Introduction to Business

Ethics and Fraud

Kadayunan,
Minatulhamida
“A l - f i t r a ” M .
 • Understand the broad isseus per taining
to business ethics.
• Know why the subject of ethics is
impor tant to the study of accounting
information systems.
• Have a basic understanding of ethical
issues related to the use of information
t o t h e u s e o f i n f o r m a t i o n t e c h n o l o g y.
Objectives: • Understand what constitutes fraudulent
A f t e r s t u d y i n g b e h a v i o r.
t h i s c h a p t e r, • Be able to destinguish between
y o u s h o u l d ; management fraud and employee fraud.
• Be able to explain frau-motivating
forces.
• Be familiar with anti-fraud legislation.
and anti-fraud prefession in general.
 What is Business Ethics
John F. Akers, the former chairman of the of the board and CEO of IBM
Corporation states: “Our ethical standards come out of the past-out of our
inheritance as a more surefootedly we can inculcate conduct in the future.”

Ethics pertains to the principles of conduct that individuals use in making

choices and guiding their behavior in situations that involve the concepts of
right and wrong.

Business ethics involves finding the answers to two questions:

1. How do managers decide on what is right in conducting their business.
2. Once managers have recognized what is right, how do they achieve it.

Ethical issues in business can be divided into four areas: equity, rights,
honesty, and the exercise of corporate power.
The Role of Management in Maintaining the Ethical
Climate
• Organization managers must create and maintain an appropriate ethical
atmosphere; they must limit the opportunity and temptation for unethical
behavior science.
Ethical Development
• Behavioral stage theory suggest that we all go through several stages of
moral evolution before sttling on one level of ethical reasoning.
Making Ethical Decisions
• Busniess programs can teach students analytical techniques to use in
trying to understand and put into perspective a firm’s conflicting
responsibilities to itts employees, shareholders, customers, and the public.

Seeking a balance between these consequences is the managers’ ETHICAL

RESPONSIBILITY. Tthe following ethical principles provide some guidance in
thier discharge of this reponsibility.

• Proportionality. The benefit a decision must weigh the risk.

• Justice. The benefits of the decision should be distributed fairly to those
who share the risk.
• Minimize Risk. Even if judge acceptable by the above principles, the
decision should be implemented so as to minimize all of the risks and
avoid any unnecessary risks.
Computer Ethics
• Computer ethics is the “analysis of the nature and social impact of computer technology and correspnding
formulation and justification of policies for the ethical use of such technology... [This includes] concers about as
well as hardware and concers about networks connecting computers as well as computers themselves.”

T. W. Bynum has defined three levels of computer ethics:

• Pop computer ethics is simply the exposure to stories and reports found in the popular media regarding the
good or bad ramifications of computer of computer techonogy.
• Para computer ethics involves taking real interest in computer ethics cases acquiring some level of skill and
knowledge in the field.
• Theoretical computer ethics is of interest to multidisciplinary researches who apply the theories of philosophy,
sociology, and psychology to computer science with the goal of bringing some new understanding to the field.

Privacy
• Privacy is a matter of the restricted acess to persons or information about persons. Thion and maintenence of
huge, shared database makes it necessary to protect people from the potential misuse of data.

Security
• Computer security is an attempt to avoid such undesirable events as a loss of confidentiality or data integrity.

Ownership of Property
• Laws designed to preserve real property rights have been extended to cover is referred to as intellectual
property - that is, software.
Race
• While African Americans and Hispanics constitute about 20 percent of the U.S. population, they make up only 7
percent of management information systems (MIS) professionals.
Equity in Access
• Some barriers to access are intrinsic to the technology of information systems, but some are avoidble through
careful system design. Several factors, some which are not unique to information systems,canlimit access to
computing technology.
Evironmental Issues
• It may be more efficient or more comforting to have to have a hard copy in addition to the elactronic version.
However, paper comes from trees, a precious natural resources, an up in the landfills if not properly recycles.
Artificial Intelligence
• Because some of the way systems have been marketed, that is, as decision makers or replacements for experts,
some people rely on them significantly.
Unemployment and Displacement
• Many jobs have been and are being changed as a result of the availability of computer technology.
Misuse of Computers
• Computers can be misused in many ways. Copying proprietary software, using a company’s computer for
personal benefit, and snooping through other people’s files are just a few obvious examples.
Internal Control Responsibility
• Managers must establish and maintain a system of appropriate internal controls to ensure the integrity and
reliability of their data.
FRAUD AND ACCOUNTANTS

Fraud denotes a false representation of a material fact made by one party or another party with the intent to deceive
and induce the other party to justifiably rely on the fact to his or her detriment. According to common law, a
fraudulent ust meet the following five conditions:
1. False representation. There must be a false statement or a nondisclosure.
2. Material fact. A factt must be a substantial factor in inducing someone to act.
3. Intent. There must be the intent to deceive or the knowledge that one’s statement is false.
4. Justifiable reliance. The misneterpretation must have been substantial factor on which the injured party relied.
5. Injury or loss. The deception must have caused injury or loss to the victim of the fraud.

In the accounting literature, fraud is also commonly known as white-collar crime, defalcation, embezzlement and
irregularities. The auditor deals with fraud typically as two levels:

a) Employee Fraud - is generally designed to directly convert cash or other assets to the employee’s personal
benefit. Employee fraud usually involves the misappropriation of assets, which is a three-step process:
1) stealing something of value (an assets)
2) converting the asset to a usable form
3) concealing the crime to avoid detection

a) Management Fraud - also called performece fraud, which often involves deceptive practices to inflate earnings or
to forestall the recognition of ethier insolvency or a decline in earnings. Management fraud typically contains
three special characteristics:
FRAUD AND ACCOUNTANTS

1) The fraud is perpetrated at level of management above the one to which international control structures
generally relate.
2) The fraud frequently involves using the the financial statements to create an illlustrasion that an entity is more
healthy and prosperous othan it actually is.
3) If the fraud involves misappropriation af assets, it frequently is shroouded in a maze of complex business
transactions, often involving relatedhird parties.

According to one study by Doonald Cressey, people engage in fraudulent activities as a result of an interaction of
forces both within an invidual’s personality and in the external environment. The forces are classifed into three major
categories:
1. Situational Pressures
2. Opportunities
3. Personal Characteristics (integrity)
Questions for such checklist related to mamgement fraud, or financial fraud as it is somtimes called, might include the
following:

• Do key executives have unusually high personal debt?

• Do key executives appear to be living beyond their mean?
• Do executives engage in habitual gambling?
• Do key executives appear to to abuse alcohol or drug?
• Are economic conditions unfavorable within the company’s industry?
• Does the company use several defferant banks, none of which sees the company’s entire financial picture?
• Does key executives have close associations with suppliers?
• Is company experiencing a rapid turover of key employees, either through quitting or being fired?
• Do one or two individuals dominate the company.

Financial Losses from Fraud

• Studies conducted by the ASSOCIATION OF CERTIFIED FRAUD EXAMINERS (ACFE) in 19% and 2002 estimate
lossees from fraud and abuse to be 6% of annual revenues. This translates to approximately $600 billion.

The Perpetrators of Fraud

• The ACFE study examined a number of factors that characterized the perpetrators of fraud including position within
the organization, collusion with others, genders, age, and education. The median financial loss was calculated for
eavh factor.
Opportunity is the factor that engenders fraud. Opportunity can be defined as control over assets or access to
assets. The financial loss difference associated with the classifications are explained by the opportunity factor.

• Gender. While the demographic picture is changing, more men than women occupy position of authorithy in
business, which provides them greater access to assets.
• Position. Thoose in the highest position have the greatest access to company funds and assets.
• Education. Generally, those with more education occupy higher position in their organizations and therfore have
greater access to company funds and assets.
• Age. Older employees tend to occuppy higher-ranking positions and therefore generally have greater access to
company assets.
• Collusion. One reason for segregating occupational duties is to deny potential perpetrators the opportunity to
commit fraud. When individuals in crtical positions collude, they create opportunities to control or gain access to
assets that otherwise would not exist.
Thanks for
listening

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