The Incidences of Fraud at Jamaican Water Project - Case Study Example

Jamaica water properties The paper analyses the incidences of fraud at Jamaican water project that contributed to its drastic economic performance in the early 1990s. The company was established in the 1880s and had had an excellent performance for a long period. The company’s progress was adversely affected by the unethical code of conduct displayed by its chief finance officer (CFO)soon after its engagement in a new line of products. The CFO liaised with some senior accountants to tap company’s wealth and resources for personal interest. The internal auditors made the fraud saga worse by failing to report suspicious accounting information to the relevant department of the company. They decided to remain silent after learning that the CFO and some senior accountants were involved in fraud to avoid being fired. The management of the company had not established effective mechanisms of fighting fraud and corruption and therefore it was difficult to prevent the company from collapsing. The company’s CEO learnt of the increased fraud incidences and raised the alarm on the subject. The CEO later resigned due to disagreement with some senior officials of the company. It was difficult to solve the fraud problem at JWP Company since the major actors in the misconduct were senior executive members of the management board. Introduction Companies are established with a variety of objectives and goals to be achieved. The core objective of establishing a company or any business is to earn a profit. However, many businesses are faced with the challenge of getting low returns than anticipated and end up making huge losses. The Jamaica water company is among the companies that developed gradual from a small to a multibillion venture. The company was established in the late 1880s and was registered as Jamaica Water Supplies Company. During the initial years of its formation, Jamaica Water Supplies Company displayed excellent economic progress and was able to acquire more assets and facilities. For instance, in 1902 the company bought the Jamaica Township Water Company and later bought several companies thereby changing its name to Jamaica Water properties in 1976. In the early 1980s, the company had grown too large, and the management decided to incorporate another line of product to maximize the profits. The company ventured into the telecommunication industry which involved selling computers and other information technology items. As a result, the company become too large for effective management, and this adversely affected its performance. In addition, the unity among the various departments deteriorated due to the large size. The diversification strategy proved to be uneconomical when the company made a loss of over six million in the first quarter of 1990. The then CEO, David Sokol blamed the finance department for gross misconduct, corruption and high incidences of fraud (Markham, 2005). Sokol later resigned due to disagreements with the company’s finance department and some top officials. Auditors’ role in the fraud saga Internal auditors. The internal auditors at JWP failed in their role to question the company’s chief finance officer (CFO)about the various suspicious accounting transactions. The auditors identified erroneous purchase approaches used by the company and the recording of non-existing assets but never questioned the CFO about the issue. The auditors were afraid that if they questioned senior company officials, their jobs might have been terminated.The fear of being fired barred the internal auditors from giving proper audit reports so that not to expose the unethical actions taken by some company bosses. Crawford (2008) states that, it is unethical for auditors to be irrational in advising the management of a company on any accounting technicalities regardless of the nature and behavior of top management officials. External auditors The company’s external auditors also contributed to the economical downfall of JWP since they never executed their task as expected. The major duty of external auditors is to analyze and audit the books of account of a company and give the most appropriate advice regarding accounting and financial transactions undertaken by the company (Feldmann, 2012). Unfortunately, this never happened with external auditors hired to audit the accounts of JWP Company. The auditors were irrational in relaying their findings to the management of the company simply because they wanted to keep the good relationship with the CFO. Exposing the CFO would have terminated their friendship and consequently stop the benefits acquired through him. Evidence of fraud at JWP Inappropriate purchase method of accounting for acquisitions The chief finance officer and his assistants engaged in a number of unethical financial practices which adversely affected the company’s economic performance. Among these practices was the widespread fraud in the purchasing methods used. The accountants manipulated the accounting information to appease the management. The company’s accounting department never observed the accounting rules and principals especially when recording purchases transaction. The information given was untrue, and this made it difficult for accounting analysts to detect the numerous fraud cases on time. Recording of non-existing assets The number of assets appearing on the company’s books of account were very different from the actual visible assets. A lot of imaginative assets appearedin the books of account since the accounting records do not show whether the recorded asset is real or just a mere fiction. The CFO exhaustively used this weakness of accounting to earn him and his associate accountants’ money that was not genuine. The CFO was aware that, it would be difficult to identify all the assets of the company since it had expanded to a large company and carrying out a physical count would be unmanageable or take a lot of time. Manipulation of percentage- of- completion method Manipulation of percentage-of-completion method by the company’s accountants was evident especially when it came to long-term contracts. The CFO and his associate accountants recorded only the residual money after taking their share in order to convince the company’s stakeholders that no money was lost in the contracting process. The stakeholders remained in dark on matters regarding financial position of the company since the information given regarding the company’s financial transaction was untrue. Erroneous accounting for Net Operating Loss Carry over (NOLCO) NOLCO is accounting practice whose core objective is to assess an enterprise’s books of account to identify the chances of suffering a loss and thereafter devise means of avoiding losses in the future. The practice is important for any business since it ensures that the company does not close down because of paying taxes especially when it runs on a loss. The accountants at JWP misused this practice by giving false information regarding the company’s financial status to evade tax. The information appearing on the books of account was exaggerated and therefore all the decisions made out of them was erroneous and misleading. Factors that contributed rampant fraud at JWP The accountants at JWP, during its economic crisis, engaged in accounting malpractices to acquire more benefits than they were supposed to get. The accountants gave figures contrary to the actual figures to mislead the company’s management about the economic progress of the company. The major reason for doing this was to increase their bonuses. For instance, the chief finance officer wanted to earn more bonuses since he was to be reward on the basis of performance. For CFO to acquire extra bonus, he liaised with some accountants to give false figures to show the management that the finance department was making outstanding progress and therefore earn extra bonus. The management was not keen when hiring external auditors to examine the accounting and financial transactions of the company. For instance, the management did not take enough time to investigate any personal relationship between any company employee and the officers from the external auditing firm hired. In this regard, the management never understood the personal relationship between the CFO and the two external auditors. The close personal relationship between the CFO and the auditing firm hindered genuine remarks concerning the financial status of the company. The Earnest and Young auditing company continued giving misleading information regarding finance status of JWP for six consecutive years just to shield CFO from being fired. In essence, the external auditing firm hired deteriorated the fraud in equity at JWP by failing to unfold the truth regarding the gross misconducting of the CFO and other senior accounting officers. The company had not established staunch mechanisms of monitoring financial transactions among the various departments. The existing mechanisms were unclear, and the officers in charge of financial transaction monitoring were there to serve their self-interest at the expense of shareholders’ fortune. The company had not established a team of specialist to investigate the behavior of the various employees in order to avert fraud cases. Managers’ role in the fight against accounting fraud The company’s managers were responsible for the financial problems that faced JWP in the early 1990s. Senior accountants and internal auditors participated in misleading the company’s management about the financial position of the company. The accountants never served the shareholders’ interest and were only worried of their job security and how to earn more money through unscrupulous means. The manager of a company or a department within a company is the chief authority and is entrusted with the responsibility of formulating rules and ensuring that the implementation process is adhered to accordingly. The managers of any company must ensure that the actions taken do not drive the company out of business. The bankruptcy of many companies emanate from the failure by managers to establish effective precautionary measures to guard against unethical accounting practices (Rittenberg, Johnstone&Gramling, 2010). If the managers and accountants of JWP followed the ethical management and accounting principles, the company financial positions would have remained unchanged. Poor Work relations between the junior employees and senior employees The union between senior and junior employees at JWP was very poor. The junior employees were afraid of reporting fraud cases of some senior employees such as the CFO since doing so would put their job at risk. Additionally, the management board of JWP contributed to the increase in fraud cases by failing to establish independent platforms of financial reporting for both the junior and senior employees. Independence in financial reporting would have provided the management with genuine accounting transactions and detecting suspicious transactions would have been made easier and on time. The management of any company should always protect the junior employees from misuse and harassment by senior employees so that the juniors execute their chores without favor or fear of being fired (Stachowicz-Stanusch, 2010). Probable solutions to JWP fraud saga Establishment of a sovereign body to watch over the selection process of external auditors- JWP Company should establish an independent body of professionals and entrust them with the responsibility of investigating and selecting external auditors. Establishing an independent body would enhance comprehensive vetting of external auditors before giving them a job. In this regard, the report that would be given by the selected external audit firm can be relied upon in decision making. The rampant fraud the company went through was fueled by choice of biased external auditors who gave reports in favor of the CFO and the senior accountants. This would have been prevented if the company conducted a comprehensive examination of the external auditors through an independent body. Strengthening of the employees to employee relationship. JWP Company should establish a free and fair employee relationship to ensure that no employee works under pressure. In this regard, the company should ensure job security for junior employees so that they can be free to give accounting reports without fear of being fired. The company should move an extra mile and restructure its accounting reporting system to detach junior employees from control by their seniors. This will aid in exposing unethical behaviors portrayed by senior officers and therefore fix financial irregularities before they endanger the performance of the company. If the issue of job security for junior employees was taken care of during the initiation stages f the company, the fraud cases would have been minimized or solved for good. Establishment of effective internal control measure. The company should establish effective internal control measures and ethical code of conducts to guide employees on how to execute their tasks in the company’s interest. JWP management team should ensure that the employees are aware of the company’s objectives and mission so that all work together to achieve the set goals. In addition, the management should establish accessible and secure platforms through which junior employees can report unethical behaviors such as fraud and misappropriation of funds by senior employees. In this regard, the company should ensure adequate privacy and confidentiality to those who report fraud cases for security purposes. The company should create a body that will be summoning the CFO and the internal auditors from time to time to monitor the company’s economic progress. In essence, the body will be able to question the internal auditors and the CFO about any accounting transaction that might appear unclear. Through this, the fraud cases will be minimized, and the auditors and the CFO will fear engaging in any accounting malpractices since they will be held responsible. Conclusion The Jamaica Water Properties Company was faced with a serious fraud scandal in the early 1990s that almost terminated its operations. The company’s chief finance officer and some senior accountants engaged a number of unethical accounting practices that accelerated fraud in the company. Fraud is among the major causes of poor performance of big companies. The management team should always ensure that the incidences of fraud are completely whipped out and that the external auditors are selected with extreme care. References: Crawford, M. (2008). CPAs Multistate Guide to Ethics and Professional Conduct (2008). New York, NY: CCH. Feldmann, D. (2012). Advances in Accounting Education: Teaching and Curriculum Innovations. New York, NY: Emerald Group Publishing. Markham, J. W. (2005). A financial history of modern U.S. corporate scandals: From Enron to reform. Armonk, N.Y.  [u.a.]: Sharpe. Rittenberg, L. E., Johnstone, K. M., &Gramling, A. A. (2010). Auditing: A business risk approach. Mason, OH: South-Western Cengage Learning. Stachowicz-Stanusch, A. (2010). Organizational immunity to corruption: Building theoretical and research foundations. Charlotte, NC: Information Age Pub. Read More