Ethics and Fraud

Ethics
Business Ethics
ETHICS pertains to the principle of conduct that individuals
use in making choices and guiding their behavior in
situations that involve the concepts of right or wrong.
Why should we be concerned about ethics in the business
world?
Ethics are needed when conflicts arise—the need to
choose
In business, conflicts may arise between:
employees
management
stakeholders
Litigation
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Business Ethics
Business ethics involves finding the answers to two
questions:
How do managers decide on what is right in
conducting their business?
Once managers have recognized what is right, how do
they achieve it?
Managers have the ethical responsibility to consider
proportionality of its decision.
Justice – those who do not benefit should not carry the
burden of risk.
Minimize risk
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Four Main Areas of Business Ethics
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Computer Ethics
It is the analysis of the nature and social impact of computer
technology and the corresponding formulation and justification
of policies for the ethical use of technology
It includes concerns about hardware, software, and
telecommunications.
THREE LEVELS OF COMPUTER ETHICS
1. POP – the exposure to stories and reports found in the popular
media
2. PARA – taking a real interest and acquiring some level of
skills and knowledge in the field
3. THEORETICAL – is of interest to researchers who apply
theories of philosophy, sociology and psychology to computer
science.
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Main Computer Ethics Issues
1. PRIVACY
The creation and maintenance of large shared databases
make it necessary to protect people from potential
misuse of the data.
2. SECURITY – accuracy and confidentiality

This is an attempt to prevent fraud and other misuse of
computer systems.
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3. OWNERSHIP of PROPERTY
Laws designed to preserve real property rights have been
extended to cover intellectual property – the software
4. EQUITY in ACCESS
Some barriers to access are intrinsic to the technology if
information systems, but some are avoidable through
careful system design.
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5. ENVIRONMENTAL ISSUES
• Limit nonessential hard copies
• Proper recycling
6. ARTIFICIAL INTELLIGENCE
A new set of social and ethical issues has arisen out of
the popularity of expert system – artificial intelligence.
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7. UNEMPLOYMENT and DISPLACEMENT
Many jobs have been and are being changed as a result of
the availability of computer technology.
8. MISUSE of COMPUTERS
• Copying propriety software
• Using a company’s computer for personal benefit
• Snooping through other people’s files
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Fraud
Legal Definition of Fraud
False representation - false statement or
disclosure
Material fact - a fact must be substantial in
inducing someone to act
Intent to deceive must exist
The misrepresentation must have resulted in
justifiable reliance upon information, which
caused someone to act
The misrepresentation must have caused injury
or loss
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Business Fraud
Intentional deception
Misappropriation of company’s assets
Manipulation of financial data
FRAUD is also known as white-collar crime, defalcation,

embezzlement or irregularities.
The Fraud Triangle

1. Situational pressure
2. Opportunities
3. ethics
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Fraud Triangle
Pressure Opportunit
y No Fraud
Pressure Opportunit
y
Ethics
Fraud
Ethics
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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
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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 more healthy and prosperous
than it actually is
Involves misappropriation of assets, it frequently is
shrouded in a maze of complex business transactions
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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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A. 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
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Enron, WorldCom, Adelphia
Underlying Problems
 Lack of Auditor Independence: auditing firms also engaged by their
clients to perform nonaccounting activities
 Lack of Director Independence: directors who also serve on the boards
of other companies, have a business trading relationship, have a
financial relationship as stockholders or have received personal loans,
or have an operational relationship as employees
 Questionable Executive Compensation Schemes: short-term stock
options as compensation result in short-term strategies aimed at
driving up stock prices at the expense of the firm’s long-term health
 Inappropriate Accounting Practices: a characteristic common to many
financial statement fraud schemes
 Enron made elaborate use of special purpose entities.
 WorldCom transferred transmission line costs from current expense
accounts to capital accounts.
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.
B Corruption – management I collusion with outsider
Examples:
Bribery – involves giving, offering, soliciting or receiving things
of value to influence an official in the performance of his lawful
duties.
Illegal gratuities - involves giving, offering, soliciting or receiving
things of value because of an official act that has been taken
Conflicts of interest – occurs when an employee acts on behalf of
a third party during the discharge of his duties or has self
interest in the activity being performed.
Economic extortion – is the use of force or threat by an
individual or organization to obtain something of value.
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C. Asset Misappropriation
Most common type of fraud and often occurs as employee fraud
Examples:
Skimming – stealing cash from the firm before it is recorded in
the books
Cash larceny or lapping
Billing schemes or vendor fraud - paying a false vendor by
submitting fictitious inflated invoices or for personal purchases
Check tampering – forging or changing a check in a material way
Payroll fraud – is distribution of fraudulent paychecks to existent
of non existent employees
Expense reimbursements – employee makes a claim for
reimbursement of fictitious or inflated business expenses.
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Ethics

2. SECURITY – accuracy and confidentiality

FRAUD is also known as white-collar crime, defalcation,

The Fraud Triangle

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