Specific purpose: To inform my audience about issues with fraud and scandals in business and how employers and employees of organizations can set measures in place to limit, if not eliminate fraud and scandals from occurring.
Introduction
I. What’s the first thing that pops up in your mind when the word “scandal” or “fraud” is brought up? Going into accounting as a major I am constantly thinking of all the big cases of fraud that have happened in the past for various businesses such as Enron, WorldCom, Tyco, just to mention a few. These cases of fraud are the reason why we must end fraud.
II. Fraud is unavoidable, but businesses must do all that they can to keep fraud to a minimum in business.
III. I will talk about various issues concerning business scandals and fraud.
A. First, I will talk about what promotes or inspires individuals to commit fraud.
B. Second, I will talk about some of the larger examples of fraud and scandals in businesses.
C. Lastly, I will list the various ways businesses and organizations can implement both internal as well as external control measures in order to avoid another WorldCom or Enron fraud case from happening again.
Transition: First, I will explain what inspires or promotes people in businesses to commit fraud.
Body
I. Fraud happens in businesses more often than people think, but what really inspires people to commit fraud?
A. “The fraud triangle is a model for explaining the factors that cause someone to commit occupational
1. The three aspects of fraud - Perceived pressure, Rationalization, and Opportunity were present in the CIT case as follows:
In the later part of 1990s, there was an epidemic of accounting scandals which arose with the disclosure of financials transgressions by trusted corporate executives. The misdeeds involved misusing or misdirecting funds, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, and overstating of revenues.
Describe the conflict faced by corporate insiders who discover unethical or illegal activities within their organization.
Another source of a great amount of fraud is the fact that a lot of businesses are careless when they're hiring new employees because they do not do conduct adequate background checks during the hiring process. They also have lack an adequate network and do not have a reliable computer security system in place so that also plays a big factor in to why their business is victim to fraud and cybercrime.
Fraud deterrence occurs in several stages, and the key is to know that prevention is not to same as deterrence. First is the impact of controls
The most common type of fraud within businesses is accounting and financial reporting fraud. The U.S. Securities and Exchange Commission (SEC) has made enormous efforts to establish laws and regulations by which accounting professionals and companies have to abide by to prevent fraudulent reporting and any sort of unethical activity. Many are very well aware of the Enron scandal which shook eth American business industry very much. A lot of investors were hurt and millions of dollars were lost. Enron’s CEO Jeffrey Skilling ended up being sentenced, even though his sentence was later reduced to 14 years of prison, (Berman, The Huffington Post). Because of the Enron scandal and few other similar ones, former President George W. Bush signed the Sarbanes-Oxley Act of 2002 into law. This act impacts all CPAs as well as CPA firms that conduct public company auditing. Attorneys, investment bankers, dealers, financial analysts and brokers are affected as well. The Sarbanes-Oxley Act of 2002 now requires the New Public Company Accounting Oversight Board (PCAOB) to retain a seven year record, cooperate with CPA groups, complete annual inspection, investigations may be completed at any time, registration with the board is mandatory, certain sanctions for violations may be put into place, etc. Without a doubt, there are a
Some industry-specific factors, such as having valuable near-cash assets, can increase the organization's vulnerability. Also they will need to rationalize the actions as justifiable. The individuals committing the fraud must first convince themselves that their behavior is acceptable or will be temporary. For example, Barry Minkow’s believed that the lies and deceit are for the betterment of his company and that with time everything will eventually return to normal.
The second part is opportunity. The opportunity to commit fraud usually arises through weak internal controls.
“The first leg of the fraud triangle represents pressure. This is what motivates the crime in the first place. The individual
Fraud is defined as a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses through deception or concealment. And Occupational Fraud as defined by the ACFE is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. Traditional fraud triangle theory by Donald Cressey explains that propensity of fraud occurring in an organization lies on three critical elements which are Pressure, Opportunity, and Rationalization.
The fraud risk triangle is made up of three different components: Motivation (pressure), Opportunity and Rationalization. Motivation, or pressure, is the idea that mangement or other employees may be motivated to commit fradulent acts such as providing false financial statements. Opportunity is the idea that certain circumstances exist, such as the nature of the industry in which the company operates, where a corporation can manipulate its financials as a way of boosting overall
The last and third factor in the fraud triangle is the rationalization. Cressey describes rationalization as a necessary component of the crime before it takes place. In other words, he said that it is a part of the motivation for the crime. In that category, the embezzler does not see himself or herself as a criminal; they justify their misdeeds before they commit the crime. The rationalization plays the main role while fraudster commits an illegal act in their job place because they try to maintain their concept of themselves as a trusted person.
The perfect fraud storm occurred between the years 2000 and 2002 involving two of the largest energy and telecom corporations in the United States: Enron and WorldCom. It was determined that both organizations fraudulently overstated assets, created assets from expenses or overstated revenues, costing investors billions of dollars and resulting in both organizations declaring bankruptcy (Albrecht, Albrecht, Albrecht & Zimbelman, 2012). Nine factors contributed to fraud triangle creating this perfect fraud storm, and assisting management in concealing the fraud until exposed and rectified.
Ethical Lessons Learned from Corporate Scandals Ethics is about behavior and in the face of dilemma; it is about doing the right thing. Ideally, managerial leaders and their people will act ethically as a result of their internalized virtuous core values. The Enron scandal is the most significant corporate collapse in the United States and it demonstrates the need for significant reforms in accounting and corporate governance in the United States. It is also a call for a close look at the ethical quality of the culture of business generally and of business corporations (Lessons from the Enron Scandal).
Studies suggest that there are four basic factors that lead to fraud. First, is the opportunity to commit fraud, second, the incentive to commit fraud, third, the rationalization of the fraudulent act and fourth, the capability to commit the fraud.