Relative Significance of Internal Controls in Preventing Accounting Fraud - Case Study Example

Submitted This paper looks into the various ways in which organizations defend themselves against fraudulent activities. In addition, the various methods used to counter this vice have specially been referred to in paper. where they have been identified as internal control measures that organizations take.. They are thus seen as internal mechanisms put in place by organizations to ensure that they mount a certain level of security to the threat of fraud. This paper will therefore discuss in detail how organizations have implemented these mechanisms, while looking at the possible flaws in their system. Executive Summary Reports have indicating that indeed fraud is one of the crimes that is significantly under-reported. At the same time, the extent to which organizations are willing and even able to cooperate with various agencies in tackling the issue has been brought to the limelight. In fact, agencies claim that greater co-operation is one of the most effective ways that can be used to achieve a real impact in tackling this vice. Under such circumstances, the deep-rooted nature of the problem call for well enhanced and facilitated bodies that would bring into the picture counter-fraud initiatives. Other observations made in recent times as far as fraud is concerned cite that these occurrences are almost unlimited as to the dishonest conduct they criminalize. One of the most conspicuous development in this phenomena is that everyone participant is looked at from the same perspective. That is , if and individual attempts fraud, regardless of whether they succeeds or not, and in spite of whether they originated the idea or not, they are included in the bracket of fraudsters and labeled as though they consummated their act of fraud. Basically, this paper is a detailed report that looks into how fraudulent dealings affect organizations in a basic and even detailed manner. This report highlights all the aspects that are related to fraud and measures taken to counter. From a wider perspective, the report seeks to show how fraud in understood from a daily life perspective by an individuals and organizations Thus, it takes into account any misconceptions that relates to this aspect of criminal activities. One of te most conspicuous elements of this kind of crime is that it is not limited to a given sector of the economy but can affect any organization (Baker, 2006). Quality analysis has been presented to enable organizations take action where necessary as well as put in place other mechanisms that can curb the vice. The discussion further takes into account the various aspects on which organizations are vulnerable. One aspect in this kind of crime is that it is applicable to all any organization, including governments agencies and even individual agents. There has also been reported an increase of fraudulent activities carried out through the internet. This report underlines the importance of collaborating and analyzing data and also notes that such procedures lead to predictive analytics or forensic analytics, which is essential for implementation of procedures and preventive measures. Forensic analytics has been used in the processes of reconstructing and detecting financial fraud. As in other criminal procedures, the process involves collecting of data, preparing and analysis with an aim of preparing a report that is expected to bear results which include the apprehension and prosecution of perpetrators. This report has been framed through various steps for easy understanding and analysis. Through it, the various media through which this crime is committed have been looked into. Besides the rather complex use of technological aspect, there are other aspects such as mail, wire and phone. As far as the web is concerned, it is seen as a tool that has been instrumental in aiding the crime. Through it, fraudsters can easily conceal their location and identity thus creating difficulties in verifying legitimacy. This paper has sought to understand all these aspects of fraud and even give recommendations on the way forward. Introduction One key element of this research is that it looks into a problem that is continuously gaining popularity more so with the development of technology. In fact technology has greatly influenced the development of crime and is continuously being used to commit these crimes. This report will focus on how the technology is used in modern times to execute fraud activities. Fraud is a rather wide topic to study and therefore looking into a specific aspect like the use of technology would greatly enhance the report. The report is based on findings realized after collecting and evaluating data that shows the importance of internal controls in preventing accounting fraud. The research was influenced by the increased cases of this kind of crime the world over. Notably, this kind of crime exhibits several unique characteristics and tends to take different dimensions. In most cases, it is associated with useful skills in technology and a general possession of wit, or to some extent, luck. Quite often, fraud leaves individuals deprived of essential possessions in a way that may sometimes make a fool of the victims. It is important to point out that the report also borrows substantially from data and previous researches on the subject. It is expected that the highlights given herein will positively impact on this whole subject. This report will thus aim at explaining various aspects of the crime in order to draw conclusions and even recommendations, with an aim of increasing awareness among organizations and the general public. The report is the culmination of a process that saw data collected from various stakeholders. The writing of this report and indeed the research itself, was promoted by the fact that in spite of its prevalence, there is seemingly little public awareness on the matter. It is therefore believed that the report will add to the data base but more importantly create awareness. Background For quite obvious reasons, every organization has a reason to be worried about fraud, and most of the endeavors to prevent it. In fact most organizations may not be awake to the fact that they are highly vulnerable to a significant extent (Rocancourt ,2000). However, if statistics are anything to go by, quite a good number of people have the capability of carrying out fraud against any given organization. One of the important tools they may need to posses is an understanding of the company’s operations. Some of them would easily crack the most well guarded secret of companies using just a bit of information on key areas. This report lays emphasizes on crime that is executed by technological aspects. One characteristic of this kind of fraud is that quite often it will involve individuals within the organization. This aspect has been quite relevantly addressed by various interest groups. The individuals within the organization may themselves be the fraudsters or work in cohorts with others. Whichever the case, the aim is to deprive organizations hard earned property in whatever form. By all standards, fraudsters have a greater objective in mind and look at the prospects provided by their actions. In other words, they are well aware of what they want to achieve and how they want to achieve it. In consideration of such a case background, the study on internal control methods thus becomes relevant and important. Although this report is done on a general scale ,it would be important that organizations highlight the parts of their structure that could make them vulnerable to fraud activities. This would be enhanced by a logical and well correlated internal system. Purpose: The main aim of conducting this report is to demonstrate how technology is used to execute fraud and therefore o contribute the existing volume of data. In addition, the report is necessary in highlighting any changing phenomena associated with fraudulent activities, especially in relation to technology. In writing this report, it was also necessary in pointing out some of the methods that have been used to prevent fraudulent activities especially in regard to recent technological advancements. It is important to note that interested parties in this study may use the report to enlighten themselves in any new methods used by perpetrators of these crimes. It is worth mentioning that like most other crimes, fraud has evolving characteristics thus the need to continue conducting studies to revel any revolving tends. While concepts of fraud and internal controls have been explored, no significant research findings exist on significance of each control. This report therefore aims at investigating the significance of different controls in order to develop a framework for rational decision making in selecting and implementing internal control measures for preventing accounting fraud. The research explores the question, ‘is there a significant relationship between applied internal control practices and reported accounting frauds in organizations?’ A preliminary study among a sample of auditors and managers has indicated preference of control measures to indicate difference in effectiveness. Scope: The widespread nature of fraudulent activities has necessitated the development of this study. Notably, each criminal activity associated with fraud exhibits different characteristics .In writing this report , technological aspects of fraud were looked into with an aim of pointing the most commonly methods of applied, where and how they are executed. This way it was possible to draw some conclusions and even make recommendations for organizations. The study doesn’t really focus on a single aspect of the crime but rather applies to a wide range of elements. However, much concentration has been given to preventive measures, especially those that organizations use to secure their own systems. Methodology In conducting this research, quantitative and qualitative research methods have been applied. In this research quantitative method of research has concentrated mainly on analyzing numerical cases and other data that has been presented in this case study. It looks into aspects such as the frequency of cases in different places, how they are recorded, actions taken against culprits, measures taken by victims and so on. By applying this method of research, the study ensured that the data presented was consistent and in consideration of any other information that is in existence/The qualitative methods on the other hand applied mostly to the various techniques used by perpetrators. It also focuses on the various prevention methods that organizations have put in place. The method thus addresses the issue of the effectiveness of these methods in curbing the vice. Problem This report makes note of three major segments that are pause and cause great challenges to organizations as far as fraud is concerned. Technical Technological Aspect of Fraud in Organizations Technology related methods are some of the commonly used in executing these crimes (Knight, 2008). Data has also shown that some organizations are highly vulnerable than others. Financial institutions form the bulk of the institutions targeted by fraudsters. Cyber or online fraud has become common with the advancement of technology. This problem is still a new phenomenon that needs to be continuously researched on. In this day and age, no one can claim to be satisfactorily safe from fraudsters. It must be taken into consideration that even the most seemingly secure systems such as some government websites relating to security and diplomatic relations have been hacked into. This explains the extent to which individuals and organizations are endangered by this kind of eventualities. In acknowledging this fact therefore this report must be rightly considered by organizations and individuals. Involvement of Insiders in fraud To any given organization, concerns of theft are a major headache that the management has to deal with. This incomes regardless of the size of the organization. In this respect putting in place control measures to curb fraud is an essential elements that must be considered .However, organizations have a major problem when collaborators are found within the organization. There are a number of internal control measures that exist and are used for both detecting and preventing fraud. Knight ( 2008) reports that this problem is usually done with the help of people who have knowledge in departments that are charged with responsibilities like planning, authorizing, and accounting. Other measures may include frequent reconciliation of accounts, restricting access to authorized personnel, strong policies that enhance loyalty and aim at discouraging conspiracy. In fact these are some of the measures that have been identified as essential. Others relate to control avenues and even brainstorming to evaluate possible fraud or indicators as well as monitoring compliance to codes of conducts as set by organization. However, the extent to which these measures are applicable may be determined by how deep rooted cases of fraud are or even how prevalent they have been reported across a given sector or organization. In respect to these concerns, the extent to which fraud an industry’s performance, consumers and even the economic underscores why it is important to address this problem from a research based perspective. Besides, in virtually all societies fraud is considered both criminal and immoral. Effective measures are therefore necessary to ensure that possible threats of fraud are identified and eliminated. Effects on organization’s Revenue In some cases, organizations have been exposed to fraud cases simply because there were loopholes within their systems that gave room for such occurrences. In most cases, organizations try to seal all possible loopholes that may cost them in one way or the other. Fraudsters are nonetheless divisive and cleverly plot new mechanisms on establishing possible loopholes Several cases where employees in an organization have collaborated with fraudsters are common. It is has been reported that the most prevalent cases that institutions and thousands of their customers are exposed to are credit/debit card fraud. Some of the methods used by conmen include hacking of payment processors information systems .Studies have also demonstrated that online criminals and rogue insiders have shifted focus and even invest their funds, time and resources to perpetrate fraud , and this has in return brought a drastic increase especially in online fraud that specifically targets banking institutions and their customers. As earlier noted, perhaps the most basic way in which to deal with “inside-jobs” in an organization is putting in place essential measures, cultivating loyalty amongst employees and even offering training to employees on various aspects of fraud. Recommendations Solution There cannot be said to be a single most applicable or one-fit-all solution to this problem. In some cases, it would be required that these solutions be tailor made. Under such circumstances, organizations would have to come up with solutions that best fit the environment within which they operate. This is mostly because all cases take a different dimension although they may have a few features in common. However, it is important that a general rule or a set of polices are applied in a bid to curb these occurrences. To this end, one of the most applicable solution is coming together of stakeholders in a given sector that is affected by this problem to brainstorm on the best measures that each one of them has taken or deem important in curbing the vice (Baker,2012). It would also be necessary that government agents be alert to the changing nature of the crime. This will help them to adopt the best mechanisms and apply them in trying to minimize cases of fraud. This would require that these agents be compliant to technological advances with all its evolution. They would also be required to update their skills and their technology if they expect to be ahead of the performers of fraudulent activities. Finally, it is important that the community becomes vigilant in reporting cases of fraud. It has been observed that the public is not keen on reporting all cases of fraud for a number of reasons. One of reason is the effective way in which fraudsters carry out their task leaving almost no trace. There is also the fooling effect that fraudsters impose on their victims leaving them with a need to hide their predicament. Conclusion This report has demonstrated that virtually all organizations are vulnerable to fraud .The most important role that organizations can play thus is to establish which areas of their systems are more exposed and to develop ways of tackling this vice especially in their internal systems. At the same time, it would be dangerous for organizations to assume that they have the best mechanism of deviating these eventualities. In fact, organizations should be awake to the evolving nature of these occurrences in order to keep them well ahead of perpetrators of these actions. It would be ignorant for organizations not to align their technological aspects with today’s expectations. However, they must put measures to ensure that these systems do not threaten their ability security and expose them to fraud. It is also important that organizations enhance their capability to deal with persons within and without who may be aiding in fraud activities. Organizations are expected to ensure that they involve the services of qualified professional personnel who charged with the responsibility of safeguarding an organization’s finances, data and any other important assets. These people, especially accounts officers and the , internal auditors, organizations’ managers and external auditors should be influenced to cultivate some level of loyalty in order to ensure as this may drive them to report possible flaws Organizations must also carry a review of their inventory from time to time, to reveal points of concerns that may expose the organization in to fraud. They should and must also invest on assets that would help them counter the trend. References Baker, J (2006) Glanville Williams Textbook of Criminal Law, London: Sweet & Maxwell, http://www.spamlaws.com/fraud.html Baker, J.(2012) Baker, Glanville Williams Textbook of Criminal Law, London: Sweet & Maxwell. Retrieved 2012-7-12. From http://article.wn.com/view/2012/06/09/Textbook_of_Criminal_Law_by_ Knight, J (, 2008), "Cyber Nations with Real Repercussions", Asia Times Online "Farberfinancial.com". Farberfinancial.com. Retrieved 2012-7-12. http://oig.ssa.gov/what-abuse-fraud-and-waste Rocancourt,C. (2000), "N.Y. lawyer arraigned in alleged $700M fraud", Retrieved December, 7, 2012 From http://www.msnbc.msn.com/id/26669502/ns/dateline_nbc/t/catch-him-if-you-can/ Read More