ETHICAL ISSUES IN

BUSINESS
 ETHICAL STANDARDS

- are derived from societal mores

and deep-rooted personal beliefs
about issues of right and wrong
that are not universally agreed
upon.
 BUSINESS ETHICS
- involves finding the answers to two questions:

1. how do managers decide 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:
1. Equity

2.Rights

3. Honesty

4.Exercise of corporate power

 MAKING ETHICAL
DECISIONS

Ethical Responsibility

- is the duty to follow a morally

correct path
The following ethical principles provide some
guidance in the discharge of responsibility:
1. Proportionality

2. Justice

3. Minimize risk
 COMPUTER ETHICS
- the analysis of the nature and
social impact of computer
technology and the corresponding
formulation and justification of
policies for the ethical use of such
technology
Three Level of Computer Ethics

1. Pop

2. Para

3. Theoretical
 A fundamental question arising is
whether computers PRESENT
NEW ETHICAL PROBLEMS or just
CREATE NWE TWISTS ON OLD
PROBLEMS.
 PRIVACY
People desire to be in full control
of what and how much
information about themselves is
available to others, and to whom
it is available.
 SECURITY (ACCURACY AND
CONFIDENTIALITY)
Computer security

- is an attempt to avoid such undesirable

events as a loss of confidentiality or data
integrity
OWNERSHIP OF PROPERTY

may be private, collective, or

common and the property may
be of objects, land or real estate
or intellectual property
 EQUITY IN ACCESS
Several factors can limit access to computing
tecnology.
1. Economic Status
2. Culture
3. Safety Features
 ENVIRONMENTAL ISSUES

Computers have made life

convenient in many ways but
they have also impacts on
the environment.
 ARTIFICIAL INTELLIGENCE
an area of computer science that
emphasizes the creation of
intelligent machines that work and
react like humans
 UNEMPLOYMENT AND
DISPLACEMENT
Many jobs have been
and are being changed
as a result of the
availability of
computer technology.
 MISUSE OF COMPUTER
Computers can be misused in many ways.
Examples:
copying proprietary software
snooping other people's files
hacking
 SARBANES-OXLEY ACT AND
ETHICAL ISSUES

has many provisions designed to

deal with specific problems relating
to capital markets, corporate
governance and the auditing
profession.
 SECTION 406- CODE OF ETHICS
FOR SENIOR FINANCIAL
OFFICERS
requires public companies to disclose to
the SEC whether they have adopted a
code of ethics that applies to the
organization's CEO, CFO, controller
The SEC has ruled that compliance with Section
406 necessitates a written code of ethics that
addresses the following ethical issues:
1. Conflicts of interest
2. Full and fair disclosure
3. Legal Compliance
4.Internal reporting of code violations
5. Accountability
 FRAUD AND ACCOUNTANTS

-The passage of SOX has had a tremendous impact

on the external auditor's responsibilities for fraud
detection during a financial audit.

-The current authoritative guidelines on fraud

detection are presented in Statement on Auditing
Standards No. 99.
FRAUD
 FRAUD
Denotes a false representation of a material fact made by one party to
another with the intent to deceive and induce the other party to justifiably
rely on the fact to his or her detriment.
FIVE CONDITIONS:

False representation
Material fact
Intent
Justifiable reliance
Injury or loss
FRAUD AT TWO LEVELS:

1. Employee Fraud

2. Management Fraud
CHARACTERISTICS OF MANAGEMENT FRAUD

The fraud is perpetrated at levels of management

above the one which internal control structures
generally relate.

The fraud frequently involves using the financial

statements to create an illusion that an entity is
healthier and more prosperous than, in fact, it is.

If the fraud involves misappropriation of assets, it

frequently is shrouded in a maze of complex business
transactions, often involving related parties.
FRAUD TRIANGLE
THREE FACTORS:

situational pressure

opportunity

ethics
 Ethics
Pressure Opportunity

No Fraud

Fraud
Pressure Opportunity
Ethics
 RED-FLAG CHECKLIST
Do key executives have unusually high personal debt?
Do key executives appear to be living beyond their means?
Do key executives engage in habitual gambling?
Do key executives appear to abuse alcohol or drugs?
Are economic conditions unfavourable within the companys
industry?
Does the company use several different banks, none of which sees
the companys entire financial picture?
Do any key executives have close associations with suppliers?
Is the company experiencing a rapid turnover of key employees,
either through resignation or termination?
Do one or two individuals dominate the company?
PERPETRATORS OF FRAUD
 Position within the organization
Collusion with others
Gender
Age
Education
 FRAUD LOSSES BY POSITION
WITHIN THE ORGANIZATION
Position Percent of Frauds Loss
Owner/Executive 23 $834,000
Manager 37 150,000
Employee 40 70,000
 FRAUD LOSSES AND THE
COLLUSION EFFECT

Perpetrator Loss
Two or more(36%) $500,000
One(64%) 115,500
 FRAUD LOSSES BY GENDER

Gender Loss
Male(59%) $250,000
Female(41%) 110,000
 FRAUD LOSSES BY AGE

Age Range Loss

<26 $25,000
26-30 50,000
31-35 113,000
36-40 145,000
41-50 250,000
51-60 500,000
>60 435,000
 FRAUD LOSSES BY
EDUCATION
Education Level Loss
High School $100,000
College 210,000
Post graduate 550,000
FRAUD SCHEMES
Three Broad Categories:

Fraudulent Statements

Corruption

Asset Misappropriation
1. FRAUDULENT STATEMENTS
The Underlying Problems

1. Lack of auditor independence

2. Lack of director independence

3. Questionable executive compensation schemes

4. Inappropriate accounting practices

SARBANES-OXLY ACT
 REFORMS
1. Accounting oversight board

Public Company Accounting Oversight Board

2. Auditor independence
Nine functions:
1. Bookkeeping or other services related to accounting or financial
statement.
2. Financial information systems design and implementation
3. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
4. Actuarial services
5. Internal audit outsourcing services
6. Management functions or human resources
7. Broker or dealer, investment adviser, or investment banking services
8. Legal services and expert services unrelated to the audit
9. Any other service that the PCAOB determines is impermissible
 REFORMS
3. Corporate governance and responsibility

4. Issuer and management disclosure

a. Public companies must report all off-balance-sheet transactions

b. Annual reports filed with the SEC must include a statement by
management, asserting that it is responsible for creating and
maintaining adequate internal controls and asserting to the
effectiveness of those controls
c. Officers must certify that the companys accounts fairly present the
firms financial condition and results of operations.
d. Knowingly filing a false certification is a criminal offense
 REFORMS
5 Fraud and criminal penalties
Penalty
Altering Documents - Fines
- Imprisonment of up to 20 years
Destruction of Audit Records - Fines
- Imprisonment of up to 10 years
Securities Fraud - Fines
- Imprisonment of up to 25 years
Mail and Wire Fraud - Fines
- Imprisonment of 5-20 years
Certifying Financial Reports that do not -knowingly
conform with the requirements - $1 million
- Imprisonment of up to 10 years
-willful
- fine of up to $5 million
- Imprisonment of up to 20 years
2. CORRUPTION
Types:
1.Bribery
2.Illegal Gratuities
3.Conflicts of Interest
4.Economic Extortion
3. ASSET MISAPPROPRIATION
Skimming

Cash Larceny(Lapping)

Billing Schemes
Shell Company
Pass-through
Pay-and-return
Check Tampering

Payroll Fraud

Expense reimbursement

Thefts of Cash

Non-cash missappropriation
 COMPUTER FRAUD
theft, misuse, or missappropriation of assets by altering computer-readable
records and files
theft, misuse, or missappropriation of assets by altering the logic of computer
software
theft or illegal use of computer-readable information
theft, corruption, illegal copying, or intentional destruction of computer
software
theft, misuse, or missappropriation of computer hardware
 Data Collection
Data Processing
> Program Fraud
> Operations Fraud
Database Management
Information Generation
(relevance, timeliness, accuracy, completeness,
summarization)
AUDITORS REPONSIBILITY
OF DETECTING FRAUD
 SAS NO. 99 CONSIDERATION OF FRAUD
IN A FINANCIAL STATEMENT AUDIT
1. Description and Characteristics of Audit
2. Professional Skepticism

3. Engagement Personnel Discussion

4. Obtaining Audit Evidence and Information

5. Identifying Risk

6. Assessing the Identified Risk

7 Responding to the Assessment

8.
Evaluating Audit Evidence and Information

9. Communicating Possible Fraud

10. Documenting Consideration of Fraud

Auditor assess risk factors related to:

1. Fraudulent Financial Reporting

2. Misappropriation of Assets
1. Fraudulent Financial Reporting
o Managements Characteristics and
Influence over the Control Environment

o Industry Conditions

o Operating Characteristics and financial

Stability
Financial Fraud Common Schemes:
Improper Revenue Recognition

Improper Treatment of Sales

Improper Asset Valuation

Improper Deferral of Costs and Expenses

Improper Recording of Liabilities

Inadequate Disclosures
2. Misappropriation of Assets
o Susceptibility of Assets to Misappropriation

o Controls
Asset Misappropriation Common Schemes:
Personal Purchases

Ghost Employees

Fictitious Expenses

Altered Payee

Pass- through Vendors

Theft of Cash/ Inventory

Lapping
Auditor's Response to Assessed Risk

Auditors judgment about the risk of material misstatements due to

fraud may affect the audit in the following ways:

Engagement staffing and extent of supervision

Professional skepticism
Nature, Timing, and extend of Procedures Performed
Response to Detected Misstatements Due to Fraud

1. Currently planned audit procedures are sufficient to respond to

risk factors

2. Extend the audit and modify planned procedures

3. Procedures cannot be sufficiently modified to address the risk

Fraud exist but has NO material effect on FS, Auditor
should:

Refer the matter to an appropriate level of management at least

one level above those involved
Be satisfied that implications for other aspects of the audit have
been adequately considered
Fraud exist and HAS material effect on FS or auditor
is unable to evaluate degree of materiality, auditor
should:

Consider the implications for other aspects of the audit

Discuss the matter with senior management and with a BODs
audit committee
Attempt to determine whether the fraud is material
Suggest that the client consult with legal counsel, if appropriate
FRAUD DETECTION
TECHNIQUES
Three Common Fraud Schemes:
1. Payments to Fictitious Vendors

2. Payroll fraud

3. Lapping Accounts Receivable

 1. Payments to Fictitious Vendors

Sequential Invoice ACL to sort the records of the invoice file

Numbers by invoice number and vendor number

ACLs expression builder, create filter to

Vendors w/ P.O. Boxes select the vendor records from the invoice
file that uses P.O. Boxes Address

ACL to join the employee file and the

Vendors w/ Employee invoice file using the address fields as the
Addresses common key for both files

ACL duplicates command to generate

Multiple Company w/ a listing of mailing addresses that are
the same Address common to two or more vendors

Invoice Amount Slightly

ACLs expression builder, create a value
below the Review range around the control threshold
Threshold
 2. Payroll Fraud

Overpayment Payments to
of employees nonexistent
employees

ACLs join feature to link

payroll and employee files
using Employee No. as
common attribute
Excessive Duplicate
Hours Worked Payments

ACLs expression builder ACLs duplicates function to

select payroll records search records of employees
that reflects excessive (same name, same employee
hours worked no., same mailing address, etc.)
 3. Lapping Accounts Receivable

1. Balance Forward Method

2. Open Invoice Method

Example: Customer A remits a check for Php 5,325.50 in payment of an
open invoice for the same amount. The perpetrator pockets the check
but does not close the invoice. Therefore, the invoice balance is
carried forward. In the next period, Customer B remits a check for Php
10,550.00 in full payment of an open invoice. The embezzler applies
Php 5,325.50 of this payment to Customer As oopen invoice, thus
closing it. The remainder of Php 5,224.50 is applied to Customer Bs
invoice, which remains open. The balance of Php 5,325.50 is carried
forward into the next period.
 3. Lapping Accounts Receivable

2. Open Invoice Method

Sales Invoice File
Invoice Customer Invoice Sales Due Closed Remittance
Number Number Amount Date Date Date Amount
77885 27345 10,550 02/12/17 02/25/17 03/28/17 5,224.50