What is the difference between fraud and an innocent error? (For more on differe

Question

What is the difference between fraud and an innocent error? (For more on different types of fraud, see http://www.lookstoogoodtobetrue.com/fraud.aspx and http://www.justice.gov/criminal/fraud/.)

How would you detect fraud, that is, what framework would you use, deontological or teleological or both, to detect fraud? (For good definitions and examples of these ethical frameworks, see http://webs.wofford.edu/kaycd/ethics/index.html and https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B-ry8jVluriHMTY0N2E2ZDgtOTdjOS00M2MyLTkyOTQtZTdkMzQzODQwYTYx&hl=en_US   

With all the advances in technology to detect and prevent fraud, why is fraud a growing problem?

If all acts of fraud or wrong doing can be detected and penalized one day, would business ethics still be important? Why or why not?

Explanation / Answer

What is the difference between fraud and an innocent error?

Whilst a focus on combating fraud is what the general body of taxpayers would of course support – that is, making sure part of our own contribution to the Exchequer is redistributed only to those in genuine need and not to those who try to ‘fiddle the system’ – LITRG’s experience is that many tax credits claimants who have made entirely innocent errors are caught up in HMRC’s anti-fraud strategies.

As well as recognizing that fraud and error are two very different beasts, LITRG is concerned that HMRC do not adequately break down and investigate the causes of error. One particular hole in the current analysis is recognition of official error – that which is caused directly by HMRC. For a number of years, HMRC have maintained that there is virtually no official error in the tax credits system. This is a claim which LITRG has long doubted, given that our past mystery shopping exercises into the quality of guidance given out by HMRC’s Tax Credits Helpline have produced worrying results.

Tax credits can be fiendishly complicated and LITRG has often found HMRC guidance on key areas of the system – both in print and on the HMRC website – to be lacking or misleading, even for what would seem to be very basic points such as who is and is not part of a couple (and therefore whether a joint or single claim should be made). Yet to date we have seen little evidence of HMRC acknowledging that this does in fact contribute to eventual claimant error.

Neither do HMRC recognize another element of error which LITRG has named ‘contributory error’. This is where, although not directly caused by a HMRC mistake or wrong advice, a lack of guidance or information from HMRC meant the claimant made the error.

The importance of distinguishing between fraud and error and breaking down error into different types cannot be overstated. If HMRC cannot identify where things are really going wrong, can we be sure that the figures quoted for error and fraud are accurate? And how can there be any certainty that HMRC’s strategies for tackling the problems are the right ones if they haven’t truly got to the root of those problems.

This would certainly go part of the way to explaining why HMRC have not been able to meet their error and fraud targets despite significantly increasing the amount of compliance checks they do.

How would you detect fraud, that is, what framework would you use, deontological or teleological or both, to detect fraud?

How would you detect fraud?

Stale Items in Reconciliations

In bank reconciliations, deposits or checks not included in the reconciliation could be indicative of theft. Missing deposits could mean the perpetrator absconded with the funds; missing checks could indicate one made out to a bogus payee.

Excessive Voids

Voided sales slips could mean that the sale was rung up, the payment diverted to the use of the perpetrator, and the sales slip subsequently voided to cover the theft.

Complaints

Frequently tips or complaints will be received which indicate that a fraudulent action is going on. Complaints have been known to be some of the best sources of fraud and should be taken seriously. Although all too often, the motives of the complainant may be suspect, the allegations usually have merit that warrant further investigation.

Unusual Behavior

The perpetrator will often display unusual behavior, that when taken as a whole is a strong indicator of fraud. The fraudster may not ever take a vacation or call in sick in fear of being caught. He or she may not assign out work even when overloaded. Other symptoms may be changes in behavior such as increased drinking, smoking, defensiveness, and unusual irritability and suspiciousness.

Common Names and Addresses for Refunds

Sales employees frequently make bogus refunds to customers for merchandise. The address shown for the refund is then made to the employee's address, or to the address of a friend or co-worker.

General Ledger Out-of-Balance

When funds, merchandise, or assets are stolen and not covered by a fictitious entry, the general ledger will be out of balance. An inventory of the merchandise or cash is needed to confirm the existence of the missing assets.

Excessive Credit Memos

Similar to excessive voids, this technique can be used to cover the theft of cash. A credit memo to a phony customer is written out, and the cash is taken to make total cash balance.

Missing Documents

Documents which are unable to be located can be a red flag for fraud. Although it is expected that some documents will be misplaced, the auditor should look for explanations as to why the documents are missing, and what steps were taken to locate the requested items. All too often, the auditors will select an alternate item or allow the audited to select an alternate without determining whether or not a problem exists.

Duplicate Payments

Duplicate payments are sometimes converted to the use of an employee. The employee may notice the duplicate payment, and then he or she may prepare a phony endorsement of the check.

Employee Expense Accounts

Employees frequently conceal fraud in their individual expense account reimbursements. These reimbursements should be scrutinized for reasonableness and trends, especially in the area of cash transactions on the expense account.

Ghost Employees

Ghost employee schemes are frequently uncovered when an auditor, fraud examiner, or other individual distributes paychecks to employees. Missing or otherwise unaccounted for employees could indicate the existence of a ghost employee scheme.

Increased Scrap

In the manufacturing process, an increased amount of scrap could indicate a scheme to steal and resell this material. Scrap is a favorite target of embezzlers because it is usually subject to less scrutiny than regular inventory.

Employee Overtime

Employees being paid for overtime hours not worked by altering time sheets before or after management approval.

Write-off of Accounts Receivable

Comparing the write-off of receivables by customers may lead to information indicating that the employee has absconded with customer payments.

Post Office Boxes as Shipping Addresses

In instances where merchandise is shipped to a post office box, this may indicate that an employee is shipping to a bogus purchaser.

Excess Purchases

Excess purchases can be used to cover fraud in two ways:

Framework

1-Identify the ethical issues, including the social work values and duties that conflict.

2-Identify the individuals, groups, and organizations likely to be affected by the ethical decision.

3-Tentatively identify all viable courses of action and the participants involved in each, along with the potential benefits and risk for each.

4-The regions in favor of and against each course of action, considering relevant

5-consult with colleagues and appropriate exports.

6-make the decision and documents the decision-making process.

7-monitor, evaluates, and documents the decision.

With all the advances in technology to detect and prevent fraud, why is fraud a growing problem?

As technology advances, so do schemes to commit fraud. Therefore, technology can not only be used to perpetrate fraud, but also to prevent and detect it. Using technology to implement real-time fraud prevention and detection programs will enable organizations to reduce the cost of fraud by lessening the time from which a fraud is committed to the time it is detected. Considering this, it is crucial that auditors stay ahead of fraudsters in their knowledge of technology and available tools. This GTAG focuses on IT related fraud risks and risk assessments and how the use of technology can help internal auditors and other key stakeholders within the organization address fraud and fraud risks.

Through a step-by-step process for auditing a fraud prevention program, an explanation of the various types of data analysis to use in detecting fraud, and a technology fraud risk assessment template, the GTAG aims to inform and provide guidance to chief audit executives and internal auditors on how to use technology to help prevent, detect, and respond to fraud. The GTAG also supplements The IIA’s practice guide, Internal Auditing and Fraud, and informs CAEs and internal auditors on how to use technology to help prevent, detect, and respond to fraud.

New and up-to-date technology is absolutely necessary to combat fraud more effectively and efficiently through data solutions, procedures, workflow and improved risk management. Regardless of the technological tool, collecting and analyzing data is of utmost importance. Proficient fraud detection depends upon the methodical ability to accumulate and quickly evaluate large amounts of data, while identifying activities and patterns symptomatic of potential fraud.

Identifying Anomalies

There are ways small business owners can combat the threat of fraud within their organization. Modern technology enables organizations to dig deeper into data to prevent and detect frauds. Analyzing the multitudes of data that an organization produces can be a daunting task. Gone are the days of the 13-column pads and simple Microsoft Excel spreadsheets; data is recorded and stored in accounting applications that permit the user to extract useful information for analysis or export to tools that can provide additional analysis.

Technological advancements in data analysis, such as link analysis, data visualization, predictive modeling, and other analytic testing, are useful tools to ferret out anomalies, patterns, and specific associations within thousands of transactions. One example of data analytics is data mining, which is used to classify and segment data by applying rules to view specific associations or find significant patterns, including those related to fraud. There are many technological tools available for every need and industry to best serve your specific analytical requirements and professional help when needed.

Assessing the risk of fraud is crucial for small businesses. It is important to have internal controls in place, risk assessment analyses performed to know where the weak links are, background checks on employees when hiring, restrictions on employee activities, and organization-wide awareness. Internal controls are policies and procedures to prevent unauthorized or imprudent use of organization funds, prevent fraud and loss by safeguarding assets and documents (i.e. segregation of duties) and promote efficiency in workflow.

What You Can and Should Do

Risk assessment is a process to determine potential hazards in the organization and what could happen if those hazards were to occur – similar to a hurricane emergency plan, but for the protection of an organization’s assets for the potential loss and probability of occurrence. Background checks are a good idea when hiring employees to verify they are not criminals and are eligible to work.

Putting restrictions on what your employees have access to will limit the potential of misappropriation of assets; if an employee has access to all aspects of an organization the potential for fraud is greatly increased. Most accounting software systems allow users to have specific access to only certain aspects of the system, such as accounts receivable. Actions that can raise awareness include implementation of a training program for employees to identify and understand fraud, execution of a code of ethics, and having a whistleblower policy or tip line.

The advances in technology and the resources available can assist small businesses in detection and prevention of fraud. Do not let your organization become a victim to an easily preventable fraud. This may seem an overwhelming task; consult a professional for guidance and put your mind at ease.

Why is fraud a growing problem?

If all acts of fraud or wrong doing can be detected and penalized one day, would business ethics still be important? Why or why not?

Investment fraud is not just a problem for the wealthy. More than half of all households in the US use a financial planner. And according to a study done by the University of Chicago and the University of Minnesota, 7 percent of financial advisors have been disciplined for a fraud dispute or some form of misconduct. Of the registered advisors who engaged in misconduct at least once, 38 percent are repeat offenders.

An arbitration panel appointed by the Financial Industry Regulatory Authority determined that McCoy and Forte were indeed guilty of elder exploitation, breach of fiduciary duty, constructive fraud, negligence and negligent supervision. They found for damages of more than $32.8 million and costs of more than $1.5 million, in addition to legal fees in the case, which have yet to be determined.

he surge in penalties is because of a number of factors, including the resolution of longstanding actions against drug makers and military contractors, as well as lawsuits brought against mortgage lenders after the financial crisis.

But it also reflects a renewed emphasis on corporate fraud, as the Justice Department devotes more resources to the issue and demands higher penalties from companies.

“We are putting more resources into these cases and better using the resources we have,” said Tony West, the acting associate attorney general.

The ballooning settlements are for civil charges of fraud against the government, criminal charges often related to the same conduct and, in the case of health care companies, recovery of money for states for Medicare fraud.

But while the collections are a boon to the government and taxpayers, they are resurrecting questions about the relative lack of charges against executives at the companies that are getting the stiffest penalties.

“A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed,” Sen. Jack Reed, D-R.I. and chairman of a subcommittee that oversees securities regulation, said at a recent hearing.

The most recent cases involve wrongdoing at some of the largest and most prominent companies. Last month, for example, GlaxoSmithKline said it would pay $3 billion to settle criminal and civil accusations of drug marketing and pricing fraud. In April, the military contractor ATK Launch Systems agreed to a $37 million settlement for selling “dangerous and defective” flares to the military.

In November, Merck settled charges of drug marketing and safety fraud for $950 million. A month earlier, Oracle agreed to pay $199.5 million after being accused of overbilling the government for software.

Individual difficulties

The difficulties of prosecuting executives were highlighted last week in New York, where a federal jury acquitted a Citigroup manager who had been involved in selling an exotic financial security involving residential mortgages. The manager, Brian Stoker, was charged with falsely describing Citigroup’s role in selecting the assets in the portfolio and failing to disclose that Citigroup was betting against the investment.

The jury cleared Stoker in part because the bank had given investors fine-print materials that apparently warned them of the investment’s risks. In a rare move, though, the jury sent a note to the Securities and Exchange Commission after reaching its decision, urging the agency not to give up. “This verdict should not deter the SEC from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” the jury wrote.

Lawyers say the government is more likely to go after companies because of their deep pockets. Civil cases against businesses can often produce substantial financial awards without the risk inherent in a trial. Civil charges also have a lower burden of proof than criminal charges. By one estimate, the government recoups $15 for every $1 spent on a civil case against a company.

But a top government enforcement official gave another reason, saying it was often too difficult and expensive to find evidence that clearly linked individual actions to corporate wrongdoing. Senior executives in particular are often insulated from day-to-day decisions, the official said, and have learned to steer clear of emails or other evidence that might prove that they knew the company was breaking the law. The official spoke on the condition of anonymity because more companies and executives were expected to be taken to court.

The Justice Department said its prosecutors assessed how strong the evidence was and the likelihood of a successful trial in deciding whether to charge individuals. Even if a company has settled a case, it said, an investigation of individual conduct can continue and might eventually result in charges.

“To the extent you do not see many individuals being held accountable, that’s not because of a lack of will on the part of the Department of Justice,” said West, the acting associate attorney general. “There is a lot of behavior that makes us angry but which is not necessarily illegal. If the evidence is there, we won’t hesitate to bring those cases.”

Dozens of individuals have been charged in financial cases. The SEC says it has charged 55 chief executives and other senior officers with violating securities law in relation to the financial crisis. In total, the commission has collected $2.2 billion in penalties, disgorgement and other monetary relief from cases related to the crisis.

In addition to being a violation of our terms of service and an unethical practice, it’s also a violation of the law in many jurisdictions. In July 2009 New York Attorney General Andrew Cuomo settled a case which resulted in a $300,000 penalty for a company posting fake consumer reviews. It is also illegal to post fake reviews in the United Kingdom, France, Italy, and Germany, Ireland, Sweden and the Netherlands (among other countries) pursuant to the EU Unfair Commercial Practices Directive, adopted by these countries.

The company to report a third quarter loss. At this early stage, putting a precise price tag on the ultimate cost of pollution penalties, criminal fines, private settlements, and the like is virtually impossible. I’ve heard an $18 billion liability figure reflects the maximum per-car clean-air penalty the Environmental Protection Agency could, in theory, assess. That’s a huge amount. However, it’s not enough, in my view, because this is a case where intent to deceive is easy to establish making it a slam dunk for fraud.

Notwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or novo contender, shall stop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730.

Business ethics important         

Ethics concern an individual’s moral judgments about right and wrong. Decisions taken within an organization may be made by individuals or groups, but whoever makes them will be influenced by the culture of the company. The decision to behave ethically is a moral one; employees must decide what they think is the right course of action. This may involve rejecting the route that would lead to the biggest short-term profit.

Knowing that the company they deal with has stated their morals and made a promise to work in an ethical and responsible manner allows investors’ peace of mind that their money is being used in a way that arranges with their own moral standing. When working for a company with strong business ethics, employees are comfortable in the knowledge that they are not by their own action allowing unethical practices to continue. Customers are at ease buying products or services from a company they know to source their materials and labor in an ethical and responsible way.

Long-term growth

Large profits are always attractive, potentially allowing faster achievement of strategic goals, a greater provision against risk and a greater sense of success and stability. However, there are countless examples in corporate history of dramatic boom and bust cycles (both on a micro, corporation level and macro-economic level). Now, more than ever, we need to re-evaluate our endless search for bigger and bigger profits with the bigger and bigger risks that entails. The financial crisis which began in 2008 is painful evidence of that. Whole countries have gone to the brink of bankruptcy as a result of an unwillingness or inability to plan long-term.

Cost and risk reduction

A precedent which argues the case made above is the Quality Management industry. In the West, this sprung up in the early 1980s, when products began to be inspected before leaving the factory in an attempt to reduce the amount of costly customer complaints. Now, most products come with at least a one-year warranty and in the case of some car manufacturers, up to five years. What started off as a self-interested need to reduce costs has led to more reliable products?

Anti-capitalist sentiment

The eye-watering profits of some of the world’s largest corporations attract a lot of negative sentiment from those outside the world of business and finance. While clearly a result of the scale of these organizations, there is always a suspicion that these profits have been achieved through not entirely ethical means - and in some cases downright unethical means, often resulting in major public failures, most recently in Japan, where the senior management of Nomura resigned en masse after an insider trading scandal.

Employee Ethics

When management is leading an organization in an ethical manner, employees follow in those footsteps. Employees make better decisions in less time with business ethics as a guiding principle; this increases productivity and overall employee morale. When employees complete work in a way that is based on honesty and integrity, the whole organization benefits. Employees who work for a corporation that demands a high standard of business ethics in all facets of operations are more likely to perform their job duties at a higher level and are also more inclined to stay loyal to that organization.

Business Ethics Benefits

The importance of business ethics reaches far beyond employee loyalty and morale or the strength of a management team bond. As with all business initiatives, the ethical operation of a company is directly related to profitability in both the short and long term. The reputation of a business from the surrounding community, other businesses and individual investors is paramount in determining whether a company is a worthwhile investment. If a company's reputation is less than perfect based on the perception that it does not operate ethically, investors are less inclined to buy stock or otherwise support its operations.

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