Chapter 3 Ethics, Fraud, and Internal Control Accounting Information Systems, 5 th edition James A. Hall COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license

Computer Ethics… concerns the social impact of computer technology (hardware, software, and telecommunications). What are the main computer ethics issues?  Privacy  Security—accuracy and confidentiality  Ownership of property  Equity in access  Environmental issues  Artificial intelligence  Unemployment and displacement  Misuse of computer See page

Companies must develop principles of control over financial reporting. continually verify that controls are working. The Sarbanes-Oxley Act- Laws Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB).

Measures vary with size and nature of the business. management’s control philosophy. Principles of Internal Control

ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task. SEGREGATON OF DUTIES Related duties, including physical custody and record keeping, should be assigned to different individuals. DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for.

Principles of Internal Control PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS Physical Mechanical and Electronic

Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION Records periodically verified by an employee who is independent. OTHER CONTROLS 1.Bond employees. 2.Rotate employees’ duties and require vacations.

Legal Definition of Fraud False representation - false statement or disclosure Material fact - a fact must be substantial in inducing someone to act Intent to deceive must exist The misrepresentation must have resulted in justifiable reliance upon information, which caused someone to act The misrepresentation must have caused injury or loss See page 118

Definition of Fraud In the Business Environment See page 118

Employee Fraud Committed by non-management personnel Usually consists of: an employee taking cash or other assets for personal gain by circumventing a company’s system of internal controls See page 118

Management Fraud Perpetrated at levels of management above the one to which internal control structure relates Frequently involves using financial statements to create an illusion that an entity is more healthy and prosperous than it actually is Involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions See page