Accounting in Business: Ethics, Fraud, and Internal Control

Accounting in Business: Ethics, Fraud, and Internal Control By Dina El Bassiouny

Outline • Accounting as Part of Everyday Life. • Importance of Ethics in Accounting. • Facts and Figures. • Fraud. • Losses on the Way. • Motivating Forces for Unethical Behavior. • Effective Ethical Controls. • Effective internal controls. • Conclusion. • References.

Accounting as Part of Everyday Life • Is one discipline of study that all people regardless of job position should have some knowledge of… • How to read your bank statement? • Know your financial gains and losses… Your income! • What are your tax dues? • Its useful in people’s everyday lives. • Companies must have reliable financial statements for both internal and external users.

Importance of Ethics in AccountingFacts & Figures • In the U.S., according to the Association of Certified Fraud Examiners (ACFE), losses from fraud and abuse => $600 billion… • In Egypt, …..??????? • Classic Case of Deception and Double Interests: “Enron”… Arthur Andersen = Auditor + Internal Auditor + Management consultant!!!!!!!!!!!!!! • In Egypt: “NO regulation in place requiring independence of auditors” Those who violate rules should be disciplined or suspended from practice… (Gamal, 2002)

Importance of Ethics in AccountingFraud Fraud is an intentional deception, misappropriation of a company’s assets, or manipulation of its financial data to advantage of perpetrator. • Symptoms can include: • Key executives appearing to be living beyond their means. • Key executives have close associations with suppliers. • Company uses several different banks, none sees full financial picture. • One or two individuals dominate the company.

Importance of Ethics in AccountingLosses on the Way • Losses due to Unethical Behavior: • Costs of legal action taken against perpetrators. • Costs of reduced productivity. • Increased unemployment as companies are forced to downsize or go out of business. • Economic loss to organization, hence to society.

Solution??? Administer Effective Ethical and Internal Controls Investigate Motives for Unethical Practice

Motives for Unethical Behavior Situational Pressures High Low Opportunities High Low Personal Characteristics (Integrity) Low High Unethical Ethical (Hall, 2004)

Effective Ethical Controls • A code of conduct that applies to the practice of a profession. • AICPA adopted codes of professional conduct that must be followed by CPAs. Integrity Integrity Integrity Independence Independence Independence Objectivity Objectivity Due Care Due Care Objectivity Due Care

Effective Internal Control System Control Environment: Influence Control Awareness of Management and Employees. Risk Assessment: Identify, Analyze, and Manage Risks Relevant to Financial Reporting. Monitoring: Entities’ Activities. Information and Communication: Quality of Info Impacts Reliability of Financial Statements. Control Activities: Transaction Authorization – Segregation of Duties – Supervision – Accounting Records – Access Control – Independent Verification Fulfill Main Objectives Safeguard Assets of the Firm Ensure Accuracy & Reliability of ACCT Records & Info Promote Efficiency in the Firm’s Operations

Conclusion Effective Ethical Control Effective Internal Controls SituationalPressure Personal Integrity Opportunities

References • Gamal, Wael (2002). “Book-Fixing, Here and There.”Al Ahram Weekly. 22-28 August. • Hall, James A (2004). Accounting Information Systems. Thomson. South Western. • Needles, Belverd E., Jr.; Powers, Marian; Crosson, Susan V. (2002). Principles of Accounting. Houghton Mifflin Company. Boston. New York.

Thank You 

Accounting in Business: Ethics, Fraud, and Internal Control