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CHAPTE R 3 Ethics, Fraud, and Internal Control 125

b. Annual reports filed with the SEC must include a statement by management asserting that it
is responsible for creating and maintaining adequate internal controls and asserting to the
effectiveness of those controls.
c. Officers must certify that the company’s accounts ‘‘fairly present’’ the firm’s financial condition
and results of operations.
d. Knowingly filing a false certification is a criminal offense.
5. Fraud and Criminal Penalties. SOX imposes a range of new criminal penalties for fraud and other
wrongful acts. In particular, the act creates new federal crimes relating to the destruction of docu-
ments or audit work papers, securities fraud, tampering with documents to be used in an official pro-
ceeding, and actions against whistle-blowers.
Corruption
Corruption involves an executive, manager, or employee of the organization in collusion with an out-
sider. The ACFE study identifies four principal types of corruption: bribery, illegal gratuities, conflicts of
interest, and economic extortion. Corruption accounts for about 10 percent of occupational fraud cases.

BRIBERY. Bribery involves giving, offering, soliciting, or receiving things of value to influence an of-
ficial in the performance of his or her lawful duties. Officials may be employed by government (or regula-
tory) agencies or by private organizations. Bribery defrauds the entity (business organization or
government agency) of the right to honest and loyal services from those employed by it. For example, the
manager of a meat-packing company offers a U.S. health inspector a cash payment. In return, the inspec-
tor suppresses his report of health violations discovered during a routine inspection of the meat-packing
facilities. In this situation, the victims are those who rely on the inspector’s honest reporting. The loss is
salary paid to the inspector for work not performed and any damages that result from failure to perform.

ILLEGAL GRATUITIES. An illegal gratuity involves giving, receiving, offering, or soliciting some-
thing of value because of an official act that has been taken. This is similar to a bribe, but the transaction
occurs after the fact. For example, the plant manager in a large corporation uses his influence to ensure
that a request for proposals is written in such a way that only one contractor will be able to submit a satis-
factory bid. As a result, the favored contractor’s proposal is accepted at a noncompetitive price. In return,
the contractor secretly makes a financial payment to the plant manager. The victims in this case are those
who expect a competitive procurement process. The loss is the excess costs the company incurs because
of the noncompetitive pricing of the construction.

CONFLICTS OF INTEREST. Every employer should expect that his or her employees will conduct
their duties in a way that serves the interests of the employer. A conflict of interest occurs when an em-
ployee acts on behalf of a third party during the discharge of his or her duties or has self-interest in the ac-
tivity being performed. When the employee’s conflict of interest is unknown to the employer and results
in financial loss, then fraud has occurred. The preceding examples of bribery and illegal gratuities also
constitute conflicts of interest. This type of fraud can exist, however, when bribery and illegal payments
are not present, but the employee has an interest in the outcome of the economic event. For example, a
purchasing agent for a building contractor is also part owner in a plumbing supply company. The agent
has sole discretion in selecting vendors for the plumbing supplies needed for buildings under contract.
The agent directs a disproportionate number of purchase orders to his company, which charges above-
market prices for its products. The agent’s financial interest in the supplier is unknown to his employer.

ECONOMIC EXTORTION. Economic extortion is the use (or threat) of force (including economic
sanctions) by an individual or organization to obtain something of value. The item of value could be a fi-
nancial or economic asset, information, or cooperation to obtain a favorable decision on some matter
under review. For example, a contract procurement agent for a state government threatens to blacklist a
highway contractor if he does not make a financial payment to the agent. If the contractor fails to cooper-
ate, the blacklisting will effectively eliminate him from consideration for future work. Faced with a threat
of economic loss, the contractor makes the payment.