Question

1. AB 99 lists eight qualitative factors that impact the definition of materiality. List all eight of these qualitative factors, and explain five.

2. Define Disclosure Fraud and list and explain four examples of it.

Answer 1

Ans:- The Definition of Materiality

In accounting, materiality refers to the impact of an omission or misstatement of information in a company's financial statements on the user of those statements. If it is probable that users of the financial statements would have altered their actions if the information had not been omitted or misstated, then the item is considered to be material. If users would not have altered their actions, then the omission or misstatement is said to be immaterial.

The materiality concept is used frequently in accounting, especially in the following instances:

• Application of accounting standards. A company need not apply the requirements of an accounting standard if such inaction is immaterial to the financial statements.

• Minor transactions. A controller who is closing the books for an accounting period can ignore minor journal entries if doing so will have an immaterial impact on the financial statements.

• Capitalization limit. A company can charge expenditures to expense that would normally be capitalized and depreciated over time, because the expenditures are too small to be worth the tracking effort, and capitalization would have an immaterial impact on the financial statements.

Thus, materiality allows a company to ignore selected accounting standards.

Here are several examples of materiality in accounting information:

• A company encounters an accounting error that will require retrospective application, but the amount is so small that altering prior financial statements will have no impact on the readers of those statements.

• A controller could wait to receive all supplier invoices before closing the books, but instead elects to accrue an estimate of invoices yet to be received in order to close the books more quickly; the accrual is likely to be somewhat inaccurate, but the variance from the actual amount will not be material.

• A company could capitalize a tablet computer, but the cost falls below the corporate capitalization limit, so the computer is charged to office supplies expense instead.

Ans:-2 Define and Disclose the fraud

By fraud we mean:

“Any intentional false representation, including failure to declare information or abuse of position that is carried out to make gain, cause loss or expose another to the risk of loss”

In the UK, the term fraud is used to describe many acts such as deception, bribery, forgery, extortion, corruption, theft, conspiracy, embezzlement, misappropriation, false representation, concealment of material facts and collusion.

Fraud and Corruption

Arguably, the terms “fraud” and “corruption” should be considered as one – fraud and corruption.

It provides the opportunity to adopt a wide and simple definition – fundamentally that fraud and corruption is an unethical act, by anyone, diminishing the value of the organisation.

This does not limit “fraud” or “corruption” to specific offences under which they may be prosecuted such as the Fraud Act 2006, the Prevention of Corruption Act 1906 or the Bribery Act 2010.   

As well as clear criminal Fraud Act “fraud” (intending dishonesty, gain or loss), criminal Bribery Act “bribery” (bribing, being bribed, failure to prevent), “fraud and corruption” also includes both fraud and bribery civil offences and damaging misbehaviour etc.

Example types of fraud Fraud risks

Fraud risks are many and varied. Examples include:

Benefit fraud -   

The Department for Work and Pensions (DWP) provides estimates of fraud and error for benefits administered by DWP and Local Authorities. These estimates are published twice a year and are overseen and subject to rules governed by National Statistics protocols and publications.

The DWP have one of the most sophisticated methodologies in the public sector for measuring the level of fraud and error.   

Fraud glossary

Bid rigging - Bid rigging occurs when bidders agree among themselves to eliminate competition in the procurement process - thereby denying a fair price. Simple ways, for example:

• “Cover pricing” - Submit a non-competitive bid that is too high to be accepted • A competitor agrees not to bid or to withdraw a bid from consideration.

• Submit bids only in certain geographic areas or only to certain public organizations. Although the schemes used by firms to rig bids vary, they all have one thing in common – the bidders agree to eliminate competition so that prices are higher.

Blue badge scheme misuse - The blue badge scheme is an important service for people with severe mobility problems that enables badge holders to park close to where they need to go.

Charity fraud - Charity fraud can be broadly defined as any fraud perpetrated within or against a charitable organisation.

Cheque fraud - According to Financial Fraud Action UK, cheque fraud cost the UK banking industry £30 million .

Fraud glossary

Council tax fraud - Local authorities collect around £26 billion a year in council tax in England alone. Council tax provides local authorities with around a quarter of funding for council services such as schools, libraries and social care. There are a number of discounts or exemptions that can be claimed to reduce the amount of council tax payable to house hold.

Grant fraud (public sector) - A grant is an award of financial assistance paid to eligible recipients for a specified purpose. There are different types of public sector grants paid out to individuals, businesses, charities and not for profit organisations. Grant-in-aid is also paid out by the public sector to non-departmental public bodies (NDPB), executive agencies and public corporations.

Housing tenancy fraud - Housing tenancy fraud is the use of social housing by someone who is not entitled to occupy that home. It includes people who submit false housing applications, unlawful sub-letting and tenancy succession fraud.   

Identity fraud - Identity fraud occurs when an individual‟s personal information is used by someone else without their knowledge to obtain credit, goods or other services fraudulently. Measuring the financial impact from identity fraud is challenging, partly because there is no standard definition of identity fraud but also due to the fact that identity fraud is an enabler rather than a specific fraud type.   

Insurance fraud – The UK insurance industry is the largest in Europe and the third largest in the world accounting for 11 per cent of total worldwide premium income. The insurance market is divided into two categories: general insurance (i.e. motor, property, accident and health) and long-term insurance (i.e. life and pensions). Long-term insurance accounts for the majority of the insurance market, with total net premiums of £131 billion, compared to £34 billion for the general insurance market.

Mass marketing fraud - The term „mass marketing fraud‟ is wide ranging and captures a number of different types of fraud.

Whether committed via the internet, through telemarketing, mail or at mass meetings, it has two elements in common. Firstly, the criminals who carry out mass marketing fraud aim to defraud multiple individuals to maximise their criminal revenues. Secondly, the schemes invariably depend on persuading victims to transfer monies to the criminals in advance, and on the basis that promised goods, services or benefits will follow. Needless to say the promised goods, services or benefits never existed and will never be delivered. Many fraudsters use generic, well-known fraud templates, simply recycling and updating schemes that have proven successful in the past. The most effective and lucrative scheme variations are often widely replicated, as criminals aim to capitalise on victims‟ delayed recognition of fraudulent solicitations. Because of this, there are many different types of mass marketing fraud.

Examples of mass marketing fraud:

- „419‟ advanced fee fraud (so called after the Nigerian criminal code pertaining to fraud). Involves the enticement of victims with promises of immediate and enormous wealth. One of the most common 419 frauds relates to funds transfer schemes, where the fraudster claims to need the victim‟s financial assistance to transfer or embezzle money from a foreign country or company, in exchange for a portion of the stolen funds. - Romance fraud (also known as „dating fraud‟).

- Recovery fraud. Targets former victims of mass marketing frauds. The victim is contacted by the fraudster who poses as a legitimate organisation, claiming that they can apprehend the offender and recover any monies lost by the victim, in exchange for a small fee. If the victim responds, the fraudster will ask for various fees, such as release and administration fees. The fraudsters may also ask the victim to provide details of their bank account so they can pay the money into it. They will then use this information to empty the account. - Foreign lottery and sweepstake fraud. These are schemes which target individuals with false promises of money, case prizes or valuable items, provided that the victims first purchase certain products or make advance payments of fictitious fees and taxes. - Premium rate telephone fraud. The victim receives a letter, mobile text message or automated telephone message informing them that they have won a major prize; urging them to telephone a premium rate number to find out what they can claim.

- High risk investment fraud. Victims are contacted and offered the opportunity to invest money into things like shares, real estate, fine wine, gemstones, coins, ventures, art or other items of „rare‟ high value with the promise that these items will significantly increase in value. What is offered either does not exist or is significantly over-priced, high risk and difficult to sell on.   

- Career opportunity. This involves victims being offered the opportunity to enhance their career by signing up with an „agency‟ or „company‟ (for example, a publishing or modelling agency). The victim is duped into paying a fee or fees up front, after which very little, if any, assistance is given by the „agency‟ or „company‟.   

- Emergency assistance schemes. Where fraudsters (sometimes posing as a family member or close friend) contacts the victim with requests for urgent financial assistance for example by claiming that a family member was arrested overseas and requires bail money or that a friend has had an accident on holiday and needs funds for emergency medical expenses. - Pyramid schemes (sometimes known as chain letter scams). Advertised through mailings, newspapers, the internet or via word of mouth.

- Psychic and clairvoyant schemes. Victims are contacted by a so called „psychic‟ or „clairvoyant‟ with offers to make predictions of events that will change the victims‟ life, provided that the victims pay in advance.   

Motor finance fraud - Types of motor finance fraud include application fraud (where a customer gives incomplete or inaccurate information to a lender), conversion fraud (the fraudulent sale of a vehicle which does not belong to the seller or on which money is still owed) and first party fraud (where a customer makes their loan repayments using, for example, a false credit card).

National Savings and Investments fraud - National Savings and Investments (NS&I) is an Executive Agency of the Chancellor of the Exchequer. They are one of the largest savings organisations in the UK with almost 27 million customers and over £98 billion invested, accounting for approximately nine per cent of the UK savings market.

Online banking fraud - According to Financial Fraud Action UK, in 2009, online banking fraud losses increased from £53 million in 2008 to £60 million, an increase of 14 per cent. This increase is largely due to criminals using more sophisticated methods to target online banking customers through malware, which targets vulnerabilities in customers‟ PCs, rather than the banks‟ own systems which are more difficult to .

Online ticket fraud - Ticket fraud occurs when victims purchase tickets for a music, sport or theatre event which do not materialise.

Organised crime (fraud) - Fraud is a significant element of the overall organised crime threat, either perpetrated by organised crime groups (OCGs) as a primary activity, or as an enabler/funding device for other serious crimes.

Patient charges fraud - NHS patient charges fraud occurs when patients falsely seek exemption from NHS charges or falsely claim entitlement to free services, for example, patients falsely claiming to be .

Payroll and recruitment fraud - Payroll fraud can occur when unauthorised changes are made to payroll systems, such as the creation of false payroll records or unauthorised amendments such as.

Pension fraud - Pension fraud can occur when relatives fail to notify the pension provider about the death of a relative / friend and continue to cash pension payments.

Plastic card fraud - Over 11 billion transactions were made on UK cards in 2009, with spending on UK cards amounting to £396 billion.   

Cardholder not present fraud is the theft of genuine card details that are then used to make a purchase over the internet, by phone, or by mail order.

Others are lost and stolen cards, card ID theft and mail non-receipt

Procurement fraud - Procurement fraud is any fraud relating to the purchasing of goods and services. It covers the entire procure-to-pay lifecycle, including fraud in the tender.

Rental fraud – Rental fraud is a type of advanced fee fraud where would-be tenants are deceived into paying an upfront fee to rent a property which turns out to not exist or already be rented out. Reports made to Action Fraud have highlighted the prevalence of rental scams in the last 12 months.

Staged/induced motor vehicle accident fraud (organised) – Staged motor vehicle accidents are an example of organised insurance fraud. They occur when two or more fraudsters deliberately crash their vehicles into each other with the intention of making fraudulent insurance claims for replacement vehicles and / or injury compensation.   

Student finance fraud – Financial support is available from the Government to support eligible students studying on an approved Higher Education course. The Student Loans Company (SLC) is responsible for administering government-funded loans and grants to students throughout the UK. If the student is studying on a qualifying NHS funded course, student funding is administered by the NHS Business Services Authority (NHS BSA). Student finance related fraud can occur when applicants provide false or misleading information when applying for a student.

Tax credits fraud – False information, not notifying changes for Child Tax Credit and Working Tax Credit - introduced in 2003 to provide support to parents returning to work, reduce child poverty and increase financial support for all families.

Tax fraud - „Evasion‟ arises where individual or corporate customers deliberately omit, conceal or misrepresent information in order to reduce their tax liabilities. Research has shown that a minority are willing to break the law to avoid paying their fair share of tax. This could be an individual concealing sources of income or a company suppressing its tournover.

  Telecommunications fraud – Telecommunications fraud involves the theft of services or deliberate abuse of voice and data networks. Some examples of types of telecommunications fraud are subscription fraud (the use of a false identity to acquire telecommunication services and or equipment), international revenue share fraud (the manipulation of international premium rate telecommunication services .  

Telephone banking fraud - Customers being duped into disclosing security details through cold calling or fake emails, which criminals then use to commit fraud.

Television licence fee evasion - There are around 25 million licences currently in force .

Fraud glossary

Vehicle excise fraud - Not having a tax disc. The Department for Transport (DfT) produces annual estimates relating to vehicle excise duties,

Examples of recent frauds

1) August 2011 – bribery, misconduct in public office and perverting the course of justice

Court clerk first to be prosecuted under Bribery Act

A London magistrates‟ court employee has become the first person to be prosecuted under the new Bribery Act.

2) Munir Yakub Patel, an administrative clerk at Redbridge Magistrates‟ Court in Ilford, London, faces a charge under Section 2 of the 2010 Act for requesting and receiving a bribe intending to improperly perform his functions.   

3) August 2011 – theft and fraud – Wolverhampton

School finance manager stole £269,000

A trusted finance manager stole more than £250,000 from the primary school where she worked. Kerry Smith wrote cheques out to herself from the school.

4) August 2011 – Manchester – abuse of position

School business manager brought in to tackle school‟s £2million deficit ... steals £120,000 to pay off his debts.