In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the
The American Dream typically involves working hard to build up an organization, maintaining it well, and reaping the benefits. This vision most certainly drove the formation of the energy powerhouse known as the Enron Corporation. The company began as two average sized organizations and within 15 years emerged as America’s seventh largest company. The organization employed close to 21,000 staff members with locations in over 40 nations around the world. Unfortunately, this success was decimated by numerous scandals involved with accounting practices. From lies of profits to questionable dealings, such as concealing debts, the parties involved with running the company had made some fatal errors. The end result left Enron without creditors and investors, leading to the firm to file for Chapter 11 bankruptcy (British Broadcasting Corporation, Enron Scandal at a Glance). The story of this once remarkable company is one that can be traced from the decisions made from its inception leading all the way to the much publicized trials that ensued.
The misrepresentation of corporate finances has been a frequent news headline during the last ten years, and the negative impact of these actions has had a severe impact on the economy. The temptation can be overwhelming for corporate leaders to step over the legal line in attempts to maximize corporate earnings, which also affects their financial compensation. Companies that ultimately collapse from these inappropriate financial behaviors, eventually put a heavy burden on the economy and many sectors of society. Corporate fraud is defined as “violations of the Internal Revenue Code (IRC) and related statutes committed by large publicly traded (or private) corporations and/or by their senior executives” (Corporate check format of cite [#1]). Employees, lenders, investors, overall financial markets, and the communities in which theses corporations reside are all adversely impacted when one of these corporations fail. “Some of these problems evolve from the interpretation of complex accounting rules” (Six Years).(Sentence is out of place – put in SOX section?)
These were examples of just two frauds that happened in USA and India. Numerous numbers of frauds have materialized in different countries namely, The WorldCom Scandal, Lehman Brothers, Tyco scandal, HBSC scandal, HIH Insurance Company scam, the Libor Scam etc. All these involved manipulation of financial accounts for personal benefit. Some common techniques used were over-optimistic valuations of assets and extensive under-reporting of liability, under pricing and reserve problems, insider trading and non adherence of laws about payment of taxes. All the companies involved in accounting frauds went bankrupt and had a huge impact on the economies of their respective countries and eventually lead to arrests of executives involved.
Accounting played a big role in the collapse of Enron. With controversial accounting practices being used, Enron perceived there finances being much bigger then what they actually were. One of the major accounting practices was decentralizing operations and putting them into shell corporation, this allowed Enron to hide
Giroux, Gary. "What Went Wrong? Accounting Fraud And Lessons From The Recent Scandals." Social Research 75.4 (2008): 1205-1238. Academic Search Premier. Web. 21 Feb. 2014.
The Royal Canadian Mounted Police [RCMP] classifies corporate fraud into two different categories: fraud by a company and fraud against a company (para. 5). The RCMP explains fraud against a company can happen through “misappropriation of corporate assets by a company senior officer or by staff” (para. 5). Employees defraud companies with methods such as “fictitious revenues, concealed liabilities and expenses, and asset or revenue understatements or overstatements” where as fraud by a company happens by “providing incorrect or misleading information to shareholders or regulators, including financial reporting fraud – where incorrect or misleading information is provided for individual financial gain” (RCMP, para. 5). The Federal Bureau of Investigation [FBI] breaks down corporate fraud into three categories based on the action of the fraudster or fraudulent company. These categories are falsifying financial information or accounting schemes, self-dealing by corporate insiders and obstruction of justice (FBI, para. 16).
Some of the most well-known accounting frauds in the U.S., in the past two decades are the Waste Management Scandal (1998), Enron (2001), WorldCom (2002) that brought the Sarbanes-Oxley Act, Tyco (2002), HealthSouth (2003), Freddie Mac (2003), Fannie Mae (2004), AIG (2005), and Lehman Brothers (2008), to name a few (Accounting-degree.org, n.d.). (Dear Our topic is corporate collapses, not accounting frauds, i think we should talk about some of the most well known corporate collapses in US)
Kaplan, R. S., & Kiron, D. (2007). Accounting Fraud at WorldCom. Boston: Harvard Business School Publishing.
Fraud is defined as someone try to act with intention to cheat other people in order to acquire an unfair or illegal advantage. The fraud happens due to management override the internal control of the organisation and fraud will affect the financial reporting. The main categories of fraud that can affect financial reporting are fraudulent financial reporting and misappropriation of assets.
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
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”.
Studies revealed that firms’ managers willfully manipulate reported to fit their own intentions by selecting accounting policies, changing accounting estimates and manipulating accruals (Yoon and Miller, 2002). And of course, the integrity of the firms’ managers due to meet their personal interest, incentives scheme or both. For example, to get a promotion from current position in firm, avoiding company tax payable and many other reasons which could benefits the firms and personal interests.
It includes an employee or the organization and is deceptive to shareholders and investors. An organization can misrepresent its financial statements by exaggerating its income or resources, not recording costs and under-recording liabilities. A number of categories and sub-categories can be divided up for fraud. Some examples are consumer fraud, management fraud, employee embezzlement, Ponzi schemes and numerous
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: