ethics different, question, versus, business, something

LiquidAssets10

In the ethics there was question on incentive to commit fraud, I picked weak internal control versus an argument with the internal auditor and bad business environment (or something similar). In the group we have all picked different answers. What did you pick?

nitoha

Bad business environment.

Weak internal controls are an OPPORTUNITY; an argument with an auditor is a CLUE; but only the bad business environment (of these choices) offers an INCENTIVE.

kd26gioi

I also picked weak internal control but I am thinking now it's external auditors that is related to pressure.

soddy1979

Incentive or pressure is the motive that exists to commit fraud. So 4 me, external auditors is an incentive to commit fraud.

Bulla564

I picked the external auditor too... although I am not sure. I looked it up and there is a chance it might be correct (stalla)..

disiz64

From Schweser :

SAS No. 99 identified the following four risk factors related to the incentives or pressures (motive) that may lead to fraudulent reporting:

Threats to financial stability or profitability as a result of economic, industry, or firm conditions :

- Excessive third party pressures on management.
- Personal net worth of management or the board of directors is threatened.
- Excessive pressure on management or operating personnel to meet internal financial targets, including sales and profitability.

So that could be the pressure of an external auditor...

rgonzalez

Wasn't this in the FRA section since this is talked about in that section? I hope it's not ethics. I chose weak internal controls but bad business environment seems like that is the Incentive portion, I kind of breezed through the question stupidly thinking it would just be weak internal controls.

lc26mizzou

Here are risk related to ATTITUDE and RATIONALIZATION to justify fraudulent behavior:

1) Inappropriate ethical standards or failure to effectively communicate or support a firm’s ethical standards.

2) Excessive participation by nonfinancial management in the selection of accounting standards and the determination of estimates.

3) Known history or allegations of violations of laws and regulations by management or board members.

4) Management’s obsession with maintaining or increasing the firm’s stock price or earnings trend.

5) Making commitments to third parties to achieve aggressive results.

6) Failing to correct known reportable conditions in a timely manner.

7) Inappropriately minimizing earnings for tax purposes.

8) Management’s continued use of materiality as a basis to justify inappropriate accounting.

9) A strained relationship between management and the current or previous auditor.

AND HERE ARE

the four risk factors related to the OPPORTUNITIES to commit fraud in financial reporting:

1) The nature of the firm’s industry or operations.
2) Ineffective management monitoring.
3) A complex or unstable organizational structure.
4) Deficient internal controls.

cyber21

Doji Wrote:
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>
> So that could be the pressure of an external
> auditor...

I seriously haven't heard any case that the external auditor can "pressure" the management to fudge the number and churn out better numbers - it should be the other way around. Saying that external auditors can pressure the management to conduct fraud is laughable. And you answered it your self with #9 (a strained relationship between management and the current or previous auditor) as a rationalization - not an incentive.

Weak internal control is obviously an opportunity, not an incentive.

Weak business environment is an incentive/pressure to mark-up sales and fudge the company's earnings. Weak business environment can be categorized as #1 (the nature of the firm's industry or operations)

kmf229

I am with you -- this should be part of FRA ...I don't think I saw this question in the ethics section