Introduction
There is no such thing as a perfect business. Although many enterprises express the illusion that they internal workings are flawless, the majority of them are being torn apart from within. This can be through many different ways, but all end in a hefty court case, possible bankruptcy or similar punishments which are associated with financial crimes. One such crime is the manipulation and misrepresentation of financial statements of a business, to hide expenses, improve earnings per share (EPS) or to attract new investors. This is known as financial statement fraud or colloquially labelled “cooking the books”. (Grossman St Amour, 2014) These crimes can have a significant impact on the business, as their stock could be driven
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However, any type of fraud is a crime and therefore must be dealt with accordingly. The most common varieties of financial statement fraud are:
Improper Revenue Recognition
Recording revenues before a sale is made, or before payment has been received seems like a feeble way to alter the books, but the method is highly effective and can accumulate to large sums of money over the long term. Listing items which are not sales, as sales, or resending tax invoices to debtors (to renew the terms and improve the accounts receivable account) in order to boast revenues which are yet to exist is the most common method of financial statement fraud. In fact, a study showed that 38% of the 403 cases involved this type of fraud. (Bradford C, 2014)
Manipulating Expenses or Liabilities
Businesses can also remove some accounts and reinsert them somewhere else in order to increase EPS or reduce tax liability. This can be done by listing expense accounts as capital acquisitions, thus, essentially listing ordinary debited expenses as credited owner’s equity and in turn falsely boosting profits. Other methods of manipulating accounts involve excluding accounts payables from the books altogether to reduce liability. The same fraud is also performed with loans and other short term liabilities by listing them as non-current, improving the equity of the business and increasing the share price. (ACFE, 2014) This was the method of fraud implemented in the WorldCom scandal, which is still
Throughout history and in our own time, legitimate accounting methods have been utilized to fraudulently engage in manipulating activities that results in illicit gains to the perpetrators and losses to individuals and financial institutions.
Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay
After reviewing the financial information of the Tech Tennis, USA, there was a concerned due to some unusual changes in the company’s accounts. Financial statements play a crucial part in the determination of the progress of an organization. It assists the relevant personnel to identify whether the company is making profits or making losses. Although unethical, some companies will tend to deliberately misrepresent some of their financial statement information to create a false impression of the company’s success. There are various techniques that organizations utilize to manipulate their financial statements such as overstating their revenues (Bierstaker, Brody, & Pacini, 2006). In addition, some organization will tend to inflate their sales without considering their cash flow amount that the organization has acquired which will be a red flag to investigate. Consequently, financial statements provide vital information that helps both internal and external users to understand the position of the organization. Some companies in an attempt to continue in the market, they end up manipulating their financial statements that create an illusion of the success of the organization.
3. Avoiding paying for costs and expenses while acquiring assets and revenues fraudulently – this takes place in the form of avoiding paying taxes on all of the company’s earning’s and where the company liquidates an employee’s pension account and distributes the proceeds among the board members and upper management in the form of performance bonuses.
The issue of revenue recognition practices is an area that has received a lot of attention from regulators. Whenever there is a report of financial restatements or negative earnings, regulators pay extra attention to review the financial statements in order to verify that that there are not any indications of financial fraud or that the organization overstepped their boundaries in the area of managed earnings. The reason that regulators have taken a special interest in financial accounting and potential fraud is due to the collapses of companies such as Enron, WorldCom and Tyco. Regulators and those in the accounting profession are focusing their efforts on the causes of fraud as well as the steps that can be taken to effectively detect
In recent year we have seen numerous companies fail as a result of these bad and/or fraudulent practices. In 1998 the publicly traded Waste Management Company falsely reported 1.7 billion in earnings. They got caught when the new CEO and management team went through the books.
11-2: The three main groups of people who commit financial statement fraud are organized criminals, mid- and lower-level employees, and senior management (Wells, 2013, p. 274). Senior management such as the CEO and CFO typically commit fraud to meet the expectations of Wall Street, preserve status, and/or receive performance bonuses (Wells, 2013, p. 274). Middle management will falsify financial statements in order to receive performance bonuses (Wells, 2013, p. 274). While organized criminals will try to obtain loans or engage in a pump-and-dump scheme (Wells, 2013, p. 274).
The manipulation of accounts fraud scheme is generally fulfilled by employees in top management positions and it usually involves making understatements or overstatements on financial statements making it very hard to detect. The process followed as Troy Adkins, (2015) explains is very simple. The financial statements are either overstated to show different figures in the earnings on the income statements making them look better than they actually are or the earnings in the current periods are manipulated in such a way that the revenue is understated or they inflate the current year’s expenses. The second process includes making the financial statements look worse than they are in reality. Deloitte, (2009) explains a number of ways which the accounts are manipulated where as one of the ways is to manipulate the reported earnings directly. They further explained that overstating the
As the WMI accounting fraud case shows, change exposes organizations to considerable financial fraud risks. The top officials used acquisitions and merger as means to perpetuate this fraud. This financial fraud took place due to the organizational breakdown of internal and external audit controls. As a result, the top management was able to commit this massive fraud without facing any resistance. It never occurred to them that they were violating the law because what mattered to them was pocketing as much as they could.
Unfortunately, I do believe that aggressive accounting and financial statement fraud are a common practice. I don’t think it’s to far fetch to believe that companies use projections and other types of false data to fool banks especially when they have huge incentives to do so.
A number of financial statement frauds went undetected from auditors in past and attracted a high profile attention. The businessmen add fake assets or transfer the assets of companies to their personal assets and result in accounting scandals when the affected companies are bankrupted or are even close of bankruptcy. Just to mention a few names, accounting scandals of Enron, AOL Time Warner and Xerox are among the hottest accounting scandals of the century. This means that despite presence of professional auditors accounting scandals happen and there is a need to learn from the mistakes of the auditors who overlooked these activities. In this report the case study of Xerox is analyzed in detail to highlight violations of accounting principles and present an example from which lessons can be learnt for the future.
Financial statement fraud is usually a means to an end rather than an end in itself. When people "cook the books" they may doing it to "buy more time" to quietly fix business problems that prevent their entities from achieving its expected earnings or complying with loan covenants (Fraud Magazine, 2014. It may also be done to obtain or renew financing that would not be granted or would be smaller if honest financial statements were provided. People intent on profiting from crime may commit financial statement fraud to obtain loans they can then siphon off for personal gain or to inflate the price of the company 's shares, allowing them to sell their holdings or exercise stock options at a profit (Fraud Magazine, 2014). However, in many past cases of financial statement fraud, the perpetrators have gained little or nothing personally in financial terms. Instead the focus appears to have been preserving their status as leaders of the entity - a status that might have been lost
On September 22, 2014 Tesco, the most dominant supermarket in the United Kingdom, confessed that its earnings for the half year finishing on the 23rd of August 2014 were exaggerated by an expected £250 million. Stocks of Tesco tumbled to a 11 year low, wiping out nearly £2 billion from Tesco's worth. Four best officials were suspended including its UK managing executive and a research covering the four past bookkeeping years was started by Tesco .With everything taken into account, another scam including errors in the financials of one of the biggest and most believed associations on the planet surfaced and once again investors have lost money, bringing up some major issues on corporate administration, monetary reporting practices, internal controls and audit guidelines. (Gagan Kukreja and Sanjay Gupta2, 2016)
Financial reports of companies shows lots of important information to shareholders and stakeholders like how is the situation of company, does it profitable or not? Shareholders and stakeholders can identify their management or investing strategies if they hundred percent sure these financial statements demonstrates truth. Accounting irregularities has massive cost to company and financial markets. For example Dell -the PC maker- between 2002 and 2006 has remembered fraudulent earning issue up to 150 million dollars. (http://www.crn.com/news/channel-programs/201800702/dell-accounting-scandal-not-a-happy-story-cfo.htm) Outcomes of this type of shame scandals face up of its costs and loose in investor wealth.
The key to the article “Cooking the Books” is to cover the business ethics of an accounting manager ordering one of his accountants to falsifying a company’s accounting ledger. The Generally Accepted Accounting Principle of expense recognition was not followed. The accounting manager was attempting to commit fraud for personal gain, he does this by manipulating the books to show higher revenue in order to meet the volume for management bonus. The accounting manager also created a hostile working environment by threating his accountant’s job security if he didn’t comply with his orders. The Sarbanes-Oxley Act will also be explored to see if there was a violation due to the unethical behavior of the