A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

Three factors that contribute to fraud:

• Opportunity
• Financial Pressure
• Rationalization

Companies must:

• develop principles of control over financial reporting
• continually varify that controls are working

Independant auditors must attest to the level of internal control

SOX created the Public Company Accounting Oversight Board

Methods and Measures adopted to:

• Safeguard assets
• Enhance accuracy and reliability of accounting records
• Increase efficiency of operations
• Ensure compliance with laws and regulations

Internal Control

Five Primary Components

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information Communication
5. Monitoring

Establish Responsibility

• Control is most effective when only one person is responsible for a given task

Segregation of Duties

• Related duties should be assigned to different individuals

Document Procedures

• Companies should use prenumbered documents and all documents should be accounted for

Physical Controls

• Safes, vaults, and safety deposit boxes for cash and business papers
• locked warehouses and storage cabinets for inventories and records
• Computer facilities with pass key access or fingerprint or eyeball scans
• Television monitors and garment sensors to deter theft
• Time clocks for recording time worked
• Alarms to prevent break-ins

Principles of Internal Control Activities

Independent Internal Verification

1. Records periodically verified by an employee who is independent
2. Discrepancies reported to management

Principles of Internal Control Activities

Human Resource Controls

1. Bond employees
2. Rotate employees duties and require vacations
3. conduct background checks

• Costs should not exceed benefit
• Human element
• Size of business