Question

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Fraud is an international act to misappropriate (steal) assets to misstate financial statements. There are many documented high-profile collapses of companies due to fraud. As the Enron and WorldCom scandals unfolded, many people asked, “How can these things happen? If such large companies that we have trusted commit such acts, how can we trust any company to be telling the truth in its financial statements? ? Where were the auditors?”

These scandals caused the creation of the Sarbanes-Oxley Act in the US (NI52-109 Canadian Equivalent) requiring companies to maintain adequate internal controls and for senior officers to sign off on the company financial statements, among other things.

Discuss one company which has committed an accounting scandal. Provide details on the fraud committed and preventative measures which could have been taken by the company.

Fraud is an international act to misappropriate (steal) assets to misstate financial statement. There are many documented high-profile collapses of companies due to fraud. As the Enron and WorldCom scandals unfolded, many people asked, “How can these things happen? If such large companies that we have trusted commit such acts, how can we trust any company to be telling the truth in its financial statements? ? Where were the auditors?”

These scandals caused the creation of the Sarbanes-Oxley Act in the US (NI52-109 Canadian Equivalent) requiring companies to maintain adequate internal controls and for senior officers to sign off on the company financial statements, among other things.

Discuss one company which has committed an accounting scandal. Provide details on the fraud committed and preventative measures which could have been taken by the company.

Fraud is an international act to misappropriate (steal) assets to misstate financial statements. There are many documented high-profile collapses of companies due to fraud. As the Enron and WorldCom scandals unfolded, many people asked, “How can these things happen? If such large companies that we have trusted commit such acts, how can we trust any company to be telling the truth in its financial statements? ? Where were the auditors?”

These scandals caused the creation of the Sarbanes-Oxley Act in the US (NI52-109 Canadian Equivalent) requiring companies to maintain adequate internal controls and for senior officers to sign off on the company financial statements, among other things.

Discuss one company which has committed an accounting scandal. Provide details on the fraud committed and preventative measures that could have been taken by the company.

Fraud is an international act to misappropriate (steal) assets to misstate financial statements. There are many documented high-profile collapses of companies due to fraud. As the Enron and WorldCom scandals unfolded, many people asked, “How can these things happen? If such large companies that we have trusted commit such acts, how can we trust any company to be telling the truth in its financial statements? ? Where were the auditors?”

These scandals caused the creation of the Sarbanes-Oxley Act in the US (NI52-109 Canadian Equivalent) requiring companies to maintain adequate internal controls and for senior officers to sign off on the company financial statements, among other things.

Discuss one company which has committed an accounting scandal. Provide details on the fraud committed and preventative measures which could have been taken by the company.

Answer 1

Accounting scandals are business scandals which arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets, or underreporting the existence of liabilities (this can be done either manually, or by the means of deep learning). It involves an employee, account, or corporation itself and is misleading to investors and shareholders.

There are two types of fraud:

1. Misappropriation of assets

2. Fraudlent financial reporting

The most recent company which committed an accounting scandal is Wirecard AG. It is a German payment processor and financial services provider, whose former CEO, COO, two board members, and other executives have been arrested or otherwise implicated in criminal proceedings.

In January 2020, Wirecard announced that a contract extension would be offered to chief executive Markus Braun. But its long-time chairman stepped aside, and in April an auditor found questionable accounting practices. According to auditing firm Ernst & Young, a trustee of Wirecard tried to "deceive the auditor", resulting in the bank processor being unable to release the share results for 2019. In a statement, Wirecard announced that it is "working intensively together with the auditor towards a clarification of the situation".

In June 2020, it was revealed that €1.9 billion was "missing". As a result, Wirecard's share value decreased by over 72%, and its CEO Markus Braun resigned.Wirecard appointed James Freis to the position on an interim basis. Freis had only joined the company the evening before. A few days later, the management board stated that the €1.9 billion amount likely did not exist. Two banks in the Philippines who were allegedly holding the money said that they did not have the sum and never did. The firm's Moodys credit rating was demoted to B3 on 19 June 2020 before this rating was removed entirely 3 days later.

A criminal investigation began on 22 June 2020 and Wirecard's recently resigned CEO, Markus Braun, was arrested the same day. On 25 June, Wirecard filed for bankruptcy citing "over-indebtedness". On 25 August 2020, the firm's administration axed the contracts of its chief executive manager and additional two other managers. Furthermore, 730 company staff were also cut. The UK Financial Conduct Authority froze the activities of Wirecard's British subsidiary, Wirecard Card Solutions Limited, between 26 June 2020 and 30 June 2020, after which Wirecard UK operations were allowed to resume with relaxed restrictions.

On 1 September 2020, the German parliament announced that will organise an inquiry in order to fully investigate the reasons why the government failed to prevent corporate fraud.

The following precautions could have been taken by the company:

1. Educate management on the three indicators of fraud. According to the Association of Certified Fraud Examiners, financial statement fraud involves the intentional publishing of false information in any portion of a financial statement. To help prevent fraudulent activities, management must implement internal controls, or structure, and know what situations to look for.
2. Segregate accounting functions. One of the main factors of an effective internal control system is segregation of duties. Management helps to prevent fraud by reducing the incentives of fraud. One incentive, the opportunity to commit fraud, is reduced when accounting functions are separated.
3. You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for some time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.
4. A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.
5. Initiate annual examinations of financial statements by an outside party. In many cases, management is the party committing fraud. Management may feel pressure to meet financial goals for the company or may receive incentives if certain goals are met. To help prevent management from engaging in overly aggressive adjustments to the financial statements, have an independent party examine financial statements on an annual basis.