Question

Discussion topic 1: Corruption Fraud Schemes

According to the ACFE, corruption fraud schemes fall into four basic categories:

1. Bribery

2. Illegal gratuities

3. Economic extortion

4. Conflicts of interest

A corruption fraud scheme can distort a company’s financial statements, or cause a company’s economic losses. As an auditor, you should be aware of red flags that can indicate some type of corruption, such as related party transactions. A major accounting scandal at Enron in the early 2000’s was the result of using related parties to hide a huge amount of debt.

Provide an example of a fraud scheme for each category and list at least three red flags that might indicate that a corruption scheme is occurring.

Answer 1

Bribery

It involves offering, giving, receiving, or soliciting anything of value to influence an official act or business decision.

• Official bribery

• Commercial bribery

Example: An outside government official visits the grounds as a component of introductory dialogs to subsidize another University office. The University pays for convenience, supper at a decent lodging, exchanges to and from the University, and presents the contributor with an encircled photo of the University and University-marked sleeve buttons. This would be considered as basic practice and inside worthy cutoff points. In any case, paying for flights and giving individual blessings of critical esteem would not, and could be deciphered as a fix.

Red flags:

• Unusual amount of interest in contract
• Accepts items not favorable to the organization
• Acts outside normal scope of duties

Illegal gratuties: A gift given by a party who profited from a choice to the individual who settled on the choice. Like reward, however typically happens after choice Frequently transform into gift plans May be an approach to decide receptiveness to a pay off

Example: one boxer mightoffer another a payoff to "throw" (deliberately lose) an important fight.

Red flags:

• Cash
• Checks/financial instruments
• Hidden interests
• Loans

Economic Extortion: Economic extortion is available when a representative or official, through the unjust utilization of genuine or compromised power or dread, requests cash or some other thought to settle on a specific business choice.

Example:

Employee X demands payment from vendor Y for decisions made in the vendor's favor.

Red flags:

• Employee or official unusual behavior towards contractors.
• Untimely meetings between vendor and official
• Frequent conversation between vendor and officialover contract

Conflicts of interest: Official or representative has an undisclosed economic or vested interest in a transaction that adversely affects his professional duties

Example: Board member has a relationship with an employee

Red flags:

• Deals not done at arm's length price
• Board member favoring a particular vendor
• Official trying to tender contract to a particular vendor