Page 227 - COSO Guidance Book

The framework also lists illegal acts as a type of fraud. Illegal acts are defined as violations of
laws or governmental regulations that could have a material direct or indirect impact on external
financial reports.

For example, a steel fabricator might not comply with OSHA safety requirements and be subject
to a major fine.

– Safeguarding of assets and corruption

The framework makes reference to safeguarding of assets and corruption schemes. It is noted
that safeguarding of assets concerns controls to prevent the unauthorized and willful acquisition,
use, or disposal of assets. Corruption schemes are typically classified into various subcategories,
such as illegal gratuities and kickbacks.

Often, the professional literature has examples that overlap among the three major categories of
safeguarding assets, misappropriation of assets, and corruption schemes. These three major
categories contain schemes that occur because of failures in various transaction-processing
systems.

 Point of focus — Assesses incentive and pressures

The assessment of fraud considers incentives and pressures.
The framework notes that incentives and pressures often result from and are associated with the
control environment’s principle regarding the enforcement of accountability. This principle notes that
the entity should consider such performance measures as tight versus loose budgets, incentives, and
rewards (such as a bonus if certain sales targets are achieved). These factors, performance measures,
and incentives and rewards can create pressure for employees to perpetrate a fraud. For example, a
pressure could be that the employee must meet certain sales targets at least 7 months out of 12
consecutive months or lose employment. The employee might cheat and overstate sales in order to
retain employment.

 Point of focus — Assesses opportunities
The assessment of fraud considers opportunities for (1) unauthorized acquisition, use, or disposal of
assets; (2) altering of the entity’s reporting records; or (3) committing other inappropriate acts.

The framework notes that opportunity is provided by weak control activities, inadequate monitoring
activities, insufficient management oversight, and management override of control.

The framework provides the following examples of when opportunity for various categories of fraud
(for example, fraudulent financial reporting, misappropriation of assets, and corruption schemes)
increase (not necessarily a comprehensive list):

– A complex or unstable organizational structure

For example, a smaller entity with several owners at which each owner is competing to become
the dominant owner.

– High turnover rates of employees within various departments, such as accounting, operations,
and IT

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