Impact of Fraudulent Financial Reporting on Companies and Stakeholders - Essay Example

Fraudulent Financial Reporting Table of Contents Introduction 3 Discussion 3 Fraudulent Financial Reporting 4 Impact of Fraudulent Financial Reporting on Companies and Stakeholders 5 Measures for Eliminating Fraudulent Financial Reporting 6 Real Examples of Fraudulent Financial Reporting 8 Conclusion 10 References 11 Introduction In the present day competitive business environment, it is vital that companies operate in a manner where they could be able to assure long term business sustainability and competitive advantage over the rivals in a particular marketplace. With the changing context of the business over the years, companies need to offer services and/or products in alignment with the needs to the market or the customers. Organisations are also identified to face with numerous challenges, which further encourage them to use effective operational approaches to avoid complexities in business. Additionally, in order to ensure continuous growth in the business, organisations also need to ensure considerable control over their activities with specific regard to the financial operations and their activities. Owing to the increasing number of cases relevant to corporate scandals such as Enron and WorldCom, companies are becoming concerned towards ensuring efficient operations in the domain of financial reporting. This is important to attract as well as keep the trust of the customers intact, which again will be seen as a beneficial prospect for the overall business in the long run. Hence, it is crucial that in order ensure better control over the financial activities of the business along with eliminating the probability of fraudulent financial reporting, companies needs to heed towards minimising all the inappropriate activities that can result in deteriorated business results (Previts & et. al., 2011). Contextually, this particular study intends to provide a better understanding about the aspect of fraudulent financial reporting and the implications associated with it. Discussion It has been noted that among the various challenges that companies need to deal with in the present day scenario, fraudulent financial reporting is an integral part. Fraudulent financial reporting within any particular business can lead to or affect the overall efficacy of a business in the long run. Understanding gained from the past instances with regard to fraudulent financial reporting affirmed that such activities could lead to complete downfall of a business. The cases of Enron and WorldCom are some of the most notable instances that can be bring into notice in this context. Fraudulent Financial Reporting In order to depict the impact of fraudulent financial reporting in any business, it is vital to depict about the concept in a more elaborative manner. Notably, financial reporting is the approach of the companies to emerge with the financial statement of the business in a periodic manner that further depicts the financial positioning of the business. Accuracy is an important part of such process since, it directly relates to the ethical and legal position of a business in front of the law, potential customers and investors among others. Contextually, fraudulent financial reporting of companies can be defined as the approaches of business units to deliberately misstate their financial statements with the intention of presenting a better or desired financial positioning of the company for the concerned stakeholders. Fraudulent financial reporting at times also includes omission of important financial records and data that can deceive the overall information about the financial positioning of the business to the concerned investors. There are specific reasons owing to which companies adopt such unethical and illegal approaches within their operations. Notably, pressures created by owners at times influence financial domains of companies to emerge with fraudulent and misinterpreted financial data that can act favourable for the company in its short term operations. Business owners usually intend to present their financial business performance as profitable and sustainable in front of the investors, so that the latter are encouraged to invest on the business. There are scenarios where lack of internal business ethics and the absence of proper corporate governance led to fraudulent financial reporting. Companies that are quite reluctant or careless towards ensuring the prevalence of ethical practices in business are deemed to be the victims of fraudulent financial reporting within their financial operations. It has been also comprehended that conflict of interest and lack of understanding amid the top level management of companies can also lead to fraudulent financial reporting (Klapproth, 2013). When there is a conflict of interest amid the top level management, the communication and the flow of information deemed to effect in a significant manner. In this context, efficiency in the financial reporting of the business can be regarded as highly uncertain. Lack of proper education and training of the accountants and others in the financial operations of companies can also act as a potential reason that result misinterpretation of financial statements (Rezaee & Riley, 2011). Hence, it is quite apparent that these factors act as catalyst in fraudulent financial reporting within the operation of the companies. Impact of Fraudulent Financial Reporting on Companies and Stakeholders It is evident that when companies’ malpractices in their overall legal and ethical principles while conducting their business activities, they deemed to face negative impacts of the same. Likewise, non-adherence to the ethical and legal principles of accounting can influence the business negatively. Notably, companies that are involved with fraudulent financial reporting are on the receiving end of direct impact of such practices in both the short and the long run. The impact may not only be in the form of financial loss but it can be in the form of reputational damage also. Notably, banks who meet the funding source of companies involved with fraudulent financial reporting will be in the verge to lose its investment. It has been noted that in general scenario, fraudulent financial reporting is conducted with the intention to resent an improved positioning of the business in front of the investors and other stakeholders. However, in the process it affects the quality as well as integrity of the process of financial reporting of the business. Furthermore, since fraudulent financial reporting is against the objectives of any business, it will certainly lead to jeopardizing the accuracy of the financial results in a considerable manner. Accounting professionals associated with the development of financial reports in any business may also be at risk of losing their license once caught on the grounds of fraudulent financial reporting. It has also been observed from secondary sources that misstated financial reports may often led to diminishing the capital markets through effecting the information presented in financial statements. However, the major impact of such sort of fraud can be mostly seen within the companies, which are directly involved in fraudulent financial reporting. The impact of fraudulent financial reporting can be in the form of bankruptcy or major economic loss for businesses, which are mostly non-recoverable. Furthermore, in similar regard, it has been also learnt that the companies that are integrally involved with financial frauds will affect its operational effectiveness and the entire business will suffer from the same. The impact of fraudulent financial reporting can be also apparently seen in the well being and interest of the investors. It is evident that inventors usually put their money in companies, which are quite effective and profitable in terms of performance. With companies involving in fraudulent financial reporting investors are at extreme risk to lose their investment. This will also influence their future approach towards investing in companies, which will have negative effect on the overall sector a company operates in (Inflibnet Centre, 2010). Hence, it is important that the causes of such fraudulent approaches of companies be eliminated from the grassroots level. Measures for Eliminating Fraudulent Financial Reporting It is apparent from the above discussion that fraudulent financial reporting has notable impacts on the performances of the business units along with the interest of the investors and other stakeholders. In this regard, it has become quite prominent for concerned authorities to emerge with plans and techniques that can hinder companies and accounting firm presenting misstated financial statements. Contextually, proper prevention, detection as well as mitigation of financial frauds in business are crucial. Senior management of business must seek to identify the right blend within an organization culture that can influence employees and accounting professionals in the financial domains to conduct their activities relevant to financial reporting with utmost ethicality and legality. The employers must show a strict approach towards dealing with any sort of internal fraud, so that example can be set for other employees to keep them away from any such activities. Furthermore, companies must also seek the help of internal and external auditor to ensure that each and every activities of the business relevant to financial reporting is conducted on the basis of international accounting rules along with a set of ethical codes practiced by the corporate. This aspect might ensure that an organization is able formulate financial statement in the most accurate manner altogether. Furthermore, it must also be mentioned that proper flow of information from the top level management to the lower level management might also act as an effective procedure in dealing with the problems of fraudulent approach in financial accounting. In addition to the same, the management of any business must also seek to provide training services to the accountants and professionals in the financial domain to update them about the changes that take place in accounting principles and standards on a continuous basis. This aspect will also help in eliminating the conduct of fraudulent accounting activities within any business by accounting professionals. It has also been noted that inappropriate management style as well as lack of supervision within any business can also contribute towards the prevalence of fraudulent activities in the domain of financial accounting. In this context, companies must need to emerge with effective planning of supervision in the workplace, so that they could be able to track and rectify all the unethical practice that prevails in the accounting domain. Disputes with regard to the practices of ethical and accounting standards can also lead to the existence of fraudulent activities in financial statements. Contextually, it is vital that companies follow a specific set of accounting based on the accounting norms set by the local government of the region they are operating in. This will not only result in lack of complexity in the reports but at the same time, it may also eliminate the prevalence of fraudulent approach in formulating accounting statements (Sengur, 2012). Real Examples of Fraudulent Financial Reporting In order to develop a better understanding with regard to fraudulent financial reporting and its implications, real examples of WorldCom and Enron would be vital to consider. The company i.e. Enron was one of the market leaders in the US in the energy sector. It used to prevail among the top 10 companies of the nation owing to its strong market performance. Although, owing to certain specific issues in the corporate governance structure of the business, the company faced bankruptcy in the later scenario. It has been identified that the corporate governance structure of a business lacked in terms of internal control mechanism. Contextually, both legal as well as ethical actions of the business were considered insufficient to control the financial operations towards a positive direction (Sterling, 2002). The internal controls of Enron were quite weak owing to the aspect of rising internal conflicts between the top level management, which is considered to be one of the major reasons for the total collapse of the business. It has also been observed that the financial accounts of Enron were quite complex, as it intended to utilize accounting limitations and tried to modify financial accounts that can work in favour of the business. The company intended to show a positive financial positioning of the business to attract the investors of the company further enhancing the reputation of the business in the global business market. In similar regard, the example of WorldCom would also be vital to depict. Notably, in the WorldCom scandal, the management of the company was using false accounting methods for manipulating the accounts along with depicting the accounts of the business in the most desired and appropriate manner. This aspect further resulted into total collapse of the business (South African Reserve Bank, n.d.). Conclusion From the overall analysis of the discussion, it can be comprehended that in the present day of complex business environment, companies need to perform effectively in each of the business domain to assure that they can be able to develop a sustainable and competitive position for themselves in comparison to that of the rivals. Contextually, financial reporting also acts as an integral part of the operations of a business that can impact its business sustainability and profitability one way or the other. However, with the increasing case of fraudulent financial reporting, the need for effective internal business governance has increased to the next level altogether. Notably, companies usually adopt illegal and unethical practices with the intention of manipulating the financial statements of a business in a desired manner, so that a better financial positioning of the business can be depicted. The causes of such activities include inappropriate corporate governance and ethical structure, lack of proper supervision from the top level management and lack of appropriate use of accounting standards among others. All these factors have not only led to fraudulent financial reporting, but at the same time, it also impacts the business in the form of economic loss, loss of reputation and bankruptcy in severe scenarios. Contextually, several measures have been suggested for companies to be able to tackle issues relating to fraudulent financial reporting in business. This can be in the form of adhering to a specific and particular set of accounting standards along with following ethical codes that can obstruct the concerned departments in accounting domain to take legal and ethical decisions for proper financial reporting. Hence, it can be concluded that proper measures are indeed important in having better control over the financial operations and reporting in any business. References Previts, G. & et. al., 2011. A Global History of Accounting, Financial Reporting and Public Policy: Americas. Emerald Group Publishing. Inflibnet Centre, 2010. Financial Statement Fraud: Causes and Consequences. Chapter 3. [Online] Available at: http://shodhganga.inflibnet.ac.in/bitstream/10603/9806/9/09_chapter%203.pdf [Accessed November 04, 2014]. Klapproth, U., 2013. Fraudulent Financial Reporting. GRIN Verlag. Rezaee, Z. & Riley, R., 2011. Financial Statement Fraud Defined. John Wiley & Sons. Sterling, T. F., 2002. The Enron Scandal. Nova Publishers. Sengur, E. D., 2012. Auditors’ Perception of Fraud Prevention Measures: Evidence from Turkey. Annales Universitatis Apulensis Series Oeconomica, Vol. 14, No. 1, pp. 128-138. South African Reserve Bank, No Date. Enron Corporate Governance Issues. Attachments. [Online] Available at: https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/4695/Annexure_D1.pdf [Accessed November 04, 2014]. Read More