Theory Fraud

1.      Fraud Triangle

a.      Pressure

pressure of someone to do fraud because of theirown personal interest or many probolem in the company that make a company should solve it in a short time.

Example: the need for financial, lifestyle, etc.

b.      Opportunity

Opportunities that are usually used to commit fraud. These opportunities can occur because of the weaknesses of internal control then it make an opportunity the employee to do fraud.

Opportunity is the easiest element to be minimized through the process, procedures, and control of the possibility of fraud is happening.

c.       Rationalization

is the important element in this context, because in this step, the doers seeking a truth based on what have they done.

Example: action for the happiness of the family, the offender feel entitled to get everything better, etc.

2.      Fraud Diamond

This theory was introduced by Wolfe and Hermanson in 2004. This theory is the development of the theory of fraud triangle. In this theory, a new capability to be a factor that complements the factors in the fraud triangle (pressure, opportunity, rationalization). Fraud will not occur if there is no person who has the ability to do so. Means the ability of an individual nature that sparked the creation of opportunities that can be exploited. The main access is the opportunity to commit fraud. Pressure and rationalization is a contributing factor in doing fraud, required a good ability to analyze the opportunity and determine the tactics of fraud in order to obtain the maximum benefit.

1.      Pressure

·         Direct: real conditions currently experienced by actors

·         Indirect: opinions of actors who can support himself to commit fraud.

·         4 common reasons that cause stress:

ü  financial stability

ü  external pressure

ü  personal financial need

ü  financial targets

2.      Opportunity

·         The last thing to note is that the internal control.

·         Financial statement fraud can occur in several conditions:

ü  The nature of the industry

ü  Ineffective monitoring

ü  Organizational structure

3.      Rationalization

The character of the offender will determine the justification do.

4.      Capability

The components that can trigger the fraud:

o   position / function of a person in the company,

o   intelligence (brain)

o   level of confidence / ego (confident / ego)

o   The ability of coercion (coercion skills)

o   lie effective (effective lying), and

o   apstres restricted immunity (immunity to stress).

3.      Fraud Pentangon

This theory was put forward by Crowe Howarth in 2011. This theory is also the development of the theory of fraud triangle, with the added factor of competence and arrogance. Competence in this theory has the same meaning with the capability that a person's ability to find opportunities that exist, and determine the tactics in doing fraud in order to get the maximum benefit. While arrogance means according to Crowe is an attitude of superiority over the rights owned and feel that the company's internal control or policy does not apply to him.

This theory basically also from fraud triangle extension with addition in:

·         Arrogance: an attitude of superiority over who owned rights and feel that company’s internal control or policies isnot effected to him

·         Competence: ability of employees to ignore internal controls, develop a strategy of concealment, and control the social situation fro personal gain

4.      Gone Theory

a.      Greed: employee want to gain much money. This is related with the moral of someone

b.      Opportunity: opportunity to do fraud is big because you have inteliigance, position and so on

c.       Need: this factor will trigger a fraud because they have an urgent need, then the individu will take an easy way to solve it

d.      Exposure: when we expose 1 case of fraud in the company, the possibility to do the fraud again is high because of the weak of law enforcement dont make the doers afraid to do so.

Greed and Need are factors associated with fraud perpetrators individually. Which means dealing with the moral (greed) and motivation (need) the relationship between the mind, the pressure, the feeling of a person against the assets owned by the company. The pressure obtained in the working environment can also lead a person to commit fraud.

Opportunity and Exposure are factors related to the organization. Opportunity is highly dependent on the position / position of the perpetrator of the crime object. Opportunity (large and small) had appeared in every position. Example = management more have a great opportunity to commit fraud.

Exposure of fraud can not guarantee that other crimes or similar will happen again, either by the same or different actors. To provide lessons for the offender, then it is better if it is made of sanctions that can create a deterrent to commit fraud perpetrators.

5.      Agency Theory

Explain the relationship between cooperaation and the parties as principal shareholders and management as agent.

The principal wants the high return while the agent have theirown interest to gain higher compensation based on what have he done. This condition shows to you, if there is a conflict between principal and agent and usually we called conflict of interest

6.      Fraud Scale

This theory is continuing the fraud triangle. This theory to measure the possibility the fraud will occur with knowing the evaluation of pressure, opportunity, and personal integrity. If the high pressure, high opportunity and low integrity then the possibility of fraud is very high. Conversely, if the opportunity and the low pressure and high self integrity then the likelihood of fraud is low.

7.      Fraud Tree

This theory generally gives an overview of the people who commit fraud in the employment relationship. This theory is classified:

1.      Corruption

Almost all types of fraud is difficult to detect, because most parties to equally benefit. In doing this type of fraud, the perpetrator has been misuse of authority, responsibility, bribery.

2.      Asset Misappropriation

Abuse of fixed assets or assets owned by the company for its own sake. Different premises corruption, fraud of this kind is easy to detect because its value can be measured.

3.      Fraudulent Statement

Fraud committed by the company to cover the actual financial condition happens to manipulate financial statements to gain an advantage.

8.      Fraud White Collar Crime

White collar crime is not ordinary crime. Because it make a worsening condition and this crime do by the people that have position. Usually they do manipulate the data, or avoidance. Then they bring harm to the society welfare for example or the employee or goodwill of the company itself.

What is a 'Common Size Financial Statement'

It displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company. The values on the common size statement are expressed as percentages of a statement component, such as revenue

Why commonsize matter?

Common-size income statements facilitate easy comparison. Not only can readers easily see how much of every dollar goes to rent, for example, they can compare that percentage to other companies or other periods in time. This allows analysts to compare companies of different sizes and not be "blinded" by the size differences inherent in the raw data.


sources:
http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/common-size-income-statement-5237
http://www.investopedia.com/terms/c/commonsizefinancialstatement.asp

8 Component of Framework COSO

1.     Internal Environment

Is really important in the organization because it have a phylosophy and style of operational, structure, policy and procedure, also awareness to control the internal of the company

2.     Objective Settings

ERM make sure, that activity done by management is related with the purpose and this purpose set based on the entity mission with the risk appetite and it should be consisten

3.     Event Identification

What happened in internal and external that will be influencing the company’s goal, it should be identify then differenciate it into risk and opportunity

4.     Risk Assessment

Risk should be analyse with calculating the possibility of likehood and the impact side, to determine the management risk

5.     Risk Response

Management choose the risk response, avoid, receive, deduct, and developed the activities, so the risk that will be happen still being tolerate and risk appetite

6.     Control Activities

Policy until procedure was set and implemented to help and make sure risk if risk response is effective

7.     Information and Communication

Identify the relevant information, then communicate it in the time that possible if each people do theirown responsibility 

8.     Monitoring

Monitoring should be continously by the management, then also evaluate it 

Audit Report from Adidas

In our group discussion, We believe the internal control in adidas already work well, why?

Because it proves that the financial statement from adidas is true and fair view of the net asset, financial position, and profit and loss that accordance with the requirement from IDW (Institute of Public Auditors in Germany). Moreover, the report is consistent with the consolidated, financial statement and as a whole provide the suitable view of Group’s position and presents the opportunities and risk in the future.

In the internal control of this company also effective, proven by the evidence in supporting the consolidation financial statement and examine the test basis of audit framework. Also we evaluate the overall presentation of the consolidated financial statement and group management report.

 Auditing Internal Control 

What is internal control?

internal control is kind of system that used for supporting the decision making and the agenda in the organization.here, control have different types, we can see in the organization for example a rules, guidelines, also an action to support the activity in there. this internal control will help the management to achieve the efficient and effective. so the management should consider and compare the relation between cost and benefit.

Here, auditor have a role in detecting and preventing fraud and protecting the organization's resources, both physical and intangible assets. Then all employees produce information used in the internal control system or take other actions needed to affect control. Also, all personnel should be responsible for communicating upward problems in operations, non-compliance with the code of conduct, or other policy violations or illegal actions

Nowadays, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) developed a model for evaluating internal controls. This model has been adopted as the generally accepted framework for internal control and is widely recognized as the definitive standard against which organizations measure the effectiveness of their systems of internal control. COSO defines internal control as having five components:

1.    Control Environmentà sets the tone for the organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control.

2.    Risk Assessmentà the identification and analysis of relevant risks to the achievement of objectives, forming a basis for how the risks should be managed

3.    Information and Communicationà systems or processes that support the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities

4.    Control Activitiesà the policies and procedures that help ensure management directives are carried out.

5.    Monitoringà processes used to assess the quality of internal control performance over time.

 Here, the function of internal control is:

1.     For the effectiveness and efficient of organization’s operation

2.     To recorded the accurate transaction

3.     To show if the financial repoting is reliable

4.     To know if the risk management systems are effective

5.     To complies with laws and regulations, internal policies, also internal procedures