Page 140 - Accounting Information Systems

3
chapter

Ethics, Fraud, and

Internal Control

his chapter examines three closely related areas of
concern, which are specifically addressed by the
T Sarbanes-Oxley Act (SOX) and are important to
accountants and management. These are ethics, fraud, and
internal control. We begin the chapter by surveying ethical
issues that highlight the organization’s conflicting responsi-
bilities to its employees, shareholders, customers, and the
general public. Organization managers have an ethical
responsibility to seek a balance between the risks and bene- Learning Objectives
fits to these constituents that result from their decisions.
Management and accountants must recognize the new After studying this chapter, you should:
implications of information technologies for such historic Understand the broad issues
issues as working conditions, the right to privacy, and the pertaining to business ethics.
potential for fraud. The section concludes with a review of
Have a basic understanding of ethi-
the code of ethics requirements that SOX mandates.
cal issues related to the use of infor-
The second section is devoted to the subject of fraud and
mation technology.
its implications for accountants. Although the term fraud is
very familiar in today’s financial press, it is not always clear Be able to distinguish between man-
what constitutes fraud. In this section, we discuss the nature agement fraud and employee fraud.
and meaning of fraud, differentiate between employee fraud Be familiar with common types of
and management fraud, explain fraud-motivating forces, fraud schemes.
review some common fraud techniques, and outline the key Be familiar with the key features of
elements of the reform framework that SOX legislates to
SAS 78/COSO internal control
remedy these problems. framework.
The final section in the chapter examines the subject of
Understand the objectives and appli-
internal control. Both managers and accountants should be
cation of physical controls.
concerned about the adequacy of the organization’s internal
control structure as a means of deterring fraud and prevent-
ing errors. In this section, internal control issues are first
presented on a conceptual level. We then discuss internal
control within the context of the Statement on Auditing
Standards no. 78/ Committee of Sponsoring Organizations
of the Treadway Commission (SAS 78/COSO) framework
recommended for SOX compliance.