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Accounting fraud in business
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Accounting fraud case studies
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The Case of Phar-Mor Inc. Phar-Mor Inc. was incorporated in 1982 as a deep discount drug store chain. The chain has grown from seventy stores in 1987 to 310 by 1992, with 25,000 employees in 34 states. Phar- Mor- was engaged in creative accounting practices: inventory was overstated as proper inventory records were not maintained to support inventory purchases; $15 million was embezzled from Phar-Mor to support WBL activities and over $200,000 were used for upgrades to his personal residence and meals to his country club. As the losses mounted, the losses were charged to what senior staff referred to a “bucket account” and were then reallocated to the inventory of the existing stores. The senior …show more content…
It therefore means that if the audit partner was on the job at the initiation of the fraud in 1989, he would have been rotated off and a new partner appointed. It is common practice for auditors to use the very methodology that applied by their predecessors and this approach would not have identified the frauds. In addition the amount of work done by auditors depends largely on the budget which could impact on the quality of the …show more content…
Profits were inflated by $1.7 billion to meet earnings targets which resulted in investors losing more than six billion dollars while the perpetuators made their illegal loot. The officers were engaged in improper accounting practices to achieve their selfish objectives. These practices included among others: excluding depreciation charges on their garbage trucks, extending their useful lives, capitalized operating expenses and failed to make provisions to pay income tax and other expenses. In addition, Arthur Andersen, has been appointed auditor for a considerable period and issued unqualified audit opinions on accounts which contained many fraudulent
Nimi Feghabo is an Atlanta-based consultant in Capgemini’s Custom Software Development service line. She has worked and acquired knowledge in many different industries spanning from Accounting to the Legal Industry. She brings significant leadership experience along with a proven track record. Prior to Capgemini, she has had experience in various industries which include legal, manufacturing, and international professional services. Her contributions include software implementation, ERP development, and facilitating changes. Through these projects, she has gained valuable insight and is able to develop transformative solutions into an effective facilitation strategy.
By deliberately falsification of their financial statements, by Martin Grass, Brown and Bergonzi. Among other things like:
Phar-Mor was known as one of the major discount chain retailers in the late 1980’s - early 1990’s. It was founded by Mickey Monus, a gambler in nature, who with the help of senior management was “cooking the books” for years to cover up his loses. The reason why senior management agreed to do this fraud is the belief in unique ability of their leader to fix everything later on. This case is known as one of the biggest accounting frauds in the corporate history of the U.S. This paper will analyze who was affected by this fraud, the motives behind it and what systems of control failed to prevent it.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Rather than being sticklers for following GAAP accounting principles and internal controls, this company took unethical behavior to a whole new level. They lied when the truth would have been easier to tell. It is almost as if they had no comprehension that the meaning of the word ethics is “the principles of conduct governing an individual or a group (professional ethics); the discipline dealing with what is good and bad and with moral duty and obligation”, (Mirriam-Webster, 2011). To be ethical all one has to do is follow laws, rules, regulations and your own internal moral compass, all things this company seemed to know nothing about.
This company in the late 1990s and the beginning of the year 2000, it's a successful electricity and natural gas company. They are also one of the leaders in the field of telecommunications. The company made billions of dollars and employed thousands of people. Their stock skyrocketed and everyone wanted a piece of this "phenomenon". In the year 2001, the false image that Enron conveyed, began to crumble and was discovered that the mass amount of dollars reported as earned on the company's financial statement were all fake. Once the world learned of the scandal, the company collapsed and investors lost millions. After the crash of Enron, the Securities and Exchange Commission started looking into Enron’s complex finances and Andersen (the audit firm) put in practice a policy calling for destroying unneeded documentation. According to NBC news "At trial, Andersen argued that employees who shredded tons of documents followed the policy and there was no intent to thwart the SEC investigation" ("Enron auditor's verdict revise", 2005). The impact that investors felt, created influence for the government leaders to implement the Sarbanes-Oxley Act. In order to cut down on the incidence of corporate fraud, Senator Paul Sarbanes and Representative Michael Oxley drafted the Sarbanes-Oxley
In the wake of the Madoff Ponzi schemes, the SEC has stepped up investment regulation and fraud detection measures. Additionally, the Sarbanes-Oxley Act of 2002 (SOX) was passed as direct result of the Enron and WorldCom ethic violations. SOX has been characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt” mandated a number of changes to improve financial disclosures from corporations and prevent accounting fraud. SOX also created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of the auditing profession. Had the PCAOB been in place perhaps Arthur Anderson would not have been so quick to turn a blind eye to Enron’s accounting irregulars.
This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
Since the early 1970s, the auditing profession has been under increased pressure and scrutiny by government and users of audit reports. The phrase ‘ Audit Expectations Gap’ was first coined when the AICPA put the Cohen Commission together in 1974 to investigate whether the ‘expectations gap’ existed. However, the history of the expectation gap goes right back to the start of company auditing in the nineteenth century (Humphrey and Turley 1992). Since then, events ranging from the collapse of Arthur Anderson to the ongoing savings and loan problems seemed to have made the gap become more and more apparent.
As the rapid growth of capital market, investors have been increasingly relying on auditors to examine the accountability of financial information prepared by management. Auditors are expected to determine if the financial statement is fairly presented. In order to do so, auditors need to detect the material misstatements. Misstatement can be classified into three groups: fraud, errors and illegal acts. Fraud is intentional misstatement while errors are unintentional. Illegal acts can be intentional or unintentional. They are the misstatements that violate laws or governmental regulations (Messier, Glover and Prawitt 2014, 26). In recent years, the increasing number of fraud scandals has weakened investors’ confidence in the capital market.
Unethical accounting practices involving Enron date back to 1987. Enron’s use of creative accounting involved moving profits from one period to another to manipulate earnings. Anderson, Enron’s auditor, investigated and reported these unusual transactions to Enron’s audit committee, but failed to discuss the illegality of the acts (Girioux, 2008). Enron decided the act was immaterial and Anderson went along with their decision. At this point, the auditor’s should have reevaluated their risk assessment of Enron’s internal controls in light of how this matter was handled and the risks Enron was willing to take The history of unethical accounting practic...
In today’s business world, an accountant and business owners should work together in order to become aware of scandals that occur in corporate companies. Since 2008 a series of corporate scandals and collapses have highlighted the importance of effective board oversight. One of the largest scandals in the corporate world was known as the Madoff’s Ponzi scheme. I will discuss the details of how an accountant allowed Maddoff to continue with his involvement in the Ponzi scheme. Since then, the board of accountancy is mandating that all corporate companies have good internal controls and getting more involved managing risks within the organization. This is becoming an essential role in maintaining a good system of internal control.
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
Moreover, the auditors had looked out the attitude or rationalisation of the company to justify the fraudulent action. The top management may behalf on their own interest but not the behalf of shareholders to maintain or raise the stock price of the company. In Cendant case, the CUC’s management allegedly inflated earnings by recording increasing revenue and reducing expense to meet expectation.
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.