal Entries Top-side entries are those entries that generally do not appear as entries to the general ledger and, therefore, are not subject to standard system controls. In many cases, they are produced in a spreadsheet and maintained separately from the general ledger. These entries also can be recorded after the consolidation is completed, but before the financial statements are prepared. 23. Bid Rigging a.) Illegal conspiracy in which competitors join to artificially increase the prices of goods and/or services offered in bids to potential customers. It may also include carving up the potential business between the conspirators. b.) A scheme in which businesses collude so that a competing business can secure a contract for goods or services at a pre-determined price. Bid rigging stifles free-market competition, as the rigged price will be unfairly high. 24. Price Fixing Establishing the price of a product or service, rather than allowing it to be determined naturally through free-market forces. Antitrust legislation makes it illegal for businesses to decide to fix their prices under specific circumstances. Example: Purchase a substitute good or service that is lower-priced. Decrease their consumption for the good, making it unprofitable for businesses to keep prices fixed. Prevention:

Look for situations where competitors always announce their price increases at the same time for the same amount or have staggered price increases with some pattern, such as appearing to take turns going first. 25. Undisclosed Side Agreements A side agreement is one that is ancillary to another agreement. In terms of International law, a side agreement refers to an international accord that is specifically negotiated to supplement a broader trade treaty. Example: NAFTA contains no provisions about labour standards or environmental protection. However, two side agreements relating to those were negotiated separately and designed to supplement NAFTA, making the treaty more attractive to the ratifying bodies. 26. Ghost Employees A ghost employee is someone recorded on the payroll system, but that does not work for the business. The ghost can be a real person that (knowingly or not) is placed into the payroll system, or a fictitious person invented by the fraudster. 27. Back-dating Stock Options, Straining Bullet Dodging The process of granting an option that is dated prior to the date that the company granted that option. In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date. This process makes the granted option in-themoney and of value to the holder. 28. Illegitimate Balance Sheet Balance sheet financing refers to the process businesses use when adding capital for major investment projects or product development. Most major companies do not use capital gained through daily operations because they wish to avoid a negative cash flow. In order to finance major undertakings, businesses will find outside financing for these projects, which usually result in a liability reported on the company's balance sheet. However, some options allow for financing that is not reported on the balance sheet, creating better financial ratios for the business through asset/liability management. 29. False Claims a.) A statute penalizing the maker of knowingly false claims against the government or any department or agency thereof. b.) Allows people who are not affiliated with the government to file actions against federal contractors claiming fraud against the government. The act of filing such actions is informally called "whistle blowing. 30. Window Dressing A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.

Example: Assume just before the end of the accounting year current assets are $100,000 and current liabilities are $50,000, representing a current ratio (current assets/current liabilities) of 2:1. To improve its current ratio for the annual report in order to attract prospective lenders, the company window-dresses by paying off $30,000 in current debt. This now makes current assets $70,000 and current liabilities $20,000, resulting in a misleading current ratio of 3.5:1. 31. Channel Stuffing A deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public. Example: Revenue relating to sales to our third party installation partners is recognized upon shipment, which is prior to the installation of the related products in the consumer s vehicle. Revenue from the sales of products and components of is recognized upon shipment to the licensee or when payment becomes reasonably assured. 32. Insider Trading Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. Example: Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments. Prevention: Claims made without the original documentation attached. The original may not exist and the document may be an attempt to pass off a made up version, or the original documents may have been submitted with a second claim elsewhere for a double reimbursement of the one expense.