Cascarino - Corporate fraud and internal control: a framework for prevention

Copyright 2013 by Richard E. Cascarino. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data

Cascarino, Richard.
Corporate fraud and internal control : a framework for prevention/Richard E. Cascarino.
p. cm.(The Wiley corporate F&A series)
Includes bibliographical references and index.
ISBN 978-1-118-30156-2 (cloth); ISBN 978-1-118-41980-9 (ebk);
ISBN 978-1-118-42172-7 (ebk);ISBN (eMobi) 978-1-118-43402-4 (ebk)
1. FraudPrevention. 2. Auditing, Internal. I. Title.
HV6691.C38 2013
658.473dc23
2012022692

Preface

DATING BACK TO 3500 BC, records of various civilizations indicate by patterns of checks and ticks that record verification took place. In ancient Egyptian, Greek, Chinese, and Roman civilizations, rulers sought to confirm official records by comparing two sets of such records. The lowest-ranking magistrate in ancient Rome was a quaestor , or investigator. This elected official traditionally worked within the treasury to supervise the financial affairs of the empire.

Accuracy of records was tested, typically by two officials working together. One official read from the one record sheet and the other checked against the other record sheet. The term auditor is derived from the Latin auditus , meaning a hearing.

With the fall of the Roman Empire, auditing and internal control disappeared in Europe. It was not until the Middle Ages that the growth of centralized control once again demanded proof of the adequacy and correctness of record keeping and the prevention of the defrauding of the king.

In the Orient, however, audit can trace its ancestry back to the Western Zhou Dynasty some 3000 years ago, in which it continued in various forms until the Song Dynasty in 992AD when a royal audit court was established. Audit in China took the form of Inspectorates until the Revolution of 1911 when an Audit Court was established, a Chamber of Audit set up, and Audit Law was issued. Auditing continued until the founding of the Peoples Republic of China in 1949 when audit was conducted by internal supervision within the Departments of Public Finance.

In 1982, the Constitution of the Peoples Republic of China was promulgated resulting in the 1983 formation of the National Audit Office of the Peoples Republic of China.

Today, capital markets, which have been rocked by recent corporate scandals and frauds on an international scale, are demanding that financial organizations, publicly listed companies, multinational companies, and the public sector implement sound corporate governance. Large-scale fraud has severely eroded investor confidence; in many cases, investors are simply waiting for the next large fraud to be announced.

In the past, many organizations, companies, and government bodies have operated in a purely reactive mode to the problem of fraud. That is, only after a fraud had taken place were decisions made regarding how to combat it. With the increasing impact of corporate governance legislation and the changes in society of recent years, the need to fight fraud in a proactive manner has become paramount.

Companies now must accept their corporate responsibility to protect assets and employees from the temptations and impacts of fraud.

At the individual level, fraud is impacting every citizen, either directly through being defrauded or indirectly through the impact of higher taxation or shopping bills. Individual fraud is also creating an atmosphere in which individuals feel cheated and defrauded, and that they have the right to retaliate by cheating and defrauding others.

Police services are under increasing pressure to combat all types of crime, particularly violent crime. As a result, often white-collar crime, corruption, and fraud are treated as the poor relation at the low end of the resources chain and receive priority only in egregious cases when they become front-page news in the newspapers.

As a result, organizations have no choice but to develop plans and strategies to deter, detect, and, where required, prove fraud utilizing their own in-house control mechanisms and systems of internal control.

This book addresses the roles of the board and its management and audit committees in implementing a system of internal controls that adequately defends against fraudulent and corrupt practices both within the organization and against it. The book itself consists of 12 chapters.

Chapter 1, Nature of Fraud, introduces fraud and irregularities, covering the elements of the crimes of theft and fraud as well as the nature and cost of fraud. It includes the basics of fraud and financial irregularities and defines fraud and prejudice resulting from fraud. It also presents general safeguards to make fraud in commerce more difficult, and ways to seek redress from fraud perpetrators.

Chapter 2, Elements of the Crimes of Theft and Fraud, explores how fraud and conventional theft differ legally. It also helps identify the principal control elements required to reduce the likelihood of a fraud occurring and its impact, should it occur, and to increase the probability of early detection in the event of an occurrence.

Chapter 3, Frauds Against the Individual, identifies specific types of fraud against the individual that, left unchecked, may increase the probability of a loyal employee turning against the employer in desperation. It also identifies corporate responsibility in educating employees against potential fraud attacks against them personally.