Fraud Examination Issues - Essay Example

Fraud Examination Fraud involves the misappropriation of assets in a company. It also includes of false financial statements to the authorities with the aim of gaining undue benefits from them. Also, the methods and techniques used to execute such frauds are varied. It is vital to note that fraud did not start recently; it has been there even in the previous decades. Documents highlighting different types of frauds involving different persons are generally available. However, over the years, fraud has evolved to become more complex in nature. The Internet, social media and the more advanced technology are among the factors that have changed the nature of fraud (Tan 26). Over the years, a lot of new issues have arisen that have changed the way fraud is executed. Inventions of the internet, social media and other technological advancements have increased the number of techniques of committing fraud. However, the other aspects of fraud have remained almost the same. The culprits still use a lot of personal networks to pull off such an unscrupulous activity. It is so evident that fraudsters in the past, from the 1920s, had very good financial skills that enabled them to intelligently falsify information. Technology has made it simpler for the culprits to commit this offense. Other motives that lead one to commit fraud have been identified recently. According to Peecher, Ira and Ken (42), executives heading big companies committed financial statement fraud in the past mainly to gain financial benefits for him or herself. In the 1920s, Ivar Kreuger was involved in fraud where he forged bonds In Italy . His act was a result of pressure, opportunity and rationalization. It lead to a big loss by the investors a significant loss of personal expenses. As a result of the Kreuger crash, several regulations were enacted; securities act 1933, securities act 1934 and anti-trust acts across Europe. In 1930s, there was the Mckesson aRobbins fraud. It involved Philip Musica and his three brothers. Musica had earlier been accused of tax evasion and using fake documents to borrow from banks. They also wrote fake purchase orders and received commission from fake sales. They also registered a fictitious sales agency called W.W Smith & Co. It was detected when the secretary, Juliani Thompson became discovered fake credit cards. The Mckesson currently runs free of the past frauds. The 1980s was not any different. Frauds were committed. An example is the one that involved Lincoln Savings and loan Company. Fraud was executed by siphoning on money from the company into the accounts of American Continental. Charles Keating was the perpetrator and financial position of the company plus other factors like personal connections that offered protection facilitated this fraud. In 1960s, Frank Abagnale case occurred. He was involved in impersonation, credit card fraud and bank fraud. He caused his father a a cash bill of about $3,400. He also wrote personal cheques on overdrawn accounts. This fraud took place amid pressure on Frank to make money. Opportunity and rationalization also contributed as he thought he could make more money easily using these illegal methods (Bolton, Richard & David 76). He impersonated an attorney, a doctor and a pilot. Later, he was caught, charged and imprisoned for 5 years after he was released to consult for the FBI. Waste management company inc. was also involved in a fraud case in the 1990s. It was a financial statement fraud. The CEO and other top management executives were involved. The fraud was detected when the new CEO, the management team and SEC scrutinized the books (Perols & Barbara 43). The culprits were later forced to compensate the shareholders. In the 2000s, there was a case involving the Lehman brothers. The company was a general store established in Alabama. It did business around the globe. On 15th 2008, the company filed for bankruptcy protection. It was the largest in history. The fraud Lehman committed involved the balance sheet. They used a repurchase get billions of dollars in the transactions therein. The company executives changed the data on the balance sheet and made the company look promising whereas it was not. During the same period of 2000s, a fraud involving the Worldcom occurred. The financial statements had been manipulated. The company structure, emotions and the lifestyles of the perpetrators are some of the factors that led to the fraud. The key perpetrators included the CEO, Bernie Ebbers and the CFO. It was detected after obscure tips were forwarded to the internal audit team. The fraud would have been avoided if there was more access to company information, strong culture and strong internal control systems. The culprits were later prosecuted and jailed. Mortgage/Subprime fraud occurred during the same period, the 2000s. It occurred between 2007 and 2009. It involved mortgage brokers, Fannie Mae, Freddie Mac and the investment banks. Jp Morgan, for example, ignored the third parties’ complaints of non-compliance and sold mortgages without following the proper procedure. This fraud occurred as a result of a combination of pressure, opportunity and perceived rationalization. Xerox scandal was another case that featured in the 2000s. It was a financial statement fraud that was characterized by overstated earnings via the reserves from the tax refunds. The crime was committed six Xerox executives which included the Ceo, Directors, controller and the treasurer. The audit firm, KPMG, was also implicated since it knew about the fraud and failed to report. SEC investigated Xerox up to 2002. Xerox was afterwards punished and was subsequently forced to settle the compensation. However, it never admitted guilty. During the same period of 2000s, another classic case of fraud took place. It involved the HealthSouth Company, the largest diagnostic, surgical and imaging company of the time. The company had contracts with so many celebrities, including athletes and other sports personalities. It occurred between 1984 and 2003 where several executives and top founders of the company committed a financial statement fraud. The CFO, Weston Smith, was the whistle blower. Pressure, opportunity and rationalization were among the factors that facilitated this fraud. It could have been prevented but there was lack of adequate internal control systems. Many investors lost their money. The culprits were later investigated, prosecuted and some of them imprisoned. Currently, most of them are out of jail and some of them are public speakers, speaking against business fraud. Health is still in operation up to now. Tyco fraud involved the CFO, CEO, and the General Counsel of the time. They were accused of security fraud, cooking the books, insider trading and bribery. It was discovered after a series of criticisms against the company that led to further investigation. A mixture of pressure, opportunity and rationalization facilitated the fraud. Kozlowski for example led a lavish lifestyle and needed more money. Koslowski and Swartz were later sentenced to 8 ½ years in prison. Adelphia communications fraud is another fraud that was committed between 1998 and 2001. It involved manipulation of the securities. The top management was implicated. This included the Riga family plus the CFO and the VP finance at the time. It was easy for the fraud to avoid detection for sometime because most of the family members were in the board of directors. Things that were manipulated included overstating earnings, use of the company funds for private affairs and hidden liabilities. It was then detected by investors and SEC which led to more investigations. Many other illegal activities were the uncovered. The company reacted with the new CFO trying to win the trust and confidence of the investors. The family members avoided press, an attempt to disconnect themselves from the fraud. Over 4.8 million customers were released as the Adelphia Company died. Another interesting case is the one that involved Bernard Madoff. He registered a company, Madoff Investment Securities LLC, in 1960. The company suffered a number of legal suits by some of its clients, some of which were compensated. According to Arvedlund (34) the company had committed a list of frauds which included a Ponzi scheme, securities fraud, and financial statements fraud. All these led to the arrest of Madoff in December 11, 2008. David Kotz, former Chief of Investigations, investigated the company and found no fraud. But the truth was uncovered when Madoff could not be able to pay off his investors who wanted their money back. The fraud was facilitated by weak internal control systems coupled up with other factors like economic pressure, increased opportunities to commit fraud and rationalization. Madoff is currently still in prison serving a sentence of 150 years. The Charles Ponzi case is another classic case of fraud (Rees 67). It has popularly coined the term ‘Ponzi scheme’. It occurred in the 1920s (Bhattacharya 56). It was facilitated by factors like increased pressure to make money, many loopholes that could be used to commit fraud and rationalization as he thought he could create a legitimate business (Liz 98). Many victims of this fraud lost their life savings. Ponzi was later charged with 86 counts of mail fraud. Ponzi ended up dying penniless (Deason, Shivaram & Gregory 22). Identity theft is a type of fraud that involves someone using false personal data to obtain an economic advantage over the others (Lai, Dahui& Chang-Tseh Hsieh 51). Deception is the main feature of this form of fraud. The intention here is to gain a financial advantage based on wrong personal information. Statistics show a rising rate of identity theft; lost indemnities of people, last records and financial losses have been on the increase (Hamilton & Francis 60).This type of fraud is further divided into categories: financial, medical, criminal and synthetic. The financial form occurs when a criminal uses someone’s identity to commit crime that results in a financial loss (Archer et al 43). On the other hand, the medical type of fraud is seen when someone uses someone else’s personal information to obtain medical services. This can negatively affect the health of the innocent individual. Criminal form occurs when an arrested individual gives to the law enforcer information belonging to someone else. Synthetic is where a criminal uses the identities of their victims. Examples of people who can steal peoples’ identities include employees, co-workers, friends and hackers. Social engineering is one way through which these thieves are able to access personal data. Money laundering is another way criminals use to commit fraud. Money laundering involves shifting money made out of a criminal activity into a legitimate business (Chong & Florencio Lopez‐De‐Silanes 66). This makes it look like the money was made through a genuine process. Halliday, Michael & Peter (82) state that business men that are involved in illegal activities like drug trafficking, child trafficking, girl trafficking and weapon trafficking use this method to disguise the real source of their wealth. Money laundering occurs in a series of stages. It is done by financial experts who understand the concept of financial reporting well. Works Cited Archer, Norm, et al. Identity Theft and Fraud: Evaluating and Managing Risk. University of Ottawa Press, 2012. Arvedlund, Erin. Madoff: The Man who stole $65 billion. Penguin UK, 2009. Bhattacharya, Utpal. 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"Biometric Benefits; Fingerprint readers reduce inventory shrink and eliminate payroll fraud." Retrieved 12th December (2012). Peecher, Mark E., Ira Solomon, and Ken T. Trotman."An accountability framework for financial statement auditors and related research questions."Accounting, Organizations and Society 38.8 (2013): 596-620. Perols, Johan L., and Barbara A. Lougee."The relation between earnings management and financial statement fraud."Advances in Accounting 27.1 (2011): 39-53. Rees, Malcolm. "Warning signs of Ponzi schemes: investigations." Personal Finance Newsletter 388 (2013): 5-7. Tan, Harry SK. "E-fraud: Current trends and international developments." Journal of Financial Crime 9.4 (2002): 347-354. Read More