ACC 100: Accounting Information System

Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

Lesson title: Ethics, Fraud, and Internal Control Materials:

Lesson Objectives: FLM Student Activity Sheets
1) Distinguishing management fraud and employee fraud
2) Understanding fraud techniques References:
Principles of Accounting
Information Systems by James
A. Hall

Some people dream of accomplishing great things. Others stay awake and make
it happen.

A. LESSON PREVIEW / REVIEW

1) Introduction
Welcome to another lecture for ACC100! For citizens, even for those of us with no
aspirations in a career in law enforcement, morality and integrity are important
characteristics to demonstrate. We instinctively know that it is good to be moral and act with
integrity, but by coming to an understanding of the reasons for morality and integrity, we will
be motivated to champion such behavior. Let’s learn and develop our virtues!

Please read the learning targets before you proceed to the succeeding activities. The
learning targets are your goals. Remember, you need to achieve your learning targets at
the end of the lesson.

2) Activity 1: What I Know Chart

What do you know about Ethics, Fraud, and Internal Control? Try answering the questions
below by writing your ideas under the What I Know column. You may use key words or
phrases that you think are related to the questions.

What I Know Questions: What I Learned (Activity 4)

What is Ethics?

What is Fraud?

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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

What is Internal Control?

B. MAIN LESSON
1) Activity 2: Content Notes
BUSINESS ETHICS
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. More specifically, business ethics
involves finding the answers to two questions: (1) How do managers decide what is right in
conducting their business? and (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.

Making Ethical Decisions

Business organizations have conflicting responsibilities to their employees, shareholders, customers,
and the public. Every major decision has consequences that potentially harm or benefit these
constituents. For example, implementing a new computer information system within an organization
may cause some employees to lose their jobs, while those who remain enjoy the benefit of improved
working conditions. Seeking a balance between these consequences is the managers’ ethical
responsibility. The following ethical principles provide some guidance in the discharge of this
responsibility.
Proportionality. The benefit from a decision must outweigh the risks. Furthermore, there must be no
alternative decision that provides the same or greater benefit with less risk.
Justice. The benefits of the decision should be distributed fairly to those who share the risks. Those
who do not benefit should not carry the burden of risk.
Minimize risk. Even if judged acceptable by the principles, the decision should be implemented to
minimize all the risks and avoid any unnecessary risks.

Computer Ethics concerns the social impact of computer technology (hardware, software, and
telecommunications).
What are the main computer ethics issues?
 Privacy  Environmental issues
 Security—accuracy and confidentiality  Artificial intelligence
 Ownership of property  Unemployment and displacement
 Equity in access  Misuse of computer

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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

Four Main Areas of Business Ethics

FRAUD AND ACCOUNTANTS PERHAPS

Perhaps no major aspect of the independent auditor’s role has caused more controversy than their
responsibility for detecting fraud during an audit. In recent years, the structure of the U.S. financial
reporting system has become the object of scrutiny. The SEC, the courts, and the public, along with
Congress, have focused on business failures and questionable practices by the management of
corporations that engage in alleged fraud. The question often asked is, “Where were the auditors?”

Definitions of Fraud

Although fraud is a familiar term in today’s financial press, its meaning is not always clear. For
example, in cases of bankruptcies and business failures, alleged fraud is often the result of poor
management decisions or adverse business conditions. Under such circumstances, it becomes
necessary to clearly define and understand the nature and meaning of fraud. Fraud denotes a false
representation of a material fact made by one party to 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 act must meet the following five conditions:

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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

1. False representation - false statement or disclosure

2. Material fact - a fact must be substantial in inducing someone to act
3. Intent to deceive must exist
4. The misrepresentation must have resulted in justifiable reliance upon information, which
caused someone to act
5. The misrepresentation must have caused injury or loss

Factors that Contribute to Fraud

Employee Fraud
 Committed by non-management personnel
 Usually consists of: an employee taking cash or other assets for personal gain by
circumventing a company’s system of internal controls

Management Fraud
 Perpetrated at levels of management above the one to which internal control structure
relates
 Frequently involves using financial statements to create an illusion that an entity is healthier
and more prosperous than it actually is
 Involves misappropriation of assets, it frequently is shrouded in a maze of complex business
transactions

FRAUD SCHEMES
Three categories of fraud schemes according to the Association of Certified Fraud Examiners:
A. fraudulent statements
B. corruption
C. asset misappropriation

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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

Fraudulent Statements
 Misstating the financial statements to make the copy appear better than it is
 Usually occurs as management fraud
 May be tied to focus on short-term financial measures for success
 May also be related to management bonus packages being tied to financial statements

Corruption
Examples:
 bribery
 illegal gratuities
 conflicts of interest
 economic extortion

Asset Misappropriation
 Most common type of fraud and often occurs as employee fraud
 Examples:
o making charges to expense accounts to cover theft of asset (especially cash)
o lapping: using customer’s check from one account to cover theft from a different account
o transaction fraud: deleting, altering, or adding false transactions to steal assets

Computer Fraud Schemes

 Theft, misuse, or misappropriation of assets by altering computer-readable records and files
 Theft, misuse, or misappropriation of assets by altering logic of computer software
 Theft or illegal use of computer-readable information
 Theft, corruption, illegal copying or intentional destruction of software
 Theft, misuse, or misappropriation of computer hardware

Data Collection Fraud

 This aspect of the system is the most vulnerable because it is relatively easy to change data
as it is being entered into the system.
 Also, the GIGO (garbage in, garbage out) principle reminds us that if the input data is
inaccurate, processing will result in inaccurate output.

Data Processing Fraud

 Program Frauds
o altering programs to allow illegal access to and/or manipulation of data files
o destroying programs with a virus
 Operations Frauds
o misuse of company computer resources, such as using the computer for personal
business

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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

Database Management Fraud

 Altering, deleting, corrupting, destroying, or stealing an organization’s data
 Oftentimes conducted by disgruntled or ex-employee

Information Generation Fraud

Stealing, misdirecting, or misusing computer output
 Scavenging - searching through the trash cans on the computer center for discarded output
(the output should be shredded, but frequently is not)

2) Activity 3: Skill Building

Answer the following question.
Explain why collusion between employees and management in the commission of a fraud is
difficult to both prevent and detect.
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3) Activity 4: What I know Chart, Part 2

Now let’s check your final understanding of Flexible Learning. I hope that everything about the
topic is clear to you. This time you must fill out the What I Learned column.

Activity 5: Check for Understanding and Keys to Correction

Independent Practice

Select the letter of your choice.

1. Which ethical principle states that the benefit from a decision must outweigh the risks, and that
there is no alternative decision that provides the same or greater benefit with less risk?
a. minimize risk
b. justice
c. informed consent
d. proportionality
2. For an action to be called fraudulent, all of the following conditions are required except
a. poor judgment
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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

b. false representation
c. intent to deceive
d. injury or loss

3. One characteristic of employee fraud is that the fraud

a. is perpetrated at a level to which internal controls do not apply
b. involves misstating financial statements
c. involves the direct conversion of cash or other assets to the employee’s personal benefit
d. involves misappropriating assets in a series of complex transactions involving third
parties

4. Forces which may permit fraud to occur do not include

a. a gambling addiction
b. lack of segregation of duties
c. centralized decision making environment
d. questionable integrity of employees

5. Which of the following best describes lapping?

a. applying cash receipts to a different customer’s account in an attempt to conceal
previous thefts of funds
b. inflating bank balances by transferring money among different bank accounts
c. expensing an asset that has been stolen
d. creating a false transaction

6. Operations fraud includes

a. altering program logic to cause the application to process data incorrectly
b. misusing the firm’s computer resources
c. destroying or corrupting a program’s logic using a computer virus
d. creating illegal programs that can access data files to alter, delete, or insert values

7. Computer fraud can take on many forms, including each of the following except
a. theft or illegal use of computer-readable information
b. theft, misuse, or misappropriation of computer equipment
c. theft, misuse, or misappropriation of assets by altering computer-readable records and
files
d. theft, misuse, or misappropriation of printer supplies

8. All of the following are conditions for fraud except

a. false representation
b. injury or loss
c. intent
d. material reliance

9. The four principal types of fraud include all of the following except
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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

a. bribery
b. gratuities
c. conflict of interest
d. economic extortion

10. Business ethics involves

a. how managers decide on what is right in conducting business
b. how managers achieve what they decide is right for the business
c. both a and b
d. none of the above

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning
A. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.
P1 P2 P3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

B. Think about your Learning

1. Please read again the learning targets for the day. Were you able to achieve those learning
targets? If yes, what helped you achieve them? If no, what is the reason for not achieving them?
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2. What question(s) do you have as we end this lesson?

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KEY TO CORRECTIONS:
Activity 3:
ANS:
Collusion among employees in the commission of a fraud is difficult to both prevent and detect. This is
particularly true when the collusion is between managers and their subordinate employees.
Management plays a key role in the internal control structure of an organization. They are relied upon
to prevent and detect fraud among their subordinates. When they participate in fraud with the
employees over whom they are supposed to provide oversight, the organization’s control structure is
weakened, or completely circumvented, and the company becomes more vulnerable to losses.

Activity 5:
1. D 2. A 3. C 4. C 5. A
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 ACC 100: Accounting Information System
Students Activity Sheet #6

Name: Class number:

Section: Schedule: Date:

6. B 7. D 8. D 9. B 10. C

Rationalization:
1. Proportionality states that the benefit from a decision must outweigh the risks, and that there is no
alternative decision that provides the same or greater benefit with less risk.
2. False representation, intent to deceive, and injury or loss --- These three must be present for n action
to be considered fraudulent.
3. Employee Fraud is committed by non-management personnel like the direct conversion of cash or
other assets to the employee’s personal benefit
4. All of the choices except C are forces which may permit fraud to occur.
5. Lapping is applying cash receipts to a different customer’s account in an attempt to conceal previous
thefts of funds.
6. Operations fraud include misusing the firm’s computer resources
7. Computer Fraud can take the form of all of the options except D.
8. All are conditions for fraud except D.
9. All are principal types of fraud except D.
10. Business ethics involves how managers decide on what is right in conducting business and how
managers achieve what they decide is right for the business.

FAQs
1. Contrast management fraud with employee fraud.

ANS:
Employee fraud is usually designed to directly convert cash or other assets to the employee’s personal
benefit.

Management fraud involves less of a direct benefit to the perpetrator. Management fraud may involve
an attempt to misstate financial performance in order to gain additional compensation or to earn a
promotion. Management fraud may also involve an attempt to misstate financial performance in order to
increase the price of the company’s stock or to reduce the cost of debt.

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