Extent of Fraud in Corporate Organizations - Essay Example

Accounting essay Introduction The rapid growth and subsequent fall of Enron in the United s typified the extent of fraud incorporate organizations. The management of the company that operated in the sale of different energy products manipulated the company’s financial records thereby portraying the company as successful in order to attract more investors before letting the company collapse as it became solvent thereby leaving the destitute investors to incur massive losses. The case among many others validates the need for the management of companies to maintain integral financial records. Auditing is a management function mandated with the sustenance of the integrity of financial statement in the company (Farquhar, 2003). Auditing refers to the planned investigation of an organization with the view of determining the adequacy of operation. The practice is essential in order to determine the position of an organization in the market thereby assuring the investors of the truth about their investments as discussed below. Auditors are essential regulators of the financial operations of a company; auditors’ primary mandate is determine the actual financial position of a company. This requires the effective investigation of the organization in order to determine the cost of every asset the company as and its actual liquidity. Auditing is therefore a periodic practice often done annually thereby determining the financial position of a company in a financial year. The integrity and thoroughness of the auditing process contributes to the effectiveness of the process thereby providing the actual state of the company to the public. Either auditors can be part of the company such as a department within the organization or the company can opt to hire an external auditor. Each case has advantages in serving the interests of the people. In house auditing departments have an effective understanding of the operation of the organization and can therefore investigate every departments effectively within the shortest time possible. However, such departments rely on the finances from the organization and may not therefore maintain integrity and independence. The lack of the two eliminates efficacy of the auditing process a feature that validates the hiring of external auditors. External auditors such as the Price Waterhouse Coopers and Deloitte have no interests in the organization. Such companies investigate the operations of the organization with the view of determining the financial flow in the organization. They are auditing companies; this implies that such companies hire professionals who enjoy vast experience in the practice. Such features contribute to the effectiveness of external auditors. The independence of the auditors is yet another fundamental feature that affects the effectiveness of the auditors. The organization should not have any form of influence on the auditors. This way, the auditors enjoy the autonomy and authority to access all the departments of the organization in order to determine the financial operations of the organization. External auditors enjoy such independence thus the permission to investigate every department of the companies. After investigating the companies, the auditors’ other roles is to prepare a report detailing the financial position and activities of the company, additionally, the auditors release such reports to both to the company and to the public through different channels. In case of public companies, the auditors readily release the report findings to the public through press conferences besides presenting copies of the same to the board of governors of the companies among other interested parties. In doing their job, auditors have specific responsibilities which they must undertake in order to carry out effective audit of companies. Key among the responsibilities is the need to maintain ethical practice. The auditors must not collude with the management of the company and maintain objective investigation of every department within the organization. Maintaining high ethical standards of operations will not only help achieve factual representation of the company in the report but also helps market the company to its potential market. Additionally, rotation is an operational responsibility of the auditors that ensures that they carry out exhaustive investigation of the company (Burke & Mattis, 2000). The auditors must rotate within the company thereby investigating every department within the organization. In doing this, they must maintain independence of operation and therefore access every document of relevance within the company. The audit quality arises from the exhaustibility of the process. To obtain high quality of audit, the auditors must portray professionalism in their work and present the facts of the company. Auditors must maintain independence and exhume professionalism in their work. This implies that they must understand the specific features of the organization to investigate and have the technical knowhow of investigating such features. Additionally, they must maintain independence by avoiding any form of control and influence from the company. Independence is an ethical principle in the operations of auditors. Colluding with the management among other stakeholders of the company in order to cover up financial misappropriations in the company was among the key factors that contributed to the fall of Enron, one of the largest cases of fraud internationally. The board of directors, also known as the board of governors or board of trustees is a senior organ in a company mandated with the formulation of policies for the company. The board of governors are either appointed by the government more specifically the president or elected by the shareholders. The mode of creation is relative to the structures of governance in a country. Once developed, the board becomes a major body in the company mandated with the formulation of operational policies within the organization. Among the roles of the board of governors in a company are ensuring that the company has adequate financial resources. This implies that the bard must obtain and plan for the finances of the company in order to steer the company’s profitability and longevity (Feld, 2013). The board also appoints the chief executive of the company, an individual mandated with overseeing the daily operations of the company. The position of the chief executive is vital since after obtaining the financial resources from the board of governors, the chief executive plans for the finances and ensures that the company sustains its profitability and longevity objectives. The board of governors account to the several stakeholders of the company on the operations of the company. This implies that the board releases the financial performance of the organization to the public among other essential stakeholders within the organization. The bard sets the salaries and stipends of different employees within the company and formulates the budget for the company. In retrospect, the board of governors is a key body within the company that manages the utilization of resources within the company. The members of the board must therefore maintain integrity and ethical of practice by upholding the standards of transparency and public accountability. The board plays an integral role in the development of financial statements of the company. The board of governors must have an effective structure of operation. The members of the board hold election through which they chose their chairperson and his or her deputy. With such a structured type of management, the flow of information becomes definite thereby improving accountability both within the board and within the organization by extrapolation. The board must maintain integrity in their operations and manage the financial resources of the organization effectively. The board must make appropriate investment decisions in the company with the view of safeguarding the interests of the stakeholders. The fact that the board accounts to the stakeholders implies that they must safeguard the financial resources of the company and curb any fraudulent operations. Additionally, the board authorizes the auditors to carry out extensive auditing of the company. The board must provide the auditors with a conducive environment for operations. The development of activities at Enron portrayed the role of the board of governors in the management of a company. The board at Enron covered the fraudulent operations of the company and participated in the fraudulent investment of the company’s financial resources thereby expediting the fall of the company and worsening the loss the public suffered. The board of governors must out source for the appropriate auditors and create a conducive environment for the operations of the external auditors in the company. The board of governors denied the external auditors such a conducive environment thereby curtailing the effectiveness of the auditing process. The boards of governors as hinted by their name are custodians of the public’s investments (Gray, Frieder, & Clark, 2005). When they collude with the auditors and participate in the fraud in the company, they not only perpetuate criminal activities but also deteriorate the state of the economy. The collapse of Enron resulted in an economic dip whose effects lasted for years. The structure of the board of governors and its participation in the affairs of a public company must permit for integrity and transparency in their operation. The board members must exhibit high ethical standards and operate with the view of upholding the interests of the public who invest in such companies. The structure should therefore permit for the investigation and subsequent removal of a member of the board. Additionally, the leadership of the board should portray the national outfit. The government must appoint qualified, experienced and integral individuals to oversee the management of public companies. This implies that the composition of the boards of governors must exhibit professionalism and ethical standards of operations. The government is yet another major stakeholder in the operations of a public company, the fall of such major public companies as Enron in the United States and the Royal Bank of Scotland group in the United Kingdom portrayed ineffectiveness of the government in the management of public companies. In both cases, the governments failed to oversee the operations of the public companies thereby creating a conducive environment for the fraudulent parties to fleece the financial resources of the company. Social contract theorists postulate that the people enter into contracts with specific individuals who form the government with the view of safeguarding the interests of the people. This implies that the government is the overall custodian of the interests of the public a feature that makes the government fundamental in the development of effective managements of public companies (Markham, 2005). The government oversees the management of public companies through the formulation of appropriate legislations that create specific organs to safeguard the interests of the people in the companies. As discussed earlier, in some countries, the government appoints the members of the board of directors to oversee the management of the public companies. However, numerous governments have exhibited inability to regulate the operations of several companies thereby permitting fraudulent managers to fleece the investors. Such scandals as the Enron, WorldCom and Tyco among others in the United States crushed investor confidence. Such scandals fleeced the American economy billions of dollars as the innocent members of the public lost billions in investments. The scandals portrayed the inability of the governments to formulate effective policies and appropriate law enforcement agencies to investigate and determine the extent of fraud in a company. Millions of investors thus lost billions as the government watched unable to safeguard the economy from the eminent crunch (Great Britain, 2009). The American government learnt from such crises thereby developing proactive legislations to curb the rising frauds in public companies. Among such legislations was the Sarbanes-Oxley Act Of 2002, also known as the SOX. The legislations provides for increased disclosure of information patterning the operation of public companies. Enron thrived in secrecy; the management of the company retained much of the company’s information to themselves as they created and marketed false stocks appropriately thereby enticing investors. The legislation revolutionized the stock market as the stock brokers must currently provide investors with detailed information about the company before enticing an individual to invest in its stocks. Additionally, the law requires companies to released detailed financial reports to their investors. The company must update the investors on the operations of the company and the financial income of the company. Such sustained transparency helps the public understand the features and operations of the company thus making them capable of stopping their investment when they feel threatened. The government of the United States has therefore increased the safety of the investors and the members of the public through the act. The act protects the public from possible fraudulent operations of public companies. The dedicated communication between the investors and the company ensures that the public remains privy to the financial operations of the company. Additionally, the management of such companies maintains increased accountability to the public through either annual or semiannual reports. Since the Enron scandal, there has not been any other major corporate scandal a feature that proves that the act has succeeded in cushioning the public from fraudsters who masquerade as managers. Additionally, the act has increased government intervention in the operations of public companies thereby cushioning the public from losing their investments and the economy from crises. References Burke, R. J., & Mattis, M. C. (2000). Women on corporate boards of directors: International challenges and opportunities. Dordrecht: Kluwer Academic Publishers. Farquhar, M. (2003). A treasury of great American scandals: Tantalizing true tales of historic misbehavior by the founding fathers and others who let freedom swing. Prince Frederick, MD: RB Large Print. Feld, B. (2013). Startup boards: Reinventing the board of directors to better support the entrepreneur. Hoboken, N.J: Wiley. Gray, K. R., Frieder, L. A., & Clark, G. W. (2005). Corporate scandals. St. Paul (Minn.: Paragon House. Great Britain. (2009). Pre-budget report 2008: Green fiscal policy in a recession : third report of session 2008-09 : report, together with formal minutes, oral, and written evidence. London: Stationery Office. Markham, J. W. (2005). A financial history of modern U.S. corporate scandals: From Enron to reform. Armonk, N.Y. [u.a.: Sharpe Read More