The Main Aim of Accounting Fraud - Case Study Example

Accounting Fraud Student’s name Institutional affiliation Introduction Fraud entails an employee or an organisation altering some account/financial details (Lewis, 2012). It involves overstating of company’s assets or understating the liabilities. The main aim of accounting fraud is to display the business as financially stronger or intent by an employee to fleece the company of the finances for personal gains. Most of the people involved with the fraud are not career criminals, they are the employees trusted by their employers and mainly with no criminal record (Wells, 2007). These people end up committing fraud due to factors inherent in the business. Dr. Donald Cressey developed a model that tries to explain why trusted employees end up being fraudulent. He identified three factors that necessitate an ordinary employee or manager to get involved in fraud. These factors include: pressure, opportunity and rationalization. This paper will discuss the factors in relation to case studies provided. Case study 1: Green Grass Company Green Grass is a small family operated company that has specialized in horticultural service care and lawn care. In Green Grass company, there exists some fraud opportunities. Some of the opportunities within Green Grass that predisposes the company to fraud include the fact that there is only one employee who runs the operations of the company. This may lead to a lot of work pressure. The employee who is trusted by the founding father and has vast experience in information system and accounting is mandated with scheduling the routes of all the employees and he happens to be solely responsible for payments, receipts and balancing the books. This means that there is no an oversight over him which gives him the chance to engage in accounting fraud. The other opportunity for the fraud is in the eight employees who are responsible for driving trucks. The track drivers are given the responsibility of collecting money from their respective customers. Again, this implies that the company lacks a good system for revenue collection. The individual collection of the revenues by drivers means that correct documentation may not be obtained and there is an opportunity for drivers reporting the wrong figures to the accounting officer. Symptoms of fraud In many situations it is very difficult to realize acts of falsifying accounts. However there some indicators that point to malpractices and which act as symptoms of fraud. According to Albrecht (2003) some of the symptoms of fraud include: Expenses which are inflated or unexpected revenues being reported. This normally acts as a cover up to the accounting falsifications that may be taking place. Green Grass having been on a steady growth over the years, abnormal revenues, which increased marginally, coupled with increases in the expenses over the last year raises a red flag which could be a pointer to a major accounting fraud in the company. Fraudulent activities are also bound to happen if there is no proper observation and supervision of the undertakings of the accountant. Such is the case in the Green Grass company where the accountant is in charge of the whole business. He oversees but he is not overseen. In companies where the accountant is in charge of the payments, revenue receipts, all the bank deposits this is a pointer to possibility of fraud as there are no clear segregation of duties. For instance in Green Grass the one employee trusted by the founder was in charge of all the financial obligations. Measures to prevent fraud Small companies such as Green Grass are increasingly becoming targets of fraud. According to the American Institute of Certified Public Accountants (AICPA) many small companies and medium sized businesses are at greater risk of fraud. For the companies to prevent fraud, the following steps should be taken: Ensure there are clear standard and systems of operation in the company Perform background checks of the employees before they are employed, i.e. finding out the past history of the employee. Payroll is one of the major areas with tendency of fraud being committed. Therefore, a payroll should be safeguarded and the owner or manager should review the payroll on monthly basis. This may be very expensive and time consuming for the managers and small business owners, but at the end of the day it saves a lot of money which could have gone to fraudsters. There should also exist a control of who receives the company’s most important documents like the bank statements. If the business owner cannot undertake the reviews by himself, he/she can hire Certified Public Accountant (CPA) to carry out the review. Finally, annual audits are other considerations. According to ACFE (2012) annual audits tries to keep the accounting staff remain honest because they may not know the documents the auditor may request for during audits. The cost of the measures will lead to the business incurring some extra cost. A closer analysis of the cost will most likely prove prevention to be cheaper compared to the losses that could have been incurred through the frauds. Case 4: Fortune 500 company An organizational work environment plays a crucial role in determining whether fraudulent activities will take place or not. Well (2007) noted that creating a conducive business environment that has checks and balances reduces the temptation of committing fraud. Consistent communication and reporting channels for suspect cases reduces the fraud. McConnell (2007) notes that setting up a hotline for reporting fraud cases sets up a tone that deters fraudulent activities as each person serves as a watchdog. Many fraud cases take place because there is laxity in the management and lack of proper channels for reporting the cases; it is the duty of all the employees and managers to engage in the checks. It has been noted that frauds occur because the perpetrator does believe there are no people. Effective ways to involve employees The most effective ways to involve employees and managers in the detection and prevention of fraud is first by setting a culture of honesty and ethics in the work place. This is achieved by ensuring that all employees are subjected to the same treatment, this will create a sense of belonging in the company and as a result, employees and managers will not encourage any activity that may adversely affect their dear company (Kroll, 2012). The company should also ensure that there is positive workplace environment. This can be achieved through equal employment and promotional opportunities. There should be a system for the managers and employees to obtain advice internally before making claims that may have legal and ethical implications on them. The other effective means is to involve the employees and the managers through training. I will advice that all the employees to undergo refresher trainings on a periodic basis. The trainings should include the components of fraud, how to detect it, prevent it and its implications on the business and jobs of the employees. Case 10: Hyperglobal Background checking business I will not agree with Kevin on the issue of doing away with background checking of the employees being recruited in the company. According to a study carried out by Association of Certified Fraud Examiners (ACFE) in America 2012, typical businesses in America suffers 7% losses of the annual profit due fraudulent deals by the employees. These employees were assumed to be of high ethical conduct on the time of recruitment. According to McConnell (2007), employers who carry out comprehensive background checks can mitigate the chances of employees committing fraud. The back ground of the employee before employment can help the employer gauge what kind of the employee that candidate will be. A background check is not very expensive and an employer can use it in risk management of fraud that is related to the employee. This means with background checks, previous offences committed by the employee can help the employer to reduce in advance a liability. Even though the checks are not a guarantee that the employees will not engage in fraud, the background checks help to mitigate and prevent businesses from some risks (McConnell, 2007). Case study 1: Plutonium The potential pressures that led Chris to commit fraud were the amount he was earning per hour which had not been increased since his employment. The $15 per hour he used to cater for the family and his education, therefore he must have been financially struggling. The potential opportunity that resulted to Chris to commit fraud included the trust bestowed on him. He became a very trusted employee, in addition Jonathan gave him and other team members the phony credit number which he opted will increase the productivity. The potential rationalization for Chris to commit fraud was due to being a trusted employee and boosted the performance of the overall team. The investigation done also cleared him of wrong doing; he was just warned and placed on short term probation. These happenings could have led to him justifying his behavior. Symptoms of fraud The pressure Chris was going through and failure to be given a chance to progress in his career through a salary increment led to discontentment which is a symptom of fraud. In addition, Chris was charged with training new employees on the systems of the company, therefore he had good knowledge of the operations of the company systems which he could infiltrate easily. All these actions built pressure on him and also opened opportunity for him to commit fraud. To eliminate some of the opportunities of the fraud, Jonathan could have increased the salary of Chris when his work output increased. This could have motivated Chris and most likely reduced the financial pressures on him. Reference Albrecht, W. (2003). Fraud Examination. Thomson South Western Publishing. Association of Certified Fraud Examiners. (2012) Report to the nations on occupational fraud and abuse: 2012 global fraud study. Available from: http://www.acfe.com/rttn.aspx. Button, M., Lewis, C., Shepherd, D., Brooks, G. and Wakefield, A. (2012) Fraud and punishment: enhancing deterrence through more effective sanctions. Centre for Counter Fraud Studies, University of Portsmouth. Available from: http:// www.port.ac.uk/departments/academic/icjs/centreforcounterfraudstudies/documents/ file to download,161060, en.tmp. Federation of Small Businesses. (2009) Inhibiting enterprise: fraud and online crime against small businesses. Available from: http://www.fsb.org.uk/policy/assets/ Kroll, A. (2012) Global fraud report: annual edition 2012/13. Available from: http://www.krolladvisory.com/insights-reports/global-fraud-reports/. Lewis, C. (2012). When mediation is a suitable, not soft, option. Fraud Intelligence. August/ September 2012, 18-20. McConnell, C. 2007. Background checking to avert fraud. National Federation of Independent Businesses. Wells, J. 2007. Occupational Fraud. Obsidian Publishing Company. Read More