Question

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.

Answer 1

Answer:

Fraud:

Fraud has been characterized by the Institute of Internal Auditors (IIA) as " any illegal act characterized by deceit, concealment, or violation of trus
t. These acts are not dependent on any threat of violence or use of force.

Frauds or misrepresentations are executed by parties and associations to

• Acquire cash, property or administrations;
• to dodge payment or loss of administrations; or
• to secure personal or business advantage".

Kinds of Fraud

Fraud is executed by:

• Internal Fraud by representatives of an association;
• External Fraud by Suppliers and Customers of the association;
• Fraud against people.

Reasons to commit fraud :

Mr. Donald R.Cressey distinguished three explanations behind individuals to commit or execute misrepresentation. They are :

• Opportunity;
• Pressure; and
• Rationalization or avocation.

Opportunity :

Opportunity is available as powerless internal controls.

Pressure :

Pressure makes an incentive or rationale to execute misrepresentation. Pressure could show as Financial Targets that association discharge each quarter to the Exchanges, or pressure made by betting obligations, or credit debts and so on.

Rationalization or Justification :

Rationalisation /Defense is only a mentality or a capacity to defend the execution of misrepresentation or fraud.

The three reasons are depicted as three corners of the Fraud Triangle. Nonetheless, the Fraud Triangle has now offered path to the Fraud Pentagon. Two additional reasons have been added to the current three purposes to commit misrepresentation. They are:

Arrogance:

Senior individuals or individuals with "big egos" who think the laws or association rules don't concern them or individuals who are of the feeling that internal control supersedes are adequate all things considered.

Competence :

"Ability offers the culprit/perpetraror the chance to change want into the reality". Capability is gotten from a senior position, outstanding knowledge and fitness at work, individual certainty, coercive aptitudes, and a capacity to remain peaceful.

These five reasons together incite fraud culprits to commit misrepresentation.

Significant Frauds

There have been a few frauds that have been found over the most recent twenty years. Some significant frauds are:

• Enron,
• Worldcom,
• Adelhphia,
• Tyco,
• Satyam computers,
• Parmalat.

In the accompanying paragraphs, we will examine the Worldcom extortion/fraud that brought about lost $ 7.1 Billion.

The Worldcom extortion/fraud :

Worldcom was America's second biggest telecom organization. 2^nd biggest as far as significant distance and biggest handler of internet information. Worldcom filling recorded more than $ 107 Billion in assets, more than even Enron. Worldcom developed by strike acquisitions financed by debt totaling $ 41 Billion.

Accessibility of modest and plentiful financing empowered organizations like Worldcom to construct cross-country and overseas fiber optic organizations in the 1990's. The overflow extra limits subsequently made brought about gracefully driving costs down for organizations like Worldcom. Worldcom's administrations incorporates basis telephone administrations and transmission of web information for huge organizations.

What did Worldcom do?

The Chief Financial Officer of Worldcom Mr. Scott D Sullivan was blameworthy of :

i) Contriving a methodology that wrongly represented $ 3.85 Billion of costs inappropriately represented in the fiscal reports as " Capital investments". It is notable that working costs must be deducted from income quickly, while the expense of capital costs could be "spread" over some undefined time frame. Inappropriately spreading ordinary costs, that ought to have been deducted from incomes or revenues inflated profits.

ii) Inappropriately recording $ 3.3 Billion of benefits in the organization's books from 1999 to the main quarter of 2002. This included the "manipulation of reserves". Organizations regularly put aside holds to cover misfortunes such antagonistic decision in claims, uncollected payments from clients and so on.

Making or putting aside reserves is typical business practice, as these speak to reserves stopped for the blustery day. However, an organization can likewise take advantage of reserves to meet the Wall Street's desires on monetary execution. It is deduced that the Chief Financial Officer purposely inflated/expanded the reserves so he and his group could dunk into them when profits from business tasks went into a nose dive. By plunging/dipping into the reserves, he could enable the organization to post fiscal outcomes that met the Wall Street's desires.

How could this misrepresentation have been prevented?

It is evident that this misrepresentation was committed by the Chief Executive Officer (CEO), Chief Financial Officer (CFO and their group to meet unrealizable "Fisacl focuses" to the speculator on wall Street in spite of being aware of the falling prices of telecom administrations. The CEO, Mr. Bernie Ebbers was quick to drive business development through acquisitions through controlling the price of the Worldcom stock. The expansion in share price could be utilized to fund the acquisitions. There was pressure on the CEO to along these lines legitimize the acquisitions through over-stated incomes and under-stated expenses.

The extortion was committed by virtue of :

1.Strain to meet the desires for the Wall Street crowd regardless of a meltdown in the telecom business;

2. Concealment and with-olding of operational and fiscal information from their internal auditors and outside auditors. They utilized their status and perhaps utilized compulsion to get information far from financial audit and investigation over a long term period.

3. A chance to extract greater rewards and bonuses dependent on their as far as anyone knows meeting profit projections. There was a craving by the CEO to secure his own money financial status.

The way that the internal auditors found the misrepresentation just in 2002 clearly shows that the two sets of auditorss fizzled in their obligations to the administration and the investors.

Improvement in nature of Audit could have forestalled the scandal

Clearly the auditors didn't do a primer review of the business and the organizations results over the long term time frame. It is likewise evident that that the auditors neglected to follow the unjustifiable inflation of reserves.

An Independent Board of Directors could have forestalled the misrepresentation

A functioning and autonomous Board of Directors could have stepped in before to lead investigations. They didn't do as such, and it is evident looking back that they may have been in collusion with the CEO in driving up profits.

A Signed Code of Ethical Behavior among the Leadership Team, and permeated downwards, could have forestalled the fraud

The Tone-At - The - Top could have been founded on "genuineness" and moral conduct. There was irreconcilable situation and trickery or deceit in the conduct of the CEO, CFO and their group;

Documented Policies and Procedures, including a Whistleblower Policy

A formalized and very much recorded set of approaches and procedures could have been actualized before. Counting a worker complaint Cell and Whistleblower strategy could maybe have opened correspondence channels between the Board and the representatives prior.

Inclusion of Lawyers and Experts

The Board could have incorporated a part who is an industry master along with another who is a specialist or expert in law. Looking for the educate regarding such specialists and legal counselors by an autonomous Board could have assisted with stopped the crisis from really developing.