Page 148 - Accounting Information Systems

CHAPTE R 3 Ethics, Fraud, and Internal Control 119

FI G U R E
3-1 FRAUD TRIANGLE

Pressure Opportunity
Pressure Opportunity
No Fraud

Fraud
Ethics
Ethics

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?
A review of some of these questions shows that contemporary auditors may need to use professional
investigative agencies to run confidential background checks on key managers of existing and prospec-
tive client firms.

FINANCIAL LOSSES FROM FRAUD
A research study published by the Association of Certified Fraud Examiners (ACFE) in 2008 estimates
losses from fraud and abuse to be 7 percent of annual revenues. This translates to approximately $994 bil-
lion in fraud losses for 2008. The actual cost of fraud is, however, difficult to quantify for a number of
reasons: (1) not all fraud is detected; (2) of that detected, not all is reported; (3) in many fraud cases,
incomplete information is gathered; (4) information is not properly distributed to management or law
enforcement authorities; and (5) too often, business organizations decide to take no civil or criminal
action against the perpetrator(s) of fraud. In addition to the direct economic loss to the organization, indi-
rect costs including reduced productivity, the cost of legal action, increased unemployment, and business
disruption due to investigation of the fraud need to be considered.
Of the 959 occupational fraud cases examined in the ACFE study, the median loss from fraud was
$175,000, while 25 percent of the organizations experienced losses of $1 million or more. The distribu-
tion of dollar losses is presented in Table 3-2.