Corporate Governance and Fraud - Assignment Example

Instructor: Corporate Governance and Fraud Name: Institution: Course: Date: Corporate Governance and Fraud Part 1 Nature of Fraud in HIH Insurance and Onetel (Australia) The 21st Century marked the collapse of high profile corporate organizations in Australia. Examples of the collapse of high profile organizations include HIH that was considered as the second largest insurance company and OneTel that was regarded as the fourth largest telecommunications company in the context of Australia. The collapse of OneTel and HIH was attributed to such factors such as weak form of corporate governance. Implementation of unsustainable business approaches, poor auditing process, inefficient working capital, excessive management compensations and questionable types of connections (Barney, 2009). In the case the nature of the fraud in OneTel and HIH was as a result of engaging in low return in terms of income business while failing to set aside adequate investment for coverage of prospective liabilities. In addition, there was a great failure in the part of management in terms of efficiently imposing and monitoring of the diligence practices. HIH collapse was as a result of poor management and ineffective systems as opposed to systematic fraud. The Directors of the company were found to have breached their roles and responsibilities under the Corporations Act. The conservative culture of the HIH involved the directors involving the company in high risk practices within competitive market approach. On the other hand OneTel collapse was attributed to inadequacy in corporate governance system. This was mainly in terms of management and reporting system of the company’s financial status (Monem, 2009). Therefore the collapse of the two largest corporations in Australia was instigated by business and accounting failures by auditors. The auditors failed to assess the business risks while the management was extravagant in the use of corporate spending and leading lavish lifestyles. The auditing process involved coming up with wrong conclusions in both companies (Westfield, 2003). The Fraud Triangle Theory Fraud is regarded as the most negative effect in the global society. The fraud triangle theory has been used in the process of identification of various factors that explains the occurrence of fraud. Hence the fraud triangle theory comprises of three factors that necessitate the occurrence of fraud: supposed pressure, prospects and rationalization. The absence of the mentioned three factors will not lead to the occurrence of fraud. The Fraud Triangle Perceived Pressure Perceived Opportunity Rationalization Perceived pressure involves motivation that leads to the occurrence of unethical form of behaviour. In this case for an individual to engage in any fraud activities there is some form of force that leads to commission of unethical behaviour. The force or pressure is perceived since it does not have to be actual or real. Thus if an individual consider that there is the existence of some form of pressure, the belief can eventually lead to fraud. Perceived pressure may result from some forms of financial needs of an individual. In most employees financial pressure has an effect on motivation and therefore regarded as a common kind of pressure. Research has indicated that approximately 95% of fraud cases are as a result of financial pressure. Other examples of pressure may include greed, financial losses, and drug practices among others (Sauser, 2007, pp.20-25). Opportunity is mainly generated by the existence of weaknesses in the structure that permits the individual to engage in fraudulent activities. In accounting this is mainly referred to as weak internal control. Thus individuals are known to take advantage of situations that are presented to them. The opportunity is also perceived meaning that it does not have to be actual. The perpetrator needs to have a belief of the existence of the opportunity. The risks of getting caught are considered as a factor in the existence of opportunity. Rationalization involves an individual justification of unethical behaviour as not a form of criminal action. Thus an individual must engage in the formulation of morally acceptable form of rationalization prior to involvement in unethical behaviour (Sauser, 2007 pp.13-25). Cultural and social factors also play an important role in the existence of fraud in the society. Within the context of Australia cultural factors indicate the involvement in fraud activities as illegal and immoral. In this case culture mainly influences the rationalization of individual’s beliefs in terms of participation in fraud activities. In this case individuals within the context of Australia will not be able to engage in the justification of fraud activities since the cultural elements of the Australian society dictate the engagement in fraudulent activities as being unethical and illegal. In terms of social factors the social structure of the society plays an essential role in the existence of fraud. For instance the social structure and the social interactions in companies within the context of United States is created in such a way there is no gap for the existence of opportunity that will permit individuals to engage in fraud or other activities that may lead to fraud (Dorminey, et.al. 2010 pp.20-23). Part 2 Alex’s Case Study Alex case study involves various ethical issues that are presented throughout the case. In any type of business ethical issues should be considered since these issues impact of the decision making process. Hence the ethical issues mainly involve the norm, principles and values of a particular company or organization. According to the principles of professional conduct a business of an organization shall not engage in any form of questionable business practices. Within Alex case study it is therefore important to find out whether the business engages in questionable business practices. In addition, another ethical issue involves illegal payments as a form of security. In business terms this is mainly referred to as extortions (McNamara, 2001, pp.61). According to the principles of professional conduct a business shall not engage in any form of extortion within or without its entity. In the case study the business engages in illegal payments to United Peoples Liberation Front that is believed to control the sites where their mines are located. This payment is done for the purpose of gaining protection form the group. Furthermore the payments are viewed as a breach of the professional conduct since it is done in such a way that there is no evidence of invoices to support such payments that are being made by the company. Hence the ethical issue in this case involves whether to continue with the payments being made to the organization as a form of protection or cease the payments and losing business or closure of the mines in the respective countries that the organization operates. Therefore if the organization decides to stop paying the extortion fee to the outlawed organization its operations will be paralyzed leading to the organization incurring a lot of setback in their operations (Armstrong, 2002, pp.150-156). Another ethical issue in the case study involves the protection of the environment. The company in the context of the case study operates mainly in countries that have no effective form of government. There is non-existence of the environmental laws since the paramilitary control the locations that CMI operates. The main ethical issue that arise involves the political aspect on whether to continue working with the paramilitary organizations or relocate to countries that have the existence of an effective form of government with laws that protect its citizens and the environment. American Accounting Association (AAA) is considered as a model that involves several steps in the decision making process. In addition the various steps take into consideration the ethical issues involved in the making of various decisions. Hence in relation to the case study AAA model will provide an important insight in assisting Alex in terms of coming up with an effective decision in relation to the operations of CMI (Langenderfer & Rockness 1989, pp. 61-65). According to the AAA model the facts of the case involve the payments of money to illegal organizations for the purpose of offering protection to the organization. This is equated to extortion. In addition the ethical issue is involved in this case study. The ethical issue in the case involve whether or not Alex should accept the payment to the illegal organization for protection purposes to continue or not. Thus, the ethical issue confronting Alex in this case involves whether to accept the payment to the illegal organization to continue or not. In relation to the norms, principles and values a company should hold itself in high integrity while engaging in honest form of dealings. In the case study the organization that the payments are being made are illegal and therefore leading to the business practice of the company being questionable. The AAA model offers various options that Alex may need to select in the context of the company. The two options that confronts Alex involves whether to accept the continued payments to be made for protection purpose of decline the payments being made and take the appropriate action. Alex therefore has to engage in the best form of action that will be in line with the norms, values and principles. The best action that Alex will be able to make involves upholding integrity of the company through refusal of payment to the organization since it is illegal and a form of extortion. Alex should also take into consideration the consequences of each action involved. One of the option is that he should let CMI continue making payments to the illegal organization so as to continue with its operations and make profit. On the other hand he should decline the payments leading to the closure of the operations of the company and eventual losses. Therefore in relation to the AAA model the decisions of Alex should be guided by the norms, values and principles. He should therefore decline the payments being made to the illegal organization for protection purposes since it is against the norms, principles and values and regarded as a form of extortion (Langenderfer & Rockness 1989, pp. 58-69). List of References Monem, R., 2009, ‘The Life and Death of OneTel’, Griffith University. Paper presented at the American Accounting Association Annual Meeting, 2009. Barney, J., 2009, ‘Corporate Scandals, Executive Compensation, and International Corporate Governance Convergence: AU.S.-Australia Case Study’. Westfield, M., 2003, HIH: The Inside Story of Australia's Biggest Corporate Collapse, John Wiley & Sons Australia. Dorminey, J., Fleming, A., Kranacher, M., & Riley, R.,2010, Beyond the fraud triangle. The CPA Journal, 80 (7), 17-23. Sauser, W., 2007, Employee theft: Who, how, why, and what can be done. S.A.M. Advanced Management Journal, 72(3), 13-25. McNamara, C., 2001, “Ethics without the Sermon” Harvard Business Review 59, 1981. In “An Ethics Toolkit for Managers”. Armstrong, M. B., 2002, Ethical Issues in Accounting, In N. E. Bowie (Ed.), The Blackwell guide to business ethics (pp. 145–157), Oxford: Blackwell. Langenderfer H. Q. and Rockness, J. W., 1989, “Integrating Ethics into the Accounting Curriculum -Issues, Problems and Solutions”, Issues in Accounting Education, Vol. 4, pp. 58-69. Read More