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· Individuals such as officers, directors, high level employees of a corporation or business, agents and brokers, or simply people in a position of trust or fiduciary relationship, owe duties to their principals or employers. The principal fiduciary duties are loyalty and care. The duty of loyalty requires that the employee/agent acts solely in the best interest of the employer/principal, free of any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. The duty of care requires business affairs to be conducted prudently with the skill and attention normally exercised by people in similar positions. CONDITIONS FOR FRAUD The risk of becoming a victim, a perpetrator, or an instrumentality of fraud is a ubiquitous reality that financial institutions face. Their susceptibility to fraud however depends on the degree to which fraud risk factors are present within the organization. Fraud risk factors consist of: events or conditions that indi |
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cate incentives/pressures to perpetrate fraud, opportunities to carry out the fraud, and attitudes/rationalizations to justify a fraudulent action. Fraud risk factors do not necessarily indicate the existence of fraud but are often present in circumstances where fraud exists. These three (3) conditions comprise what is known as the fraud triangle as illustrated by Diagram A. The first condition, incentive or pressure to commit fraud may include: · meeting budget targets, including for operating results, financial position, or cash flow · meeting consensus-earnings expectations or debt covenants, · supporting a drug or gambling habit, · meeting burdensome financial obligations, or · supporting a lifestyle not commensurate with income. The second condition, opportunity, to carry out the fraud may include: |
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· poor or insufficient internal controls, · the absence of proactive fraud detection measures, · significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another audit firm, · high turnover of senior management, counsel, or board members, or · a faulty tone at the top from executive management. * These outcomes could be the result of ineffective or inappropriate communication, implementation, support, or enforcement by management of the entity’s values or ethical standards. The third condition of attitude/rationalization, is a concept that is often more difficult to understand since often times individuals cannot perpe |
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The FSC Sentinel |
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