ACCA
BUSINESS &
TECHNOLOGY
BISC TRAINING CENTER
Mr. Ha Long Giang, FCCA, CPA
www.bisc.edu.vn
085 8822 168
[email protected] Business & Technology
PART C - ACCOUNTING AND
REPORTING SYSTEMS,
CONTROLS AND COMPLIANCE
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Business & Technology
Part C – Chap 10:
IDENTIFYING AND
PREVENTING FRAUD
1. WHAT IS FRAUD?
Definition
Deprivation by deceit
A false representation of fact made with the knowledge of its falsity
or without belief in its truth, or recklessly careless, whether it be true
or false
Exam focus point: In a corporate context fraud can fall into one of two
main categories: removal of funds or assets from a business or the
intentional misrepresentation of financial position of business
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1. WHAT IS FRAUD?
Removal of funds or assets from a business
Theft of cash
Theft of inventory
Payroll fraud
Teeming and lading
Fictitious customers
Collusion with customers
1. WHAT IS FRAUD?
Removal of funds or assets from a business
Bogus/fake supply of goods or services
Paying for goods not received
Meeting budgets/target performance measures
Manipulation of bank reconciliations and cash books
Misuse of pension funds or other assets
Disposal of assets to employees
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1. WHAT IS FRAUD?
Intentional misrepresentation of the financial position of the business
Overvaluation of inventory
Irrecoverable debt policy may not be enforced
Fictitious sales
Manipulation of year-end events
Understanding expenses
Manipulation of depreciation figures
2. POTENTIAL FOR FRAUD
Prerequisites for fraud
Dishonesty
Motivation
Opportunity
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2. POTENTIAL FOR FRAUD
Assessing the risk of fraud
External factor
Step 1: Consider the market place as a whole and the general
environment in which the business operates may exhibit factors
that increase the risk of fraud
Step 2: Narrow the focus a little and consider whether the industry
in which the firm operates is particularly exposed to certain types
of fraud
2. POTENTIAL FOR FRAUD
Assessing the risk of fraud
Internal factor
Changed operating environment
New personnel
New or upgraded management information systems
New overseas operations
Rapid growth
New technology
Corporate restructuring
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2. POTENTIAL FOR FRAUD
Assessing the risk of fraud
Business risks
Profit levels/margins deviating significantly from the industry norm
Market opinion
Complex structures
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2. POTENTIAL FOR FRAUD
Assessing the risk of fraud
Personnel risks
Secretive behaviour
Expensive lifestyle
Long hours or untaken holidays
Autocratic management style
Lack of segregation of duties
Low staff morale
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2. POTENTIAL FOR FRAUD
Potential for computer fraud
Computer hackers
Lack of training within the management team
Identifying the risks
Need for ease of access and flexible systems
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3. IMPLICATIONS OF FRAUD FOR
THE ORGANIZATION
Removal of funds or assets from a business
Immediate financial implications
Long-term effects on company performance
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3. IMPLICATIONS OF FRAUD FOR
THE ORGANIZATION
Intentional misrepresentation of the financial position of the business
If results are overstated
A company may distribute too much of its profits to shareholders
Retained profits will be lower than believed, leading to potential
shortfalls in working capital
Incorrect decisions will be made
Investors making decisions based on inaccurate information
will find actual returns deviating from expectations
Suppliers will extend credit without knowing the financial
position of the company
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3. IMPLICATIONS OF FRAUD FOR
THE ORGANIZATION
Intentional misrepresentation of the financial position of the business
If results are understated
Returns to investors may be reduced unnecessarily
Share price may be fall
Access to loan finance may be restricted if assets are understated
Negative publicity can damage the business by affecting the
public’s perceptions
Legal consequences
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Prioritising prevention
In order to prevent fraud, management must
be aware of the risks and signs of fraud
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Reasons for fraud
Industry
Factors specific to the business
Changes in circumstances
Certain areas are normally high risks
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Reasons for poor controls
Controls will not function well
Staff problems
Changes in senior personnel
Emphasis on the autonomy of
operational management
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
General prevention policies
Emphasising ethics
Personnel controls
Training and raising awareness
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Prevention of fraud in specific business areas
Segregation of duties
Appropriate documentation
Limitation controls
Certain areas should be prohibited
Internal audit work should concentrate on these areas
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Systems for detecting and preventing fraud
Detection and prevention Customer signatures
Internal control Standard procedures
Physical controls Documentation
Segregation of duties Sequential numbering
Authorization policies Dates
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Systems for detecting and preventing fraud
Using words rather than numbers
Holidays
Recruitment policies
Computer security
Fraud officer
Evolving control systems
Whistleblowing
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Manager and staff responsibilities
Operational manager: should be alert for signs of Petty fraud…
Finance staff: Unusual items or trends in accounting data
Personnel staff: Low moral or close relationships
Internal audit staff: Reviewed systems and controls
External audit staff: Assess the risk that fraud may have a material
impact on the company’s account
Non-executive directors: Act on signs of dishonesty by senior
executive management
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Availability of information
Cost and management accounting systems
provide information with details
Personnel procedures: staff meetings,
appraisal and exit interviews
Lines of reporting should be clear
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4. SYSTEMS FOR DETECTING AND
PREVENTING FRAUD
Investigation of fraud
Establishing the extent of the loss
Establishing how the fraud occurred
Considering who else may have been
implicated in the fraud
Assessing whether the fraud was not detected
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5. RESPONSIBILITY FOR DETECTING
AND PREVENTING FRAUD
The responsibility of directors
Ensure the activities of the entity are conducted honestly and that its
assets are safeguarded
Establish arrangements to deter fraudulent or other dishonest
conduct and to detect any that occurs
Ensure that, to the best of their knowledge and belief, financial
information, whether used internally or for financial reporting is
reliable
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5. RESPONSIBILITY FOR DETECTING
AND PREVENTING FRAUD
The role of the auditor
The responsibility of the external auditor is only to express an
opinion on whether the financial statements give a true and fair
view of the company’s financial situation and results
Design audit procedures to have a reasonable expectation of
detecting misstatements arising from fraud or error
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6. MONEY LAUNDERING
Introduction
Money laundering constitutes any financial transactions whose
purposes is to conceal the origins of the proceeds of criminal activity
Money laundering is used by organized crime and terrorist
organizations but it is also used in order to avoid the payment of
taxes or to distort accounting information
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6. MONEY LAUNDERING
Risks associated with a company’s products and services
Luxury goods: Risks of the products being resold through the black
market or returned to the retailer in exchange for a legitimate cheque
from them
Financial crime: Increase complexity
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6. MONEY LAUNDERING
The effects of regulation
Assessing risk – the risk-based approach
Identifying the money laundering risks that are relevant to the business
Carrying out a detailed risk assessment on such areas as customer
behavior and delivery channels
Designing and implementing controls to manage and reduce any
identified risks
Monitor the effectiveness of these controls and make improvements
where necessary
Maintain records of actions taken and reasons for these actions
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6. MONEY LAUNDERING
The effects of regulation
Assessing the customer base
New customers carrying out large, one-off transactions
Customers who have been introduced by a third party who may not
have assessed their risk potential thoroughly
Customers who aren’t local
Customers whose businesses handle large amounts of cash
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6. MONEY LAUNDERING
The effects of regulation
Customer due diligence
Check customers who they are
Applying customer due diligence
When establishing a business relationship
When carrying out a high value “occasional transaction”
When doubts exists about identification obtained previously
When the customer’s circumstances change
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6. MONEY LAUNDERING
The effects of regulation
Ongoing monitoring
It is important that an effective system of internal controls is in place
to protect the business form being used for money laundering. Staff
should be suitably trained in the implementation of these internal
controls and be alert to any potential issues
Full documentation of anti-money laundering policies and
procedures should be kept and updated as appropriate
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6. MONEY LAUNDERING
The effects of regulation
Maintaining full and up-to-date records
Businesses are generally required to keep full and up-to-date records
for financial reporting and auditing purposes but these can also be
used to demonstrate compliance with money laundering regulations
Such records include receipts, invoices and customer correspondence
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6. MONEY LAUNDERING
Categories of criminal offence
Laundering
Failure to report
Tipping off
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6. MONEY LAUNDERING
Penalties
14 years’ imprisonment and/or a fine for
knowing assisting in the laundering of
criminal funds
5 years’ imprisonment and/or a fine for
failure to report knowledge or suspicion
of money laundering
2 years’ imprisonment and/or a fine for
“tipping off” a suspected launderer, the
suspected launderer must not be alerted
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6. MONEY LAUNDERING
Money laundering process
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6. MONEY LAUNDERING
The role of the Financial Conduct Authority
Set up procedures and establish accountabilities for senior
individuals to take action to prevent money laundering
Educate staff and employees about the potential problems of money
laundering
Obtain satisfactory evidence of identity where a transaction is for
more than €15,000
Report suspicious circumstances
Not to alert persons who are or might be investigates for money
laundering
Keep records of all transactions for five years
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6. MONEY LAUNDERING
The cost of compliance
It is not cheap, especially if policies and procedures are being
established for the first time
ACCA is one of the supervisory bodies and is responsible for
monitoring its own members. Such supervision comes at a cost,
however, and monitored firms are expected to pay a fee for
this service
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6. MONEY LAUNDERING
Financial Action Task Force (FATF)
FATF is an inter-governmental body whose purpose is the
development and promotion of policies, both at national and
international levels, to combat money laundering and
terrorist financing
FATF members are committed to implementing FATF standards
and having their anti-money laundering (AML)/counter-terrorist
financing (CTF) systems mutually assessed
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6. MONEY LAUNDERING
International Monetary Fund (IMF)
The IMF promotes itself as a “natural forum for sharing information
developing common approaches to issues and promoting desirable
policies and standards” in order to fight money laundering and the
financing of terrorism
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See you next lesson!
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