Metrobank loses over

P14B in market value amid

fraud issue

BANK COMMITMENT. George Ty (left) of Metrobank assures no customer has been affected in this
incident. Photo by Alecs Ongcal/Rappler

MANILA, Philippines – Metropolitan Bank & Trust Company (Metrobank), lender owned
by business tycoon George Ty, lost P14.63 billion in market value in a day, as the
Bangko Sentral ng Pilipinas (BSP) launched its investigation into the alleged P900-
million fraud case involving a senior bank official.

Shares in Metrobank plunged by 5.03% to P86.90 each on Friday, July 21, from P91.50
each on Thursday. This happened the same day the National Bureau of Investigation
(NBI) presented Maria Victoria Lopez, vice president of the Corporate Service Unit at
Metrobank’s Makati head office, as the primary suspect in the case.
"The stock of Metrobank was the biggest underperformer as they were hard hit by the
news, as the BSP is to probe the bank on how a single officer circumvented internal
controls, which led to the alleged loss of at least P900 million in loans," Marita
Limlingan, president of Regina Capital Development Corporation, said in a report.

NBI spokesperson Ferdinand Lavin said on Friday that the Metrobank senior official was
arrested while trying to move the stolen money to an unspecified personal account. The
money was taken from the credit facility of one of the Metrobank's biggest corporate
clients.

Lavin said the 54-year-old Lopez, who was trusted by big corporate clients, had served
the bank for over 3 decades and received a monthly salary of at least P250,000.

This is the latest controversy to hit the Philippine banking industry in the past few
months. In 2016, Rizal Commercial Banking Corporation (RCBC) was slapped a record
P1-billion fine for involvement in $81-million Bangladesh Bank heist.

Last month, numerous clients of Ayala-led Bank of the Philippine Islands

(BPI) reported unauthorized transactions in their accounts for two days. The bank
attributed the fiasco to an "internal data processing error."

Weeks after the BPI glitch, Banco de Oro (BDO) became the target of multiple ATM-
skimming attacks, while Union Bank probes a suspected P17-million fraud incident
involving one of its employees.

Resilient

Despite these mishaps, BSP Governor Nestor Espenilla Jr and the Bankers Association
of the Philippines said on Friday they are confident in the banking sector's resilience.
(READ: Banking sector backs Metrobank to pull through P900 M fraud case)

"We're looking into it. We have to look into the circumstances and the facts around it.
That's really all that the BSP can say for now," Espenilla said.

In a separate disclosure to the local bourse, Metrobank said the bank will continue with
its daily operations.

"The bank is reinforcing its commitment to the highest standards of integrity and
upholds the protection of its customers as its main priority. No customer has been
affected in this incident," Metrobank said in a statement.
Metrobank is the country's second largest bank in terms of total assets with P1.9 trillion
as of first quarter of 2017. It booked a net income of P18.09 billion last year as well as
profit of P6.21 billion for the start of this year.

The bank's parent firm GT Capital also saw it stock fall by 2.85% to P1,195 each. –
Rappler.com

2.

The suspect, Maria Victoria Lopez, was arrested on July 18 after she allegedly attempted to shift
P2.25 million in interest from unauthorized loans, officials said.
Lopez was presented to reporters wearing an orange detainee's shirt and with her face wrapped
with a shawl.
The interest payment was for one of 2 borrowings from a P25-billion pool. The bank's client,
which was authorized to borrow from the fund, denied executing the 2 loans worth P900 million
and P850 million, officials said.
The NBI did not name Metrobank, the country's largest lender, which on Friday confirmed
the arrest of an individual for alleged fraud. The bank's admission came after the Philippine
Daily Inquirer reported the case.
"The biggest loss on this is the integrity of the banking system and the internal control system of
the bank," said NBI spokesman Ferdinand Lavin, adding authorities were "doing everything" to
safeguard the industry.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi Fonacier meanwhile assured that
the incident is an "isolated case" and that the banking system is "well-capitalized."
"Metrobank is a big bank. It can handle the situation," Fonacier told reporters.
Lopez had worked for the bank for 3 decades and was earning around P250,000 per month as
head of corporate services. She could be tried for qualified theft, falsification of documents and
violation of banking laws, officials said.
"She's not cooperating. She's not talking," Lavin said, adding an investigation was underway to
determine if other people were involved.
Lopez allegedly directed the issuance of a manager's check to an individual, a "red flag" because
such checks are issued only to corporate clients, said Norman Aguirre, the NBI agent on case.
"There were irregularities in the documents itself, indicating falsification such as different fonts,
dubious signatures," Aguirre said.
"The bank conducted an internal inquiry, confirmed that the client has a loan with the bank or if
they have draw-downs. Much to their dismay, they discovered such loans were unknown to the
client," he said.
BSP Governor Nestor Espenilla said regulators were investigating the fraud, the latest in a wave
of controversies to hit the banking system since last year.
Espenilla said he expected the lender, controlled by taipan George Ty, to be "resilient."
In February 2016, unidentified hackers shifted $81 million from Bangladesh's foreign reserves to
an RCBC branch in Makati City.
The BSP fined the Yuchengco-owned lender a record P1 billion over the incident, which
exposed the vulnerabilities of the financial system to money laundering.
 Legislators also recently investigated local banks over glitches.
Last month, Bank of the Philippine Islands' digital channels were paralyzed for 2 days due to
what it said was an "internal error."
The country's largest lender, BDO Unibank, later admitted that 7 of its ATMs were
"compromised" in a "skimming" attack that allowed unauthorized transactions.
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Read More: Metrobank banks fraud National Bureau of Investigation

FROM THE WEB

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3.
A senior executive has been arrested and charged for defrauding Metropolitan Bank
and Trust Co. (Metrobank) in a scandal that sent the lender’s shares tumbling on
Friday.
National Bureau of Investigation officials presented Maria Victoria Lopez, a vice
president at the corporate services unit of Metrobank’s head office in Makati City, to
reporters on Friday afternoon, hours after the banks and financial intermediaries
committee of the House of Representatives announced an inquiry into the fraud that
hit the Philippines’ second-largest bank.
NBI officials said Lopez, who appeared at the news conference with her face covered
with a shawl, was suspected of stealing P1.75 billion in loans from Metrobank.
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The Philippine Daily Inquirer was the first to report on the fraud, stating in its Friday
edition that Metrobank, owned and controlled by George Ty, may have lost as much
as P2.5 billion after the suspect allegedly funneled disbursed loans into fictitious
accounts created in the name of one of the bank’s biggest corporate clients, Universal
Robina Corp. (URC).
A trusted employee of the bank for 30 years, earning a monthly salary of P250,000,
Lopez was arrested on Monday while trying to move the stolen money to an
unspecified personal account, NBI spokesperson Ferdinand Lavin said.

‘Biggest loser’
“The biggest loser of this is the integrity of the banking system,” Lavin said.
The NBI filed charges of theft, violation of the banking law and falsification of
documents against Lopez at the Makati City Prosecutor’s Office on Tuesday.
Metrobank did not confirm how much was stolen or detail the timeframe of the fraud,
but stressed that it did not affect its customers.
“In the context of the bank’s P1.9-trillion financial resources, rest assured that we
continue to operate business as usual for the bank and our customers,” the listed
lender said in a statement.
ADVERTISEMENT

Metrobank is investigating whether there were other people involved in the fraud,
Lavin said.
URC, a large food processing company, said on Friday the fraudulent loans had been
drawn from its credit facility with Metrobank.
“We thank Metrobank president Fabian Dee for giving us a heads-up advice that URC
will not be financially impacted in any way by this incident,” the company said in a
statement.
Investors sell their shares
The fraud, however, wiped out nearly P15.2 billion off the paper value of Metrobank
on Friday as investors sold down the stock.
Metrobank shares closed 5.03 percent lower on Friday to P86.90.
The lender’s parent company, GT Capital Holdings, fell 2.85 percent to P1,195.
URC shares closed 0.62 percent down to P161 Friday.
But Bangko Sentral ng Pilipinas (BSP) Gov. Nestor Espenilla told reporters he had no
doubt Metrobank would be able to absorb the blow.
“Banks have controls so that these kinds of things can be mitigated and withstood,”
Espenilla said.
But he added: “We have to look into the adequacy of those controls if in fact a
significant crime happened.”
House inquiry
Eastern Samar Rep. Ben Evardone, chair of the House banks and financial
intermediaries committee, said his panel would inquire into the fraud.
“The discovery of the ‘fake accounts’ in Metrobank is very alarming,” Evardone said
in a statement.
“The adverse effects of the existence of ‘fake bank accounts’ is more damaging than
‘fake news’ because this [involves] actual money of depositors,” he said.
Evardone did not say when the inquiry would be held, but said BSP officials would be
invited to the hearings.
Metrobank officials will also be questioned to determine how the fraud happened, he
said.
“We will look into their protocols and procedures [to see] why fake accounts were
allowed to be opened,” he added.
The Inquirer reported on Friday that the money in the fake accounts was siphoned off
electronically into other accounts in other banks and into the pocket of Lopez.
Initial investigation showed that Lopez made two separate loans—P900 and P850
million—from URC’s P25-billion credit line.
Promissory note
Lawyer Norman Anire of the NBI told the news conference that Metrobank
discovered the fraud after noticing that one promissory note intended for the payment
of interests was irregular.
“Based on the presentation of the bank … their employees discovered the falsified
letter directing the bank to issue a manager’s check in favor of an individual payee.
That itself is a red flag,” Anire said.
He explained that since the owner of the credit line was a corporate account, the bank
“cannot issue a manager’s check to an individual payee.”
Anire said bank officials decided to verify the loans with URC and learned that the
company had made no such loans.
The NBI officials could not provide more details, as they did not have full information
from Metrobank.
It seems that because the credit line used to facilitate the theft belonged to a valued
client, bank officials did not question the transactions.
To cover her tracks, Lopez would pay the interest on the loans and she was supposed
to pay P2.250 million in interest, the funds for which she debited from URC’s
account, on the day she was arrested.
‘I was surprised’
Lopez, who is a year short of retirement from the bank, lives in a posh village in
Quezon City.
She owns nine cars, the “cheapest” of which, according to NBI officials, is a Range
Rover.
The officials did not say how many children Lopez has, but some of them, according
to them, are in school in the United States.
Lopez talked to the Inquirer briefly, but kept the shawl that covered her face.
“No,” she said when asked whether the money really went to her personal accounts.
When asked whether she worked alone, Lopez fell silent.
She said she was in her office when NBI agents arrested her in an entrapment
operation on Monday.
“I was surprised,” she said. —WITH REPORTS FROM DJ YAP AND AFP

Read more: http://business.inquirer.net/233691/exec-metrobank-fraud-

charged#ixzz4ooMrp4KJ
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Bank executive arrested
over P900-M Metrobank
fraud
Friday, July 21, 2017

By

KEITH A. CALAYAG

A SENIOR official of the Metropolitan Bank and Trust Co. (Metrobank) suspected of
orchestrating an elaborate fraud scheme to embezzle millions of pesos from the second
largest bank in the country was arrested by the National Bureau of Investigation (NBI) last
July 17.

In a statement released by Metrobank on Friday, July 21, it said that the authorities have
already arrested last Monday the alleged mastermind of the P900-million internal fraud.

NBI sources identified the suspect as Maria Victoria Lopez, vice president of the corporate
services unit in Metrobank's Makati City head office.

The Metrobank assured the public that none of its clients have been affected by the incident
that may have lost as much as P2.5 billion.

"The bank is reinforcing its commitments to the highest standard of integrity and upholds
the protection of its customers as its main priority," it said.

"No customer has been affected by this incident. In the context of the bank's P1.9 trillion
financial resources rest assured that we continue to operate business as usual for the bank
and our customers," it added.

The management also said it cannot comment further as the case has already been filed
against Lopez.

Lopez, 54, now detained at the NBI headquarters in Manila, was accused of funneling loans
into fake accounts in the name of a legitimate client, Universal Robina Corporation.

The funds allegedly went to other accounts and financial institutions controlled by Lopez.

Banko Sentral ng Pilipinas Governor Nestor Espenilla in a statement said they will look into
the issue, particularly on how a sole official was able to rob such a huge amount from the
bank.
Espenilla also said they will look into the adequacy of the controls being used by banks in
the country to prevent electronic fraud.

"Our banks have their natural internal controls precisely to prevent these things from
happening," he said.

"So we will have to look into the adequacy of those controls if in fact, a significant crime
happened within the bank," he added.

Espenilla said "no system is perfect" but believes that Metrobank is resilient to such
issues. (SunStar Philippines)

Overview of Financial Fraud:

As technology increases and the world becomes more reliant on financial

data for global interaction then there is a greater risk for financial fraud to
be present. The 21st century has seen the collapse of many large companies
such as Enron, and World Com, due to errors in financial reporting and
committing overt acts of financial fraud. In 2002, the Sarbanes-Oxley Act
was enacted as a direct response to financial fraud. The Sarbanes- Oxley act
is also known as the SOX act or the Public Company Accounting Reform and
Investor Protection Act. This bill is a direct response to the accounting
scandals of the publicly traded companies Enron and WorldCom which were
facilitated by the once prestigious accounting firm known as Arthur
Anderson. This article is meant to explain causes of fraud, the methods used
to commit fraud as well as the consequences that come with committing
financial statement fraud.

Learning Objectives

 You should be understand the elements that it takes for a fraud to be committed.

 You should be understand and distinguish the different methods for creating fraudulent
 financial statements.

 You should be to understand the three necessary components that allow the perpetrator(s)

the opportunity and reasoning to commit financial fraud.

 You should be familiar with the classifications of fraud and the different roles that business

owners, employees, investors, and auditors play in each type of fraud.

Fraud can encompass various different types of acts but is generally defined
as the intentional misleading of a person or deception of a person in order to
cause someone to lose property, money, or some other right. This therefore
implies that fraud must be intentional. So theoretically someone can commit
an error on the financial statements without it being considered fraud or
rather without trying to deceive anyone for personal financial gain.

To Identify Fraud you must have a number of items that are identified first.
These items are listed below:

1.) There must be a victim.

2.) There must be a detailed account of the deceptive or fraudulent

act.

3.) There must be able a mechanism to identify and quantify the

victim's loss.

4.) There must be a person suspected of committing the crime.

 5.) There must be evidence that the suspect acted with the intent to
commit the crime.

6.) There must be evidence that the suspect profited in some way
by the act(s) that were committed.

It is important to note that the indicators and the symptoms of fraud can be
separated and differentiated from any errors that might occur as a result of
account mistakes by the use of fraud indicators. These fraud indicators help
serve as specific clues or "red flags" that could merit further investigation by
an auditor into a specific area of the business or a specific activity that the
business. These fraud indicators can be classified into three main categories,
which are listed below.

CATEGORIES OF FRAUD INDICATORS:

1.) Personal Mistakes or Shortcomings:

 A situation where a person lives too far beyond their means

 There is a high turnover of employees or personnel

 There is a situational pattern of uncharacteristic behavior from employees.

2.) Financial Downfalls and Shortcomings:

 There are unexplained changes or entries of financial records

  There has been an extremely unusual or high amount of cash transactions

 There is evidence of altered, missing, or stolen financial documents.

 The transactions that have taken place don't have the proper transaction numbers or

serial numbers.

3.) The Operational Downfalls and Shortcomings:

 A lack of internal accounting and process controls exists within a business

 There is one person in the business that is in control and there are no separations of

duties that exist in that structure.

 The financial records and the inventory for a business are not reconciled.

 There are one or more unauthorized transactions that exist.

Classifications of Fraud:

Generally the term fraud is meant as a generic overview and can encompass
many different types of fraud that are deliberate acts meant to deceive or
mislead someone that can result in personal, physical, or financial harm.
This act of fraud or intentional deception can be separated and differentiated
in a number of different ways depending on the nature of the act and who
committed the act. Take for example when fraud is committed by an
individual in the form of embezzlement or theft, this type of fraud has a
different classification than the type of fraud that is committed by the
management team of a company where the management team falsifies or
knowingly and inaccurately reports incorrect information on the financial
statements of the company. The first example is known as employee fraud
and the second example is known as management fraud. There are multiple
types of fraud that are segmented by the people who commit the fraud, the
type of fraud, and the victims or people who are negatively affected by the
fraud that has been committed.

Types of Fraud:

Type of Fraud Perpetrator/Suspect Victim or Victims Explanation of Fraud

Employee Employee Employers The employee

Embezzlement either directly or
Fraud indirectly steals
money or other
items of value
from the business
that the work for.

Customer The Customers Businesses or Customers will try

Fraud organizations to scam sellers
that buy goods into giving the
or services customers
something they
 should not have or
scamming the
business into not
charging the
customer

Management The People who rely The management

Fraud management on financial team of a
team for a statement business allows
company information for
such as misrepresentation,
investors, of the financial
banks, and information
other lenders.

Interested in learning

more? Why not take

an online class in

Understanding

Financial Statements?

Vendor or Organizations or Businesses or Organizations will

Supplier Fraud individuals who other over change the
sell goods and organizations business that the
services directly that purchase sell to or not even
to other goods and ship the good
businesses services on a even though
 B2B channel. payment has
already been
made.

Investment Usually Individual People trick other

Scam Fraud individuals Investors investors in giving
them money for
an investment
that is either not
financially sound
or does not exist
at all.

Financial Statement Fraud:

Generally when the business owners or managers of a company report false

financial data it is referred to as financial statement fraud. For the most part
financial statement fraud is generally committed with the goal that if there is
an audit of the financial statements then no misappropriations or material
misrepresentations will be caught by the auditor or auditing team. As
technology increases and financial transactions take place in greater volume
and at a more frequent rate it can be difficult to accurately and thoroughly
monitor against financial statement fraud. As stated earlier in the article
financial statement fraud can be defined as the intentional or deliberate
wrongful act committed by a person or persons inside the company through
the use of false or misleading information in the financial statements which
result in a form of harm or injury to creditors, investors, and potentially
employees. These acts are usually committed by the financial management
team and are considered to be well-masked schemes that are not
immediately discernable as financial statement fraud. Listed below are four
common fraudulent schemes that companies have used before.

Fraudulent Schemes That Are Often Used by the Management Team of a Company

 The falsification, manipulation, or the alteration of material financial statement documents or

records and the manipulation of supporting documentation or transactions that occurred.

 Manipulation of the GAAP accounting practices and standards that have been established by

the FASB and other governing boards.

 The usage of aggressive accounting techniques through the illegal or illegitimate financial

earnings of the management.

 The material omission, misstatements, or the misrepresentation of events, financial accounts

for the company, or other significant sources from which the financial statements are

derived.

The Methods for Creating Fraudulent Financial Statements:

1.) The Overstatement of the Assets- The assets of a business can be

overstated by not logging the accounts receivables or by not reporting the
assets with any depreciated or impaired values, or the items in the inventory
that are considered to be obsolete of no value.
2.) The Understatement of Liabilities- The liabilities of a business can be
understated by improperly recording the liabilities as equity or it can be done
by moving the liabilities between short-term and long-term classifications.

3.) The Overstatement of Revenue- The revenues for a business can

easily be overstated by the use of inflated sales. This is generally
accomplished by entering in fake sales that never happened or it can be
done in a more deceptive fashion by entering in a sale into the financial
records before the revenue from the sale is actually earned.

4.) The Understatement of Expenses- Expenses can be understated by

holding the expenses the business incurred in one period over to the next
accounting period. This can easily happen by improperly capitalizing an
expense over multiple accounting periods rather than correctly expensing it
immediately.

5.) One Time Expense Mischaracterization- The management team of a

company may remove one-time expenses from the accounting records,
which thereby gives investors and other people the false impression
regarding the results from operations for the business to the participants in
the capital markets.

6.) The Misrepresentation of Information- The management team or

individuals inside the company can either omit or misrepresent certain types
of financial information to present a healthier overall appearance for the
business. Often times many people who are trying to commit financial fraud
will just omit certain items from their reports.

7.) The Improper Use of Reserve Accounts- There are reserve accounts
that hold reserves for things such as the accounts receivables, obsolete
inventory accounts, returned sales accounts, and warranties. These accounts
can be notoriously difficult to discern because a substantial amount of
judgment and knowledge of the business is required in order to determine
the proper balances at the end of the accounting period.

8.) The Misapplication of the GAAP Rules- There are many businesses
that employee clever accountants and members of the management team
that have familiarized themselves with all of the rules and regulations for the
FASB and GAAP. Just like every system there are still loopholes, which can
be exploited for those people who are looking to intentionally commit
financial statement fraud.

Reasons for Fraud and the Triangle of Fraud:

Financial statement fraud is considered to be a deliberate and wrongful act

where the perpetrator has the intent to deceive. With this intent there is
generally some sort of basis for rational or justification for their actions,
along with the right conditions present inside of the business that would
allow the fraud to be committed. This is where the triangle of fraud comes
into use. When analyzing the nature of fraud there are generally three
characteristics that universally apply. These characteristics are: Opportunity,
Rationalization, and Motive.

 Opportunity- Opportunity is considered to be the set of situational

circumstances that provide the perpetrator a chance or opportunity
to perform the material misstatement of the financial recodes. These
opportunities that might lead to fraud can be things such as a weak
or non-existent internal accounting control system, absence of an
 auditor or auditing committees, and the negligent or improper
oversights by the board of directors for the company.

 Rationalization- When the term rationalization is used we are

referring to the ability for a person to commit certain action based on
a self-perceived set or ethical values or a moral code. Many times
people that commit fraud have found a way to justify their actions to
themselves, often citing a utilitarian principle of "helping the greater
good". An example of this would be when a business owner over
states his assets on the balance sheet when presenting his financial
records to the bank in order to receive a loan to help the business
stay afloat and thereby keeping the people that work for him
employed. He thinks that by defrauding the bank he is only hurting
the bank while at the same time providing help to multiple
employees, therefore providing benefit to the maximum amount of
people in the situation.

 Motive- The motive for committing fraud can be thought of as a type

of pressure. This pressure can be thought of as either internal
pressure or external pressure. This means that the person
committing the fraud either feels the need internally to do it or there
is an outside influence such as a person or a business that is
pressuring him to commit the fraud. Motivation or pressure can also
be classified as "psyche", "egocentric", "ideological", or "economic".
The psyche classification relates to things that are habitual in nature.
The egocentric classification is related to image, personal prestige, or
the way that people view the perpetrator. The ideological
classification relates very closely to the utilitarian principle that was
 discussed in the previous section over rationalization. This utilitarian
concept or ideology relates to someone committing an action
because they believe that they have the moral justification to do so.
The economic classification relates to the need for money that an
individual or a business may experience.

Auditing and Types of Audits:

Types of Audits: in order to counteract financial fraud and limit the

likelihood of a business to engage in fraudulent financial reporting an
accounting process known as auditing is used by many companies and in the
case of publicly traded companies auditing is required. An audit is defined as
an examination of the financial accounts and the reporting of financial
activities for business entity that is performed by an individual or company
that is independent of the business entity that is being audited. The types of
financial reports that our audited include the balance sheet, income
statement, statement of stockholders equity, statement of cash flows, and
any financial information or notes that summarize or explain the accounting
procedures and techniques that are used by a business.

The purpose and goal of an audit is to formulate an opinion based on

empirical evidence of whether or not the financial information that a
business has presented is accurate. Auditors must follow auditing standards
that have been set forth by the FASB, the United States Securities and
Exchange Commission, and any other auditing boards that are instrumental
in the development of these standards. After an order has examined the
financial information of a company and their work is complete they write an
audit report explaining what exactly they have done, the techniques they
have used, the information that they have evaluated, and then summarize
all of this by giving an opinion of whether or not financial statements for
business are accurate based upon their findings. It is important to
understand that there are multiple types of audits, which an auditor may
perform. These types of audits are listed below.

THE DIFFERENT TYPES OF AUDITS

 Investigative Audit: An investigative audit generally will take place as the result of a business

being reported for unusual or suspicious activity by an individual or an entire department

within a business. Investigative audits tend to be focused on specific functions and aspects

the deal with the scope of work for an individual or department within the business.

 Departmental Review: A departmental review is an analysis based in the current time period

of the administrative functions for business. This type of evaluation seeks to measure and

review the adequacy of controls, how efficiently resources are being used, the safety or

safeguarding of assets, and in compliance with any relative regulations, enterprise policies,

or laws that have been set as standards for the business to follow.

 Financial Standards Audit: A financial audit is an independent evaluation that is historically

based and has the purpose of confirming the accuracy, fairness, and reliability of financial

data that has been reported via business. A certified public accounting firm usually performs

the financial audit. These accounting firms are usually larger accounting firms such as

Deloitte, Pricewaterhouse Coopers (PWC), Ernst and Young (EY), or KPMG.

 Business Information Systems Audit: There are three basic types of Information Systems

Audits they can be performed. These three types of audits or for general controls review,
 system development review, and applications control review. These types of audits are

designed to guarantee that the controls are in place in the information systems function in

order to protect the operation as well as the security of the information systems, which

ensure the safeguarding of financial data for business.

 Business Operations Audit: An operational audit has a future based scope that is systematic

and employs an independent evaluation of the organizational activities of a business. While

financial data of the business may be used it is not considered to be one of the primary

sources of evidence. The primary sources used for operational audit are the operational

policies and the achievements that are related to the organizational objectives for business.

In this type of audit internal controls and efficiencies are the most likely to be evaluated and

reviewed.
 KEY POINTS REVIEW

 Fraud is generally defined as the intentional misleading of a person or deception of a person in

order to cause someone to lose property, money, or some other right.

 The fraud triangle consists of three elements: Opportunity, Rationalization, and Motive

 Investigative audits tend to be focused on specific functions and aspects the deal with the

scope of work for an individual or department within the business.

 The three categories of fraud indicators are: Personal Mistakes or Shortcomings, Financial

Downfalls, and Operational Downfalls.

 A financial audit is an independent evaluation that is historically based and has the purpose of

confirming the accuracy, fairness, and reliability of financial data that has been reported via

business.

Effect on Accounting Profession

Accounting rules and regulations exist to ensure that financial statements are useful to their end users in their
financial decision-making. For financial statements to be useful, the information presented therein must be
accurate, faithful to the financial circumstances and be produced in time to help the decision-making process.
Poor ethics in accounting result not only in increased incidences of criminal activities, but also hurt the
business through harming its reputation and rendering their financial statements untrustworthy and thus
useless.
Criminal Activities

Poor ethics amongst a business' accountants means that those persons are more willing to break the rules to
benefit either themselves or their business illegally. For example, an unethical accountant granted too much
control and too little oversight from superiors can embezzle from the business and conceal the evidence. In
contrast and comparison, an unethical accountant working at the behest of the business can manipulate the data
to commit a number of crimes including fraud and tax evasion.

Personal Consequences

Once caught and tried, accountants so unethical as to commit crimes related to their profession are punished.
Depending on the specific circumstances of the case, this can result in prison time, financial costs and other
legal punishments to the accountants found guilty. Not only is this devastating for said accountant, it is also
devastating on both friends and family, particularly the family.

Business Reputation

Poor ethics can also inflict damages on the business' reputation and trustworthiness of its stakeholders, such as
customers and business partners. The absence of trust ensures that the business finds it difficult to conduct
business with others. This damage to a business' reputation is particularly devastating to accounting firms who
rely heavily on that reputation to remain in business. Arthur Andersen LLP effectively perished as a business
because of its poor conduct in the Enron scandal.

Usefulness of Financial Statements

Each time that an unethical accountant deliberately breaks the rules and regulations to manipulate the
information presented on the financial statements to illegal advantage, those financial statements become less
and less useful. Since financial statements must remain accurate and truthful to help end users in making their
financial decisions, financial statements tainted deter the decision-making process. Erroneous figures cast all
other figures into doubt and end users simply become unable to trust the information presented.

Accountants play an important role within small businesses by handling the company’s financial records.
Managers, creditors and investors depend on accurate accounting information to make good business
decisions. The level of responsibility given to accounting professionals can lead to accounting abuse. Many
small businesses suffer greatly because of accounting abuse, which often leads to a loss of profits and a
tarnished reputation. A business owner should understand how accounting abuse negatively impacts her
company and how to prevent it.
Embezzlement

A common type of accounting abuse experienced by small businesses is accounting embezzlement. This
occurs when a trusted employee manipulates accounting records to steal funds from the company.
Embezzlement directly affects a company’s bottom line and can cost a company thousands of dollars if it goes
undetected for many years. Some common signs of embezzlement include an unexplained decline in profit,
missing documents, altered check amounts, unexplained vendors and duplicate payments. Embezzlement is a
criminal offense, and an employee may face serious penalties if found guilty.

Fraud

Fraudulent accounting activity typically occurs through the influence of a company’s manager. Most
companies participating in accounting fraud are attempting to hide serious financial problems from the public.
One form of fraudulent activity is manipulating accounting records and financial statements so that the
company appears financially healthy to investors. Companies depend on investors to finance their business
operations, and negative financial reports discourage investors from buying the company’s financial securities.
Accounting fraud can cause irreversible damage by ruining the reputation of a business and forcing the
company to go out of business. Legal charges may be brought against individuals participating in financial
fraud.

Abuse of Power

Some employees and managers abuse their power within companies. The abuse of power occurs with
employees and managers who make decisions on behalf of the company. An example of an abuse of power
includes an accounting employee who offers special discounts of the company’s products to her friend. The
employee manipulates the accounting records to make the discount appear legitimate. An employee who
abuses her power in relation to a vendor not only negatively impacts the employer’s finances but also can
jeopardize positive relationships between the company and its vendors.

Preventing Accounting Abuse

You can prevent or reduce the level of accounting abuse in your company by establishing certain internal
controls. A primary method to deter accounting abuse is through the separation of job duties, which prevents
one employee from possessing too much power to manipulate accounting records. Requiring documentation
and authorization for certain accounting transactions is another internal control method. For example, you can
establish rules that require several managers to sign off on payments to vendors over a certain dollar amount.