Analyse the Problem of Accounting Fraud in a Listed Company and Evaluate Possible Solutions

1795 Words Jan 14th, 2011 8 Pages
Analyse the problem of accounting fraud in a listed company and evaluate possible solutions

In 2001, Enron Corporation went into bankruptcy due to the disclosure of false information in its financial statements. Similarly, when Lehman Brothers collapsed there was no evidence that it had ever publicly disclosed certain detrimental accounting information. Cases of accounting fraud such as these have become increasingly serious. Accounting fraud can result in creditors and stockholders losing confidence in listed companies, which negatively affects the whole worldwide economy. This paper will briefly analyse some of the causes of accounting fraud in listed companies, and then examine and evaluate three possible solutions to address the
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Indeed, while executive stock options play a positive role in the management of a company, according to some empirical evidence (Hanlon et al., 2003), managers may use option grants for their own benefit (Aboody & Kasznik 2000; Yermack 1997). The above research indicates that reducing the proportion of stock-based compensation for managers can help reduce the incidence of accounting fraud.

However, the granting of stock options in low level for company executives may affect their working enthusiasms. The most commonly cited advantage in granting stock options to managers is that they increase managers’ loyalty and commitment to the organization, and managers become owners with a financial stake in the company's performance (Hillstrom 1999). Moreover, higher level of stock-based compensation helps reduce tax to companies which are not having the need of recording options pending as an expense until stock options are exercised by executives. This evidence points out that the listed company could provide more stock options to executives to motivate their talent and potentiality to enhance the company's profits.

Improving the independence of auditors might be another effective way to exert control over accounting fraud. This may be achieved through both ethics education for university students and continued ethical training for auditors. Bean and Bernard (2009) point out
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