-Fraudulent Accounting-

--ACCOUNTING SCANDAL ---

Fraud and white collar crime have increased considerably over the recent years, and professionals believe this trend is likely to continue. The cost of fraud to businesses is difficult to estimate because not all fraud and abuse is discovered, not all uncovered fraud is reported, and civil or criminal action is not always pursued. The findings below are of particular importance:

· 62% of respondents felt that fraud is a major problem for Malaysian business generally.

· 83% of respondents acknowledged experiencing fraud in their organization. This is an increase of 33% from the 2002 survey.

· 36% of companies suffered total losses of RM10,001 to RM100,000 to fraudulent conduct in the survey period while 17% suffered losses in excess of RM 1 million (the "survey period" is the period from January 2003 to December 2004).

· Good internal controls (44%), management investigation (37%) and internal audit review (29%) rank highly as methods of fraud detection.

· 87% of the frauds were perpetrated internally [non-management employees (69%) and management employees (18%)]. This was a decrease of 10% from the 2002 survey.

· Inadequate internal controls and collusion between employees and third party were cited as the most common reason giving rise to fraud.

· The four most common prevention methodologies were indicated as being review and improved internal controls, improved security measures, pre-employment screening and establishing a corporate code of conduct / ethics.

· 30% of the respondents that experienced fraud indicated that "red flags" or warning signs which should have alerted respondents to the fraud were ignored by either management or supervisory personnel.

· The typical fraudster is male within the age group of 26-40 years and has an annual income of RM15,000-RM30,000. Most frauds reported by respondents were committed by individuals employed between 2-5 years.

· 85% of respondents considered computer / information system to be a potential security risk.

· 38% of respondents considered intellectual property to be at the risk of fraud.

THE SOURCES FOR THE OCCURRENCE FOR FRAUD

Of the total 109 respondents that expericed fraud, 69% claimed that their nonmanagement employees were the most significant perpetrators of fraud whilst 18% claimed it was their management. On the other hand, external sources of fraud perpetrators were customers (26%), suppliers (22%) and service providers (21%

Resource: KPMG Malaysia Fraud Survey 2004

RELATING THE CASES WITH THE THEORY THAT WE LEARNED SUCH AS THE TYPE OF FRAUD AND WHY THE FRAUD OCCURRED.

GET UPDATES OF THE LOCAL FRAUD CASES IN MALAYSIA

KNOW WHY THE PEOPLE COMMIT FRAUD AND THE IMPACT AND EFFECT OF FRAUD TO THE BUSINESS ORGANIZATION

KNOW THE DEFINITION OF FRAUD AND ALSO THE TYPE OF FRAUD

CONTENTS

What is Fraud?

Fraud is generally defined as an intentional deception, omission, or perversion of truth to gain unfair advantages and induce another to part with some valuable item or surrender a legal right as when a person makes false statements. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading. A false statement is fraudulent if it is made knowingly, without believing it to be true, or carelessly stated, without regard for the truth. Frauds include numerous gross misrepresentations including income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by conspirators. The borrower's debt is not fully disclosed, nor is the borrower's credit history, which is often altered.

TYPES OF FRAUD :

1. Employee embezzlement

Embezzlement the crime of stealing the funds or property of an employer, company or government or misappropriating money or assets held in trust. It is the act of dishonestly appropriating or secreting assets, usually financial in nature, by one or more individuals to whom such assets have been entrusted. It is a kind of financial fraud. For instance, a clerk or cashier handling large sums of money can embezzle cash from his or her employer, a lawyer can embezzle funds from clients' trust accounts, a financial advisor can embezzle funds from investors.

2. Management Fraud

Management fraud also known as financial statement fraud involves the intentional publishing of false information in any portion of a financial statement. It usually occurs when a company overstates assets or revenue, or when it understates liabilities and expenses. Often stockholders, employees and investors are kept completely in the dark about the value of corporate assets and the existence of liabilities when such a fraud is taking place.

3. Investment Scams

Investment scam is consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements in which investors make purchase or sale decisions on the basis of false information and will resulting in losses. Investment fraud includes outright theft from investors and misstatements on a public company's financial reports. Although there generally must be a statement or representation for fraud to occur, if the broker had disclose the fact omitted, it is considered fraud. A broker's recommendation of an investment without disclosing the risks would constitute a fraudulent misrepresentation.

4. Vendor fraud

Vendor fraud is a term that spans a broad range of abuse from fraudsters who create fictitious companies and submit bills to you for payment to trusted suppliers who pad invoices and charge you more than they are due. Vendors involved in fraudulent activity may even collude with your own employees to help them navigate through your company’s internal controls. The vendor fraud also deals with the vendor not delivering the correct amount of inventory on the shipping invoice. Small amounts of inventory can easily be removed from the packaging or boxes and remain unnoticed. Another method is fewer boxes are delivered than specified on the invoice.

5. Customer fraud

Customer fraud occurred when customers deceive sellers into giving customers something they should not have.

6. Miscellaneous fraud

· Insurance fraud - is any act committed with the intent to fraudulently obtain payment from an insurer.

· Credit card fraud - is a wide-ranging term for theft and fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account.

· Telephone fraud - for example, signing up with a fake name, or no intention to pay

· Internet – A significant step forward in criminalizing unauthorized access to computer systems and networks, generally refers to any type of fraud scheme that uses one or more online services such as chat rooms, e-mail, message boards, or Web sites to conduct fraudulent transactions, or to transmit the proceeds of fraud to financial institutions or to others connected with the scheme.

· Resume fraud - refers to any act that involves providing fictitious, exaggerated, or otherwise misleading information on a job application or resume. It is for persuading a potential employer to hire an applicant for a job they may be unqualified for, or that they are less qualified than other applicants.

· Matrimonial - The couple marries with knowledge that the marriage is solely for the purpose of obtaining legal status for the man or woman in the destination country. This is frequently arranged as a business transaction.

Why People Commit Fraud? The Fraud Triangle

The element of fraud triangle consist perceived pressure, rationalization and perceive of opportunity. In the element of pressure it can divided into four which is financial pressure, vices, work-related pressure and other pressure.

Financial pressure is the most common type of pressure to commit fraud. They usually to do so because of poor cash position, receivables that aren’t collectible and others. Motivations created by vices such as gambling, drugs, and alcohol also make person committed fraud. Then, fraud motivated by other pressure such as spouse who insists on an improved lifestyle can make the husband act dishonest.

Rationalization referred to the fraudster explains their action as acceptable. However, in the element of the opportunity it has at least six major factors that will increase the opportunity for individuals to commit fraud, which is the lack of controls that prevent and or detect fraudulent behavior; inability to judge quality of performance; failure to discipline fraud perpetrators; lack of access to information; ignorance, apathy, and incapacity; and lack of an audit trail.

Opportunity referred to the chances where the fraudster has for example their position in the organization so it becomes easier to the person to commit fraud. Sometimes the opportunity are been used to conceal something and also to avoid the punishment for example the sales of the month are decreasing so the person try to conceal it and reported that the sale are increasing to avoid him to be punish by the management.

IMPACT OF FRAUD

Fraud is an unfortunately common occurrence. The list of potential impacts on a nonprofit suffering from the effects of fraud might include:

· Financial loss

The actual dollar value of the cash or other items stolen is the easiest cost to quantify. Frauds on record have cost in the hundreds of dollars and even into the millions.

· Cost of investigation

Every fraud should be investigated to determine the actual amount involved, the methods used and who was involved. Such investigations needs much costs depending on how complicated the fraud is.

· Reputation

An organization that suffers a fraud will lose some of the trust the public. At a minimum, people will assume the organization lacks proper management. At worst, people will decide the organization has no credibility.

· Damaged relationships

Other nonprofits, grantors, and governments will all releases their relationships with the organization.

· Negative publicity

When pundits say that any publicity is good publicity, they clearly are not thinking of a nonprofit that has experienced fraud. The resulting publicity not only damages the organization immediately, but also leaves a kind of toxic residue. Those involved with the organization will continue to harbor doubts about the organization’s credibility for years to come.

· Loss of employees

Depending on the nature of the fraud especially if a senior staff member commits it other employees may well begin looking for a better-run place of employment.

· Loss of donors

Donors receive solicitations from many nonprofits. An organization with a publicized fraud is less attractive to all but the most highly dedicated donors.

· Litigation

If the nonprofit decides not to hide a substantial fraud, it is quite possible that a court case will ensue. The minimum cost of litigation will be in the tens of thousands and can considerably more. Donors or government officials could even allege that board members are personally liable if it appears that they have failed to fulfill their fiduciary responsibility.

· Damaged morale

For employees who decide to stay with the organization, there will be a definite decline in morale. Employees may feel the organization has failed them and failed the mission.

PAST BOARD OF DIRECTOR’S ACTIONS AND DECISIONS THAT CONSIDERED UNINTENTIONALLY FRAUD

Although fraud usually is concealed and management's intent is difficult to determine, the presence of certain conditions may suggest to the auditor the possibility that fraud may exist. Particularly in matters involving accounting estimates and the application of accounting principles. For example, unreasonable accounting estimates may be unintentional or may be the result of an intentional attempt to misstate the financial statements.

For example, an important contract may be missing, a subsidiary ledger may not be satisfactorily reconciled to its control account, or the results of an analytical procedure performed during the audit may not be consistent with expectations. However, these conditions may be the result of circumstances other than fraud. Documents may legitimately have been lost or misfiled; the subsidiary ledger may be out of balance with its control account because of an unintentional accounting error; and unexpected analytical relationships may be the result of unanticipated changes in underlying economic factors. Even reports of alleged fraud may not always be reliable because an employee or outsider may be mistaken or may be motivated for unknown reasons to make a false allegation.

Some employees of a large company made an unintentionally fraud by sell a product or offer a service without personal knowledge of a deception.

CONCLUSION

Prevent the fraud occurred; fraud can be reduced and prevented by creating a culture of honesty, openness and assistance and eliminating fraud opportunity. Start by creating a work environment that defines and reinforces anti-fraud behavior. Owners and senior managers lead the way by communicating clearly that the company is committed to always doing the right thing with employees, customers and vendors, even if it means a higher cost to the company. If the leaders cut corners or shade the truth, there is no reason to believe those who follow will behave differently.

Establish clear written policies for all procedures and processes. Include an Ethics Policy that specifies how the company defines fraud and the actions management will take when it is discovered. Make sure all employees have a copy of the policies so no one can claim ignorance later. Then, enforce the policies fairly and consistently.

Make a background check a routine part of the hiring process for all employees. Check vendors’ dealings with other companies before approving them. Ask for references and check them. Set up a system of internal controls. Segregate duties such as making deposits and reconciling bank statements, approving and paying invoices, authorizing and signing checks, keeping payroll records and writing payroll checks, and receiving payments and posting them to accounts receivable. In smaller companies with few employees, the owner may have to perform some of these duties himself. Monitor the controls and their effectiveness regularly and have an outside CPA review them annually. Make unannounced spot checks periodically.

Increase the perception of detection. The single most effective way to prevent fraud is to make it clear that it will not go undetected. Cross train employees to cover vacations and illness, and make all the internal controls visible. Enforce vacations. When people know someone is watching or will be following up on their work, they are more likely to follow policies consistently and less likely to try to bypass them.

Consider establishing programs to help employees under outside pressures. If employees know they can get help with issues like substance abuse, marital and financial problems, they are less likely to look for ways to steal from the company to solve their problems. Guard the physical custody of bank accounts, petty cash, marketable securities, and blank checks. Take inventory regularly and spot check randomly.

References:

Albercht, W.S. (2005). Fraud Examination. 3rd edition. South Western College.

Albercht, W.S. (2005). Fraud Examination. 2nd edition. South Western College.

Forensic Accounting. Retrieved on July 14, 2009; from www.wikipedia.org/forensic accounting.



Barnes, B. D. (n.d.). e-how.com. Retrieved JULY 13, 2009, from http://www.ehow.com/how_4423637_prevent-business-fraud.html

Bernama. (n.d.). Retrieved July 15, 2009, from http://bernama.com/bernama/v5/index.php

LEE, J. (n.d.). TD Banknorth. Retrieved July 13, 2009, from http://www.tdbanknorth.com/bank/preventingbusfraud.html

News Strait Times. (n.d.). Retrieved July 14, 2009, from http://www.nst.com.my

The Star Online. (n.d.). Retrieved July 13, 2009, from http://www.thestar.com.my