Forensic Accounting and Fraud Examination - Report Example

FRAUD As an investigator into the ABC Learning company out of Australia, it is my duty to compare and contrast the downfall of this company with that of the American companies Enron and Worldcom. This examination focuses on factors of growth patterns, non-transparent and deceptive accounting methods, and the impact of a large company falling on other businesses both in and out of the energy, computing, and education sectors. There are some similarities between these public, scandalous falls, and there are also differences. There is also the assertion that regulators could have stopped each situation earlier, although given hindsight, it is easy to say what could have or should have happened. Enron Worldcom ABC Learning Monopolistic tactics Y N Y Inadequate supervision Y Y Y Misleading investors Y Y Y Fined repeatedly during ascendancy N N Y Like Enron and Worldcom, ABC had a spectacular fall, because it fell from great heights. Before this fall, the company had nearly achieved a monopoly in Australian childcare. In fact, “The Australian Competition and Consumer Commission reviewed the companys acquisition of Peppercorn and permitted the deal to go ahead after imposing certain conditions including a requirement to close centres in some areas and agree not to purchase in other areas” (Samandar, 2009). ABC Developmental Learning Centres, because of its position in the market, found itself in charge of significant financial resources, and used these resources to build up bulwarks of protection against fines and sanctions by the government. In this respect, it is different from Enron and Worldcom, which worked multinationally in many cases to avoid oversight of the American government entirely. Unlike Enron and Worldcom, ABC was a domestic company only, without international operations. But like these giants, the company had a spectacular fall: “An unexpected drop of 42 per cent in profit in the second half of 2007 to $37.1 million and its inability to service its $1.8 billion debt triggered a decline in the companys share price. Several directors of the company were then forced to dump millions of shares after receiving margin calls” (Morrison, 2008). This led to claims that ABC was essentially cooking its books by overstating profits, claiming child care licenses as an asset and misleading investors. Like ABC, after a successful rise, Enron was called out on corruption, and its leaders have been indicted for fraudulent financial statements and business practices. Unlike ABC, Enron was a multinational company in the energy sector. Its fraudulent practice caused its stock to plummet in value when the extent of corporate corruption at Enron was revealed, not before. By 2001, it was reported that “The company, whose main business is energy trading, is in crisis following the termination of a multi-billion dollar rescue bid” (Weiss, 2001, p. 2). It folded as a result, but, like ABC and Worldcom, in its prime was considered to be an innovative company and industry leader. Enron at the height of its power contributed as much as $2.1 million in “individual, P A C, and soft money contributions to federal candidates and parties:” this ranked it “among the top 50 organizational donors in the 1999 – 2000 election cycle.” (Weiss, 2001, p. 1). After the very public fall of Enron, new accountability measures became the stuff of extreme media, public, and political scrutiny in the US, just as the fall of ABC caused a similar reaction in Australia. The problems involved focused on issues of internal financial controls and transparency as well as standards of accountability. Just like ABC and Worldcom, Enron was posting financial results which were designed not to reveal and disclose information, but rather to conceal losses through the assumption of profits through financial document manipulation. As an investigator, I need not point out to you that there are many concepts that can be focused on this issue. First of all, there is the concept of training. The question here becomes whether or not it is possible to train an employee, manager, or CEO to behave in a manner that is ethical. It becomes clear that the working environment of the business must also function in the societal space as a greater microcosm than the individual, but a lesser one than the society. Poor training programs are often the result of a poor reflection of the business as an ethical macrocosm of, and example for, the community, in terms of the impact of training on the employee. Therefore, the rules and codes of the society in terms of generalized drives towards ethical behavior must be followed by the company in its regards to the training of the employee and manager as well, and perceived as such by the individual, in descending order of relative size, to be a reflection of the greater society of which both are a part. This community sets the ethical code, in a sense, since it is at least theoretically there to determine a positive relationship with the individual through models of good behavior that does not bring harm upon others. Like Enron and ABC, Worldcom was a company that had good performance in some areas with a great deal of strength in integration and market development, but this company had the sort of retrenchment and financial opacity weaknesses that led to its ultimate downfall and scandalized position in the market. This is perhaps because performance appraisal was based on market development, rather than internal auditing and financial transparency. Specifically, the performance appraisal conduct of Worldcom, like ABC and Enron, turned a blind eye to issues of off-balance-sheet finances, synthetic leases and special purpose entities, being called into question through misuse by companies and employees. These concepts of performance appraisals and training are relevant because if any of these companies’ employees had been trained in ethics and appraised on transparency, problems may have been avoided. One solution offered by ethics training would be training employees in positive behavior, or socially positive behavior. Socially positive behavior may be influenced by moral behavior, which has a more religious semantic connotation, but it should not be confused with moral behavior. “An analysis of the annual reports of the 1998 Fortune 100 revealed 78 companies had included management reports, virtually all of which began with a statement that management took responsibility for the presentation of the reports in this study of the financial statements” (Willis and Lighitie, 2000). The main focus is the point of the economy before the US recession that sparked the global problems, versus the state of the economy presently in terms of what has changed. In my perspective as an investigator, I advise both Australian and US governments that the situation has changed, primarily along the lines of outsourcing, consumer debt, mortgage and banking industries, and other aspects. In the last two years, changes have taken place superficially, although the Australian and US financial systems remain fundamentally unchanged in their nature as a system that is not socialist, but rather is basically capitalist, in nature. Recommendations of the current investigation include an international shift towards corporate ethics and responsibility, so that government intervention in company matters does not remain common. There have been strides made in this regard internationally, including the recent development of solutions like the Sarbanes-Oxley Act. REFERENCE Morrison, K (2008). ABC Learning on the verge of bankruptcy. http://www.wsws.org/articles/2008/sep2008/abcl-s30.shtml Samandar, L (2009). ABC ignored boards. http://news.theage.com.au/breaking-news-business/abc-management-ignored-boards-order-20100419-sopg.html Weiss, Steven (2001). The Fall of a Giant: Enron’s Campaign Contributions and Lobbying. Open Secrets, 6(31). Willis, D.M. and S.S. Lightie (2000, October). Management reports on internal controls. Journal of Accountancy. Read More