In the early 2000s, fraud was a major issue that was becoming more and more frequent. In an attempt to dissuade frauds, the government passed the Sarbanes Oxley Act, created the Public Company Accounting Oversight Board, and issued the Statement of Auditing Standards 99. These costly reforms sought to improve financial disclosures from organizations, establish audit standards, inspect accounting firms, and enforce compliance with all rules highlighted by the Sarbanes-Oxley Act. However, fraud occurrence has not been impacted. Fraud, at its core, has three factors that are present in every case. These three factors are shown in Donald Cressey’s fraud triangle as opportunity, incentive, and rationalization. Fraudsters must have the opportunity to commit a fraud. It could be possible due to poor or effective internal controls where a manager has the ability to override. A fraudster must have an incentive to commit a fraud. Incentives could include meeting analysts projections and stockholder expectations, reaching goals for company performance bonuses, raising stock price for personal stock options in the company. The governmental reforms of the early 2000s attempted to limit frauds through these two aspects of the fraud triangle. Since frauds still continue to occur, the rationalization aspect may be the largest part of the problem.
Written by Douglas M. Boyle, CMA, CPA, James F. Boyle, CPA, and Daniel P. Mahoney, CPA, CFE, “Avoiding the Fraud Mind-Set” outlines the following learning objectives that address the rationalization element of the fraud triangle: develop an ability to recognize your own human tendency toward rationalization, understand that fraudsters are “real people”, realize the psychological cost of “getting away ...
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...lose personally with Jeffrey Skilling, Enron’s CEO at the time. Upon Enron’s eventual bankruptcy, Skilling noted that Baxter was heartbroken by what had happened to Enron and all of the employees who lost their jobs and life savings. He was sued personally and former employees along with the media publicly slandered his name. Knowing his role in the fraud, Baxter could not take it anymore. Seven months after his resignation from Enron, Baxter was found dead in his Mercedes because of a self-inflicted gunshot wound to his head. He left behind a suicide note to his wife reading:
“Carol,
I am so sorry for this. I feel I just can 't go on. I have always tried to do the right thing but where there was once great pride now it 's gone. I love you and the children so much. I just can 't be any good to you or myself. The pain is overwhelming.
Please try to forgive me.
Cliff”
Weld, L. G., Bergevin, P. M., & Magrath, L. (2004). Anatomy of a financial fraud. The CPA
Financial statement fraud makes up a marginal (less than 10%) percentage of occupational fraud cases, but the median loss is significantly higher at $975,000. A fraud scheme occurring over a significant amount of time will likely result in much higher median losses. For example, a fraud scheme lasting more than five years could result in median losses of $850,000. Larger companies are more likely able to implement strong anti-fraud controls due to size and finances, therefore, smaller companies become more susceptible to fraud schemes due to lack of proper preventive controls. Preventive controls include: implementing internal controls, continually updating the company’s Code of Conduct, rotating jobs/duties, and
Hanson, J. R. (n.d.). Fraud or confusion? RDH Magazine, 19(4). Retrieved 3 15, 2014, from http://www.rdhmag.com/articles/print/volume-19/issue-4/feature/fraud-or-confusion.html
Internal controls are in place to protect entities against theft from dishonest workers and outside predators. They are also an accurate series of checks and balances and are in place to find discrepancies.
Dodd-Frank and Sarbanes-Oxley Acts are important legislations in the corporate world because of their link to public and privately held companies. Sarbanes-Oxley Act was enacted to enhance transparency and accountability in publicly traded companies. On the contrary, Dodd-Frank Act was enacted to disentangle the confused web of financial service company valuations. Actually, these valuations are usually hidden by complex and unclear financial instruments. The introduction of Sarbanes-Oxley Act was fueled by recent incidents of accounting frauds by top executives of major corporations such as Enron. In contrast, Dodd-Frank Act was enacted as a response to the tendency by banks, insurance companies, hedge funds, rating agencies, and accounting companies to serve up harmful offer of ruined assets and liabilities brought by systemic non-disclosure (Anand, 2011, p.1). While these regulations have some similarities and differences, they have a strong relationship with the financial markets.
In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency.
Throughout history there have been many white collar crimes. These crimes are defined as non-violent and financial-based crimes that are full ranges of fraud committed by business and government professionals. These crimes are not victimless nor unnoticed. A single scandal can destroy a company and can lose investors millions of dollars. Today, fraud schemes are more sophisticated than ever, and through studying: Enron, LIBOR, Albert Wiggan and Chase National Bank, Lehman Brothers and Madoff, we find how the culprits started there deception, the aftermath of the scandal and what our country has done to prevent future scandals.
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
After Cliff Baxter committed suicide, a note was found. In the note to his family he wrote with shame of how he once took great pride in doing the right thing. He wrote that the pride was gone and he felt he could be of no use to his family. He expressed love and asked for his family's forgiveness. I believe the film tried to make Baxter look like the initial voice of morality that was being moulded into the “corporate bad guy”. Baxter committed suicide because he felt as if he was becoming greedy, dishonest and going against his morals. Unlike the other Enron elites, he couldn’t deal with the person he had become and his guilt took over his thoughts and he could no longer continue on.
[17] Robert K. Elliot, CPA and John J. Willingham PhD, CPA, Management Fraud: Detection and Deterrence. New York: Petrocelli Books, Inc., 1980, pp. vii.
Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001.
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues.
For those who do not know what fraud is, it’s basically deception by showing people what they want to see. In business it’s the same concept, but in a larger scale by means of manipulating figures that will be shown to shareholders and investors. Before Sarbanes Oxley Act there was “Enron Corporation”, a fortune 500 company that managed to falsify their statements claiming revenues over 101 billion in a span of 15 years. In order for us to understand how this corporation managed to deceive the public for so long, the documentary or movie “Smartest Guys in the Room” goes into depth by providing viewers with first-hand information from people that worked close with or for “Enron”.
The principle territory we are planning to address is accounting fraud and how it could impact an organization by answering, the who, what, when and how. Its goal is to increase the awareness of accounting fraud and fraud counteraction. The intriguing thing about accounting fraud is that little disclosure as a rule usually leads to an enormous increase in fraud. A number of categories and sub-categories can be divided up for fraud.