Approaches against Fraudulent Activities - Case Study Example

 Approaches against Fraudulent Activities Introduction Accounting fraud is one of the greatest threats to the long term sustainability of organizations today. The last decade witnessed a series of corporate failures in the United States due to accounting fraud. Accounting fraud is not easily detected when it is committed by persons at the helm of affairs. This paper will critically analyze the case “And the fraud continues” prepared by Thomas L. Lyon and Anthony L. Tocco. Internal Control Weaknesses in MCI While evaluating the case study, it is clear that MCI’s internal control weaknesses contributed to the commission of this fraud. To illustrate, the company did not have proper internal control mechanisms to keep the level of bad debts and accounts receivables within the fixed range. Hence, even poorly performing firms obtained huge amounts of credits from MCI and this condition adversely affected MCI’s operational efficiency. When receivable collection periods went beyond the stipulated timeframe, the organization was forced to write off some of its receivables. Undoubtedly, this condition caused the firm to experience a rise in its expenses and thereby a decline in earnings per share. Ultimately, MCI’s stock price dropped due to the decline in EPS. As Lyon and Tocco (n. d.) point out, Pavlo used a variety of accounting tricks to convince the management that the level of bad debts and amount receivables had fallen under the safety range. In other words, Pavlo totally manipulated the accounting system to conceal the actual state of affairs of the company. It is obvious that the absence of a well executed internal check system assisted Pavlo to apply unfair accounting tricks to deceive the company management. A person is not allowed to carry through a transaction from beginning to end under the internal check system. Pavlo would not have falsified the company accounts if MCI had an effective internal check system. In addition, the company failed to implement internal control mechanisms including internal audit, job rotation, or cross checking. Furthermore, Pavlo was allowed to manage debt levels and receivable collection periods alone. This favorable (unfavorable?) situation aided him to employ accounting malpractices such as ‘unapplied cash’ and ‘placeholder credits’ to conceal MCI’s actual financial status. Approaches against Fraudulent Activities If an individual suspects fraudulent activity within the organization where he works, it is advisable for him not to make any false allegation. In addition, he must never try to take any unfair advantage of that fraudulent activity. Every organization has a distinct corporate culture and hence a specific mechanism to report fraud. It is recommendable for the individual to strictly adhere to the accepted fraud reporting mechanism of the organization. If an individual suspects fraud in his organization, firstly he must make an immediate note of his concern. He should specifically try to note relevant details concerning the fraud including telephone conversations, date and time, or names of parties involved. Secondly, the individual has to report the fraud to someone with proper authority and experience. Generally, it is better to report fraud to line managers, internal auditors, or whistleblowers. In addition, fraud may be reported to the Monitoring Officer, Chief Executive, or the Director of Finance. The individual should not make any delay in reporting the suspected fraud to proper authorities because such a situation would cause the organization to suffer further financial loss. Finally, the individual should ensure that the authority has taken proper actions over his fraud report; otherwise, he must report the case to higher authorities. Under no circumstance, the individual can disclose his suspicion to public or any other unauthorized person. Ethics of Pavlo’s Actions While examining the case context, Pavlo’s actions cannot be ethically justified from any perspective. Lyon and Tocco (n. d.) clearly indicate that Pavlo took initiative to deposit money received from resellers into the Calyman Island’s account. This illegal and unethical activity caused MCI to lose $6 million. As an MCI manager, Pavlo was ethically responsible for maximizing the firm’s wealth and reputation. Likewise, the given case clearly reflects that Pavlo employed a variety of accounting tricks such as ‘unapplied cash, placeholder credits, and false asset creation’ so as to intentionally falsify company accounts and thereby misrepresent the firm’s financial status (Lyon & Tocco, n. d.). It is clear that the accounting malpractices such as unapplied cash and placeholder credits can alter the organization’s bad debt level as well as amount receivable status. Since items like sundry debtors and account receivables directly affect the balance sheet, those unfair accounting practices would compromise the accuracy and authenticity of the balance sheet. As Kranacher, Riley, and Wells (2010, p. 436) point out, false asset creation practices will certainly change the balance sheet totals and give a fairer view of the company. Evidently, Pavlo used those types of accounting tricks to inflate the net profit with intent to conceal the actual financial obligations of the firm. Undoubtedly, inflated balance sheet figures would make shareholders and prospective investors to judge the firm falsely. In total, Pavlo’s fraudulent accounting practices caused many difficulties to MCI and affected the firm’s goodwill and customer loyalty to a great extent. Crime Causation Theory Classical criminology theory is the crime causation theory related to this case. As per this theory, people choose to commit crime “when, in their estimation, profits become greater than the cost (the risks of detection, conviction, and sentence)” (as cited in Mukherjee & Graycar, 1997, p.5). The case analysis clearly reflects that Pavlo intentionally committed this accounting fraud and thereby deceived the company and its stakeholders. Since Pavlo was one of the mangers responsible for billing and collection, he thought his likelihood of being suspected is less. In other words, Pavlo weighed expected profits and losses before committing this fraud. He realized that the benefits obtained from this accounting fraud would outweigh all possible risk factors. Conclusion From the above case analysis, it is clear that inefficiency of internal control mechanisms such as internal check, internal audit, job rotation, and cross checking contributed to the commission of this fraud. Pavlo’s actions were completely unethical as he deceived his employer firm and its stakeholders. The classical criminology theory can be applied in this context to explain the causation of this case. References Kranacher, M. J., Riley, R & Wells, J. T. (2010). Forensic Accounting and Fraud Examination. US: John Wiley & Sons. Lyon, T. L & Tocco, A. L. (n. d.). And the fraud continues. The Society for Case Research (SCR). Mukherjee, S. K & Graycar, A. (1997). Crime and Justice in Australia, 1997. Sydney: Hawkins Press. Read More