Fraud Risks to Organization

Fraud Risks to Organization

            All businesses may face the risk of loss through the employees’ fraudulent activities including activities of management. The list of potential risks of fraud below is partially based on a type of fraud risks given in the old auditing standard of United Kingdom Auditing Practices Board called SAS 110 Fraud and error. You can observe that a number of the examples listed are signs of poor procedures of corporate governance, such as overcoming by one person or pressures on the internal audit and accounting departments.

Previous experience or incidents which call into question the integrity or competence of management

• Management dominated by one person (or a small group) and no effective oversight board or committee
• Complex corporate structure where complexity does not seem to be warranted
• High turnover rate of key accounting and financial personnel
• Personnel (key or otherwise) not taking holidays
• Personnel lifestyles that appear to be beyond their known income
• Significant and prolonged under-staffing of the accounting department
• Poor relations between executive management and internal auditors
• Lack of attention given to, or review of, key internal accounting data such as cost estimates
• Frequent changes of legal advisors or auditors
• History of legal and regulatory violations

Particular financial reporting pressures within an entity

• Industry volatility
• Inadequate working capital due to declining profits or too rapid expansion
• Deteriorating quality of earnings, for example increased risk taking with respect to credit sales, changes in business practice or selection of accounting policy alternatives that improve income
• The entity needs a rising profit trend to support the market price of its shares due to a contemplated public offering, a takeover or other reason
• Significant investment in an industry or product line noted for rapid change
• Pressure on accounting personnel to complete financial statements in an unreasonably short period of time
• Dominant owner-management
• Performance-based remuneration

Weaknesses in the design and operation of the accounting and internal controls system

• A weak control environment within the entity
• Systems that, in their design, is inadequate to give reasonable assurance of preventing or detecting error or fraud
• Inadequate segregation of responsibilities in relation to functions involving the handling, recording or controlling of the entity's assets
• Poor security of assets
• Lack of access controls over IT systems
• Indications that internal financial information is unreliable
• Evidence that internal controls have been overridden by management
• Ineffective monitoring of the operation of system which allows control overrides, breakdown or weakness to continue without proper corrective action
• Continuing failure to correct major weakness in internal control where such corrections are practicable and cost effective

Unusual transactions or trends

• Unusual transactions, especially near the year end, that has a significant effect on earnings
• Complex transactions or accounting treatments
• Unusual transactions with related parties
• Payments for services (for example to lawyers, consultants or agents) that appear excessive in relation to the services provided
• Large cash transactions
• Transactions dealt with outside the normal systems
• Investments in products that appear too good to be true, for example low risk, high return products
• Large changes in significant revenues or expenses

Problems in obtaining sufficient appropriate audit evidence

• Inadequate records, for example incomplete files, excessive adjustments to accounting records, transactions not recorded in accordance with normal procedures and out-of-balance control accounts
• Inadequate documentation of transactions, such as lack of proper authorization, supporting documents not available and alteration to documents (any of these documentation problems assume greater significance when they relate to large or unusual transactions)
• An excessive number of differences between accounting records and third party confirmations, conflicting audit evidence and unexplainable changes in operating ratios
• Evasive, delayed or unreasonable responses by management to audit enquires
• Inappropriate attitude of management to the conduct of the audit, eg time pressure, scope limitation and other constraints

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Ethical Theories

Ethical Theories

            A key debate in ethical theory is whether ethics can be determined by objective, universal principles. How important the consequences of actions should be in determining an ethical position is also a significant issue.

Do ethics change over time?

            One viewpoint is that ethics do vary between time and place. Slavery for example is now regarded as wrong, whereas in Roman times slavery was acceptable. The view that ethics vary between different ages and different communities is known as ethical relativism. He opposing view is that ethics are unchanging over time and place; some courses of action are always right, others are always wrong. A simple example would be saying that it is always wrong to steal. The view that there are certain unchanging ethical rules is known as ethical absolutism.

What are consequences of decision made based on ethics?

            Some people think that society is best served by all people by adhering specific ethical principles and following them don’t matter what the consequences are. The argument is that people will undermine society if they disobey the ethical rules, even if they do so with the intention of avoiding adverse consequences. This viewpoint known as deontological ethics, developed by Kant. The opposing viewpoint is that you cannot divorce an action from its consequences, and when taking ethical decisions you must take account of what the consequences will be. This viewpoint is known as teleological ethics. If you take this viewpoint, that implies that you have to define what the best possible consequences are, the different variations of the teleological viewpoint try to do this.

What thought processes people should adopt?

            What the theories are aiming to do to complete the following sentence:

“You should act ethically because….

• People who are less ethically developed may think: 'You should act ethically because you’ll be punished if you don't.'
• People who have more advanced ethical development may think: 'You should act ethically because your country's laws say you should.
• People at the highest level of ethical development may think: “You should act ethically because it’s always right to do so, no matter what the consequences and costs are to you personally.

PROCESS AND METHODS OF PERFORMANCE APPRAISAL

Performance appraisal practice takes into consideration in order to facilitate the employees of an organization in a plausible manner. Study shows that, effective and timely performance appraisal system will help the organization to retain the employee. Manager should give a special concentration to the design of the performance appraisal system in order to obtain maximum benefit from their employees. The managers or the head headers are well cognizant with the fact that, what thing will add value in their organization and what induce their employees to work with immense care and fragility. In almost every organization, performance appraisal has been conducted in a series of process, which is mentioned below

·     In ab-initio, the managers make a decision regarding what they intend to measure. It means that the managers seek to establish the job criteria and appraisal standards.

·     The managers are keen to determine how often performance appraisal will be conducted from the employees.

·     The managers then decide about the appraiser. It will be done on the basis of the employee’s performance.

·      Then the exhorting period of indicating the strengths and weaknesses of the employees has been started, which is termed as “Providing Feedback” section.

There is no rocket science behind the utilization of the performance appraisal method. It can be done by any credible person or manager who is familiar with an employee’s performance to elected appraisal method (Schuler, 1995: Pg-312-316). This is not a hard a fast rule to apply a single performance appraisal method solemnly on a specific person. Sometimes the organizations and the managers use different kinds of evaluation method, while some entities use all of the methods to condense the biasness to a minimum level. Formal performance appraisal is now become a standard for administrative and development purposes. It has been observed that there is some kind of scarcity found in the feedback process, in which the supervisors gave feedback ironically. Therefore to eliminate the biasness from the feedback system, multi organizations purely emphasize on the multi-source feedback system. Apart from the traditional methods for evaluation, 360 degree performance evaluation method has also evident a reliable one because of the inclusion of the supervisors, subordinates, peers, coworkers, self and customers.

The 360 degree feedback process collecting information about the employee’s behavior from the boss or bosses, immediate reporting managers, colleagues, project team, internal and external customers and suppliers. (Pulakos, 2000). You have seen the 360 degree appraisal with different strange names like, “multi source feedback, full circle appraisal, multi dimensional evaluation and upward feedback appraisal”. Despite some disadvantages of the system like time consuming and bit hectic, but still have been implant in the performance appraisal process, because it have the propensity to hoard the data from different resources, which we have mentioned above. One of the great advantages of the 360 degree appraisal system is that, it vanquishes on the biasness may take place in the appraisal system and it also apprise the employee regarding his/her behavior and their strengths and weaknesses as well.

References 

Schuler, R. S., Managing Human Resource, Min Ist. Paul: West Publishing, 1995

 

Pulakos, Elaine D. and Wexley, Kenneth N. “The Relationship among Perceptual Similar-ity, Sex, and Performance Ratings in Manager-Subordinate Dyads”, Academy of Management Journal, 26 (1), 1983, 129-139

PERFORMANCE APPRAISAL IN THE UNITED KINGDOM’S ORGANIZATIONS

A number of European companies, especially the organizations pertains to the United Kingdom (UK), underscored the appraisal process or system. The number which has been evident regarding the formal performance appraisal has been shown an upward trend, which was hiked from 74% to 89% in the fiscal year 1991 (Murphy & Cleveland, 1991). In the year 1987, 30 organizations had been examined to check which appraisal method had been utilized by the organization and the result was very satisfactory because it revealed that the quantity has been surged by 5% to reach on 94% which was previously 89%, which showed that 94% out of 300 organizations were utilized the formal appraisal system. In the year 1987, when the result of the survey had been take placed the most often appraisal were to make salary decisions, improve the individual performance, and to provide true feedback to the employees  (Roberts, 1995).

1. The percentage of evaluating the performance was almost the same for the private and public listed organizations. On the contrary, a recent survey of human resource professionals in state governments has been done, which indicated that over 75% of the state employment systems required an annual formal appraisal in UK. The method and procedure of the appraisal varies from organization to organization. Sometimes the supervisor has been asked to evaluate the employee’s performance through twice evaluation process. The action is quite rigorous and it includes a long series of planned meetings (Roberts, 1995).

In the year 1987, a study was conducted in England of the non managerial performance in the municipal public sectors and the research found that 86 percent of 142 municipal governments annually appraised their employee’s performance through a transparent method of appraisal. The impotence of the performance appraisal was not denied before and can’t even deny in the future as well, the fact had been revealed by the members of International Personnel Management (IPMA), and they also said that that effect of performance appraisal within the organization will not be diminish. The respondent in UK predicted that the prevalent use of performance appraisal will continue to be ranked as number under the head of the Human Resources Management (Williams, 1998).

References

Murphy K.R. and Cleveland, J.N. Performance Appraisal: An Organizational Perspective, Boston: Allyn and Bacon, 1991 

Roberts G.E., “The Influence of Participation, Goal Setting, Feedback and Acceptance on Measures of Performance Appraisal Effectiveness,”, Dissertation Abstracts International (Doctoral dissertation, University of Pittsburgh, 1990

Williams, R., Performance Management, Thomson Learning Press: London, 1998.

BEHAVIORALLY-ANCHORED RATING SCALES (BARS)

BEHAVIORALLY-ANCHORED RATING SCALES (BARS)

          One of the modified form of the rating scale technique is been use in the behavioral anchored rating scales. Professionals and officials have believed that the BARS are a detailed form of rating scales. The method has been chosen by many organizations over the techniques of management bi objective because of its propensity to provide more opportunity for supervisors to exhort the employees in a more reliable fashion regarding their appraisals. Behavioral Anchored rating scale are totally based and emphasized on the behavior of the employee. The employee has been rewarded the points on his performance from his ethical behavior. Ethics, calm and relent behavior will lead to employee’s performance in BARS. The method is very useful from the managers view point as well, because it enables them to easily offer the solutions that might be daunting job performance. Generally, two main steps have been involved in this method. First it must be defined all the jobs which will be evaluated. The main condition behind the BARS technique is that the employee is fully equipped with the knowledge and his specific responsibilities. Human resources department is held responsible to identify the exact boundaries of a job, which is so important to direct the path of the employees towards the productivity. Training sessions and job relevant interviews are being utilized to alleviate the future problems. The second step is like an assignment between the subordinates and the supervisors which observes the behavior of each other and then the same will be reported to the higher management. The work will be evaluated according to the work assigned and how pertinently the employee performed that work. One of the foremost advantages of the BARS technique is the feedback that the managers are able to give to their subordinates. The employees of the organization have to be rigid enough to belt down with any situation with tranquility in order to obtain successful job performance. The method of BARS, is no doubt one of the best methods to evaluate the performance of an employee but the time it consumed to complete the procedure is too hectic. One thing is for sure that whenever an organization change or intend to be change the behaviorally-anchored rating scales must be adjusted to reflect the new changes.

TYPES OF PERFORMANCE APPRAISAL

TYPES OF PERFORMANCE APPRAISAL

There are an enormous methods of appraisal persists. Under this heading we will examine in details regarding the diversified techniques used by the organization to evaluate the performance of the employees in the organization.

Critical Incident Technique (CIT)

Outstanding success and outstanding failures are the two basis of this method. The method is commonly known with the name of CIT. The main prospective of the critical incident techniques is to avoid the problems of the recency effect which can be done by keeping a log over time of incidents rather than recence at the time of appraisal. In this technique the evaluator listed down the observable behavior of the employees from time to time and assists in producing the records for the employees. CIT doesn’t follow a hard and fast rule to evaluate the performance of the employees.  In this evaluation the evaluators have specified expected responsibilities of the job of every employee. The comparison between the performances of the employees will be done by compare the list of two employees. The most dominating characteristic of the CIT is that, this method focus upon the most important aspects of a job or more precisely we can say that the method mostly emphasized on the job description and the job specification of the employees. In CIT different kinds of logs and charts are also maintain to provide very specific examples for the evaluator at the time of the appraisal. Managers and evaluators often used the charts to gauge the performance of an employee and after their assessment they present the progress before the employee with due diligence. 

Essay or Narrative Evaluations

Observation of the performance of specific job duties is described in this method. Every organization made some kind of standards to evaluate the performance of their employees in an impeccable manner. Likely, the evaluator is following some pre-determined standards and with the help of these standards evaluation of the employee’s responsibilities, strengths and weaknesses becomes relatively easy. To work on a standardized format is mandatory in order to ensure the consistency among the evaluation process. In an essay evaluation method a series of questions has been include in the evaluation form which have to be duly filled by his immediate manager or supervisors to estimate the performance of the employee. The main flaw which persists in this evaluation is the lack of writing skills of the evaluator. Another drawback of the process is that it halts the employee to viewed his/her own performance and the evaluator is not suppose to describe the performance of the employees in front of them in a proficient manner. Uncertainty in the validity in comparing the performance of the employees are also found by using this process, which is one of the major causes why a number of organizations doesn’t like this process to adapt. However the method is quite useful to direct the right part for the employee’s strengths and weaknesses, areas of improvement and career direction. One of the biggest advantages of the method is that it enhances the level of interaction between the employees and the supervisors which ultimately boost up the moral and satisfaction level of an employee.  

Rating Scales

The easiest technique or method uses by the managers or the evaluators is the rating style methods. It seems relatively easy to grade the employees as compared with the other set of measurement scale. Accumulation of the information regarding the performance of the employees become more precise and specific with the help of rating scale which excrete out a meaningful result for the employees in the end of the day because the method is totally based upon the predetermined standards. An employee’s performance has been judged through the numbers or adjectives or both can be used to rate an employee. Ethical issue arise in the utilization of this method because a numerous amount of peoples percept that estimating the performance through number seems bit impersonal. On the contrary the adjectives can provide great feedback which are totally relevant to the specific area of a job of an employee. A number of peoples still contradict the ranking method with the rating process or methods and thinks that both the methods are congenial in nature but it is not true, both the things are totally differ in nature. On of the great advantages of the rating scale method is that they are easy, to the point, quick, specific and accepted well by the managers and the supervisors as well. One thing must be bare in mind while applying the rating method to weigh the performance of the employees that the method is suitably applied in the correct manner because the overall goal can be overlooked if too many people involved in this method.