The Occurrence of Fraud - Report Example

Introduction With growing industrialisation and more of corporate, corporate scandals have drawn significant attention of the society due to the occurrence of fraud. A corporate fraud usually affect the shareholders, creditors and lead to a decline in the trust and confidence of general public in large towards the financial system of an organisation. Fraud can be explained as a deliberate false representation of a fact or concealment of a fact which should had been disclosed to gain some advantage from it and deprive other of its legal rights. It is to be noted that for an act to be fraudulent there must be material fact and it should essential affect a person’s decision to do some action. A fraud may be classified as Management Fraud or as an Employee Fraud. Management fraud may be actions like a fraud or misrepresentation in the financial statement of the organisation, assets misappropriations, illegal acts being performed by the management, bribery taken by the top management etc (Bales & Fox, 2011). Employee fraud may include acts like theft of property of the organisation or embezzlement of assets of the organisation, certain illegal acts performed by the employee, breach of duty etc (Anand, Ashforth & Joshi, 2004). Literature Review Occurrence of fraud or corporate scams and scandals can be dated back to 1494 of Medici Bank, however at that time or till the 20th century frauds were limited but there has been a sharp increase in corporate fraud detected in the early 20th century and the number is increasing day by day. From the start of 20th century till date the number of corporate scandals which had a major impact on the society at large and which had hit the world economy at a considerable rate has been around 30 in number (Agoglia, Kida & Hanno, 2003). As per The Association of Certified Fraud Examiners, there has been around a loss of US$650 Billion till 2006, which has been increasing at a rapid rate. Fraud affects the society at large the culture of an Enterprise indulges in fraudulent practices where very little consideration is given to social norms and laws of the society (Ball, 2009). It is to be noted that an institutional structure plays a major role in controlling and preventing fraud to a considerable extent. It emphasis on creation of institutional structures for online exchanges to control and prevent fraud in the online business environment since E-Business has been so dominating in this modern world. One can say that ethical culture of an organisation has a direct and great impact on the risk level of fraud in an organisation. It is due the socialisation practises in an organisation that allow existing and new comers to accept unethical practices and fraudulent practices in an organisation. Corporate Governance plays an important role in preventing and detecting fraud in today’s environmental conditions. The major corporate scams in the United States concluded that models of corporate governance and policies needs to more stringent in its rules and applications in order to prevent and avoid future financial crisis to a considerable extent. Thus, by studying the literature of fraud one can come against how different kinds of fraud had occurred in our society and affected the society at large. It brings an insight of what kind of fraud has occurred, how a research was conducted to know about and the fraud and how it could be used as a tool to prevent future fraud (Albrecht, Albrecht & Dunn, 2001). Auditors play an important role in detecting fraud and management plays an important role in both controlling fraud in its organisation and it may also acts as an originator of fraud if business ethics are not followed in a proper manner. It is mostly observed that auditors use brainstorming procedures which are generally open discussion that generates a lower fraud risk whereas auditor using nominal group and round robin brainstorming practices detects a higher fraud risk in its practice of detecting fraud in an organisation. Study on Some Corporate Collapse in US Corporate scams and scandals had been very prominent in today’s world. Even most powerful countries like United States had failed to prevent frauds in its country, there had been some major corporate collapses which on study has been found to be fraudulent practices in an organisation. Here we have taken two such frauds which had largely affected Unites States and world economy. Information about Adelphia Adelphia is a cable television provider in US. It is to be noted that Adelphia was a family business and became the 6th largest cable company in the world with nearly 5.6 billion subscribers to the company. This family business enjoyed most luxury of the world through its public company. The company through their renowned serives was able to deliver superior performance. The company was caught in a scam which has been provided below. The scam led towards bankruptcy and made the organization file for bankruptcy. Information about Lehman Brothers Lehman Brothers which was a global financial service firm was the most admired securities firm in the world. It went bankrupt in the year 2008 with over $639 billion in assets and around $623 billion in its liabilities. It collapsed affected thousands of players in the financial market, numerous aftershocks were felt due to its cross-border inter dependents on the firm. The Scams Adelphia fraud in the year 2002 in the cable television was a major corporate scam. It is mainly on account on internal corruption in the organisation. It is to be noted that Adelphia was a family business and became the 6th largest cable company in the world with nearly 5.6 billion subscribers to the company. This family business enjoyed most luxury of the world through its public company. Accounts of the company were mishandled and personal expenses were charged in the books of the company. There were many fraud charges against the company like breach of contracts and fiduciary duties, violation of RICO act, unjust enrichment, misuse and wrong conversion of corporate assets to personal assets etc. the fraud mainly took place on account of Adelphia backing personal loan of around $2.3 billon to the Rigases, which manipulated its books to inflate its books and make a rise in its stock prices and further created private partnership with Adelphia as a self- dealing tool. Thus the accounting policies were seriously misused by Adelphia to engage in non-corporate projects and use its fund in a legitimate manner (Albrecht, Albrecht & Albrecht, 2004). Thus we see that financial policies were weak and the fraud was on account on internal corruption and misuse of the organisation ethics. There were other factors such as the auditors were not prudent enough to detect the fraud at an early stage and internal management was completely involved in the fraud and acted as per their desire rather than the objectives and ethics of the organisation. The fraud was thus a complete mix of internal corruption, auditor negligence and false accounts which manipulated the stock prices and allowed corporate assets to be easily transferred and use as private assets. Another corporate scam which shook the United States and the world to a great extent was the scandal of Lehman Brothers. Lehman Brothers which was a global financial service firm was the most admired securities firm in the world. It went bankrupt in the year 2008 with over $639 billion in assets and around $623 billion in its liabilities. It collapsed affected thousands of players in the financial market, numerous aftershocks were felt due to its cross-border inter dependents on the firm. The main players who were involved in the bankruptcy of the world’s largest financial firm were executives of the Lehman Brothers itself and the auditors of the firm i.e. Ernst & Young. The financial statements of the company were misleading and did not represented a true and fair view as it hid over $ 50 billion in loans which were disguised and shown as sales in the books of accounts. Lehman Brothers sold toxic assets of the company to Cayman Island Banks with a mutual understanding that the assets would be bought back eventually in the coming years. This misrepresented the financial statements to a great extent as it shown overvaluation of cash assets in the company of $ 50 billion and correspondingly devaluated its toxic assets by $ 50 billion which resulted in the ultimate bankruptcy of the Lehman Brothers (Bales & Fox, 2011). Thus we see that this fraud was majorly due to false accounting policies and misrepresentation of the financial statements to its stakeholders. The auditors of the company were completely involved with the internal management system of the organisation and concealed the true facts of the organisation. Lack of sound policies in corporate governance, weak internal control, wrong financial statements, misuse of the business ethics was responsible for the downfall of the company. Thus, to conclude we see that both these scams were largely affected by wrong accounting policies and there were other factors such as low internal control, weak corporate governance, dishonest management structure, weak business ethics and negligence and involvement of auditors in making the fraud a success and downfall of the company (Bayou & Reinstein, 2001). Measures to prevent Frauds Taking pro-active measures to prevent fraud is one the biggest concern in running a business. An organisation may be largely affected if the internal control system of the organisation is weak and sound business ethics is missing. Fraud has formed a major concern of the world economy today and strict legal laws had been enacted both nationally and globally to strictly punish the crime makers. An organisation should use business policies to control and prevent fraud in the organisation. Clear standards should be set up from the very beginning of the operation of a business, business ethics should be clearly defined and strict punishments should be used if anyone is found not obeying the ethics. When hiring a new employee proper check on employee references should be made mandatory as a part of internal control to check on the background of new hired employee. Organisation should be secured both internally and externally including proper safeguards on the payroll accounting. Strict controls should be imposed on the review system of sensitive information of the organisation and secrets of the company should be under severe surveillance (Bayou & Reinstein, 2001). Financial accounting of the company should be strong and independent reviews should be made by the organisation to ensure proper accounting practices and policies have been followed. Multiple audit firms should be engaged in the audit of the organisation and the organisation should ensure peer review of the audit firm by another firm to ensure audit of the organisation. The financial system should be as per the standard followed in the country and should show transparency and fair and clear view of all components in the organisations balance sheet. Thus frauds can be prevented as these are controllable and are the results of human misuse of the power in an organisation. A strong internal control with strict business ethics is a necessity for any organisation and both internal and external audit should be considered with due diligence and proper representation of the financial statements. Whistle blowers should be highly appreciated in cases of fraud and names should be kept secret (Apostolou, Hassell & Webber, 2000). Management should be reviewed on frequent and regular interval to ensure no internal corruption and conspiracy exists in the organisation. Conclusion Organisations are a part of a society and a society is thus largely affected by corporate scams. Employees of the organisation suffer a lot in cases of this business scams due to complete shutdown of the organisation. Frauds in an organisation are controllable and can be traced during its very birth in the organisation by help of proper internal controls implemented by the organisation. Implication of Corporate Governance has largely affected in minimizing the frauds in corporate world due to its legal requirement of disclosure of many policies and practices followed by an organisation which were not clearly reflected in the traditional system of presentation of financial statements. Management have understood the usefulness of having a strong internal control system in the organisation and have been continuously trying to inculcate strong business ethics in the working environment with strict punishments to anyone found not abiding by the business ethics at all levels of the management system in an organisation (Alleyne & Howard, 2005). Thus, to conclude frauds had been very prominent in today’s economic scenario and strict involvement of government and other regulation bodies have helped in finding many frauds in the world and further imposed very strict punishments for the same. However, the major issue is not just finding the frauds but to generate policies and practices to ensure a complete transparent business organisation. Management all around the globe has understood and learned from the various frauds that had been detected in the recent past and inculcate a sense of responsibility on their shoulders to impose strict internal control. However there are still many organisations and company which had been indulged in frauds and are still to be located. Cases of frauds being detected is still on an increasing note which had involved billions of dollars under is purview and is seriously an area of concern for all organisations and governmental bodies operating in the world. Refrences Agoglia, C., Kida, T., Hanno, D. 2003. The effects of alternative justification memos on the judgments of audit reviewees and reviewers. Journal of Accounting Research, 41(1), 33-46. Albrecht, W., Albrecht, C., Albrecht, C. 2004. Fraud and Corporate Executives: Agency, Stewardship and Broken Trust. Journal of Forensic Accounting, (5), 109-130. Albrecht, C., Albrecht, W., Dunn, J. 2001. Conducting a pro-active fraud audit: a case study. Journal of Forensic Accounting, (2), 203-218 Alleyne, P., Howard., M. 2005. An exploratory study of auditors’ responsibility for fraud detection in Barbados. Managerial Auditing Journal, 20(3), 284-303. Anand, V., Ashforth, B., Joshi, M. 2004. Business as usual: the acceptance and perpetuation of corruption in organizations. Academy of Management Executive, 18(2), 39-53. Apostolou, B., Hassell, J., Webber, S. 2000. Forensic expert classification of management fraud risk factors. Journal of Forensic Accounting, (1), 181-192. Bales, K., Fox, T. 2011. Evaluating a trend analysis of fraud factors. Journal of Finance and Accountancy, 5, March, 1-10. Ball, R. 2009. Market and political/regulatory perspectives on the recent accounting scandals. Journal of Accounting Research, 47(2), 277-323. Bayou, M., Reinstein, A. 2001. A systemic view of fraud explaining its strategies, anatomy and process. Critical Perspectives on Accounting, 12, 383-403 Read More