Professional Documents
Culture Documents
SOX - Fraud Triangle
SOX - Fraud Triangle
- Public outcry surrounding ethical misconduct and fraudulent acts by executives of Enron, Global Crossing, Tyco,
Adelphia, WorldCom
- Provisions designed to deal with specific problems relating to capital markets, corporate governance, and the auditing
profession
- requires public companies to disclose to the SEC whether they have adopted a code of ethics that applies to the
organization’s CEO, CFO, controller, or persons performing similar functions
- If the company has not adopted such a code, it must explain why
Code of Ethics
1. Conflicts of Interest
- outline procedures for dealing with actual or apparent conflicts of interest between personal and professional
relationships
- Focus on dealing with conflicts of interest, not prohibiting them.
- Whereas avoidance is the best policy, sometimes conflicts are unavoidable.
- Provide decision models, and participate in training programs that explore conflict of interest issues
Note:
- Overly complex and misleading accounting techniques were used to camouflage questionable activities that lie at the
heart of many recent financial scandals.
- The objective of this rule is to ensure that future disclosures are candid, open, truthful, and void of such deceptions.
3. Legal Compliance
- require employees to follow applicable governmental laws, rules, and regulations
- doing the right thing requires sensitivity to laws, rules, regulations, and societal expectations
- provide employees with training and guidance
5. Accountability.
- must take appropriate action when code violations occur
- implementing various disciplinary measures
Notes:
- intentional deception, misappropriation of a company’s assets, or manipulation of its financial data to the advantage of
the perpetrator
I. Employee Fraud
- more insidious than employee fraud because it often escapes detection until the organization has suffered
irreparable damage or loss
Top management fraud
Performance fraud
- involves deceptive practices to inflate earnings or to forestall the recognition of either insolvency or a
decline in earnings
Example: fraudulent activities to drive up the market price of the company’s stock
- to meet investor expectations or
- to take advantage of stock options that have been loaded into the manager’s compensation package
Note: management can often perpetrate irregularities by overriding an otherwise effective internal control structure
that would prevent similar irregularities by lower-level employees.
1. Situational Pressure
- includes personal or job-related stresses that could coerce an individual to act dishonestly
2. Opportunity
- involves direct access to assets and/or access to information that controls assets
3. Ethics
- pertains to one’s character and degree of moral opposition to acts of dishonesty
- auditor’s evaluation of fraud is enhanced when the fraud triangle factors are considered