Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”
References Association of Certified Fraud Examiners (ACFE). 2006. 2006 ACFE Report to the Nation on Occupational Fraud and Abuse. Available at: http://www.acfe.com/documents /2006-rttn.pdf. Beasley, M., J. Carcello, and D. Hermanson. 1999. Fraudulent Financial Reporting: 1987–1997 An Analysis of U.S. Public Companies. Washington, D.C.: Committee of Sponsoring Organizations of the Treadway Commission. Berenson, A. 2003. The Number: How the Drive for Quarterly
In the present day forensic accounting plays a huge role in many of the court cases publicized by the media. With the spotlight on the profession, this is a good opportunity to discuss the following topics:
This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.
In this case, there are several conspirators who is involved in the fraud receiving punishment from either SEC or federal government. Robert Levin, the AMRE executive and major stockholder, and Dennie D.Brown, the company’s chief accounting officer, were subject to the punishment in the form of a huge amount of fine by the SEC and the federal government. This punishment came from reasons. After AMRE going public, the company have the obligation to publish its financial reports but its performance did not meet expectation. The investigation by SEC shows that Robert took the first step of this scam, fearing the sharp drop of AMRE’s stock price because of the poor performance of company. He abetted Brown, to practice three main schemes to present a false appearance of profitable and pleasant financial reports. Firstly, they instructed Walter W.Richardson, the company’s vice president of data processing, to enter fictitious unset leads in the lead bank and they originally deferred the advertising cost mutiplying “cost per lead” and “unset leads” amount, so that they deferred a portion of its advertising costs in an asset account. The capitalizing of advertising expenses allowed them to inflate the net income for the first quarter of fiscal 1988. Secondly, at the end of the third and fourth quarters of fiscal 1988, they added fictitious inventory to AMRE’s ending inventory records, and prepared bogus inventory count sheets for the auditors. Thirdly, they overstated the percentage
In fraud committed against organizations, the victim of fraud is the employee’s organization. In frauds committed on behalf of an organization, executives usually are involved in some type of financial statement fraud; typically, to make the company’s reported financial results appear better than they actually are. In this second case, the victims are investors in the company’s stock. A third way to classify frauds is via the use of the ACFE’s occupational fraud definition, “the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE, 2010). The ACFE includes three major categories of occupational fraud: asset misappropriations involves the theft or misuse of the organization’s assets, corruption involves the wrongful use of influence in a business transaction in order to procure benefits contrary to their duty to their employer, and fraudulent financial statements involving falsification of an organization’s financial statements for personal gain.
An accountant that acts with “reckless disregard” for the consequences of their actions is said to have committed constructive fraud. An accountant that commits fraud is liable for compensatory and punitive damages to any foreseen person that could be injured. A fraudulent act is a false depiction of a material fact and it is made with the objective to deceive the user.
Saiz, Thomas J. "FRAUD IS A MAJOR SECURITY ISSUE FOR BUSINESSES." San Diego Business Journal, vol. 20, no. 15, 12 Apr. 1999, p. 19. Learning Resource Center, t7lrcproxy.iccms.edu:2129/sbrc/detail/detail?vid=0&sid=9b7a4376-1cc6-48ea-8008-4ece1e694af8%40sessionmgr4008&bdata=JnNpdGU9c2JyYy1saXZl##AN=1805123&db=b9h.
In Australia finance executives manipulate the financial records by using cookie jar reserve to inflate profits and fail to record expense. The Australian company overstated operating income in 2009 by 5% to meet analyst earning target. The CFO Wayne Banks agree to settle the charge and pay “disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years (SEC, 2015).” In CSC Nordic region and Denmark, it was also found that senor executive used financial manipulation and fraud to inflate operation results in the HNS
88 Case 1.12 Madoff Securities Instructional Objectives 1. 2. To identify the principal precursors of financial fraud. To identify “red flags” or risk factors typically indicative or symptomatic of fraud.
Following the several financial scandals of the early 2000s involving the former notorious companies such as Enron and WorldCom corporations, the Sarbanes-Oxley Act of 2002 emerged. Indeed, SOX required that every publicly traded company CEO and CFO endorse the accuracy of their organizations financial statements prior to the official release. Obviously, the idea behind this decision is certainly a way to ensure the integrity of the upper management which dismisses the existence fraud on the financial statements. However, a discovery of fraudulent information on certified financial statements is subject to civil liabilities and criminal prosecutions.
The illegal construction of the Bernie Madoff securities pyramid scheme grew to preposterous proportions from legal, auditing, and regulatory weaknesses of the Securities Exchange Commission, the designated regulatory body of the U.S. financial markets. The required expertise, authority, and relevant penalties needed to deter management from committing ethical breaches lacked substance in the case study of BMIS (Crews 11). Even after the wake of the Enron and WorldCom scandals that occurred in the early 2000s, the SEC unexplainably revoked provisions created to help avoid fraud. The provision the SEC revoked specifically mandated firms structured like Madoff’s to be audited by accounting firms registered and audited by the Board. By revoking the provision, BMIS was allowed to continue its Ponzi scheme for another half a decade with the aid of utilizing an unregistered, small accounting firm called Freihling & Horowitz (“Madoff’s Jenga”
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
The course Fraudulent Financial Reporting and Corporate Governance of prof. Hermanson is the great oversight of financial reporting and governance issues. The students are able to understand the roles of the board of director and board committees, the critique research on fraudulent financial reporting and the cycle of fraud through real fraud cases over the world. Indeed, I recognize the importance of corporate management over financial reporting. The three main things I learned from this class is understanding of the effect of board of directors on fraud decisions, elements of fraud, and the importance of fraudulent accounting to accountants and auditors
The past decade has seen the discredit and collapse of various high-profile corporations across the world. These scandals were inherently the result of fraud, scams, mismanagement, fraudulent reporting and audit failure among many other deficiencies present in the corporate governance model of various syndicates. Some of these made the very foundation of the financial markets unstable and open to financial crisis. The international and national community were compelled to more efficiently address the issues of corporate fraud, misconduct of management, corruption and weak audit measures. In this paper we will focus on fraud, mainly occupational fraud, within corporations and combat mechanisms available within corporate governance. “No entity is immune from fraud. Fraud indiscriminately affects all types of organizations regardless of sector, size, or geographical location. It does not distinguish between public or private entities, by what they do, by their environmental footprint, by their level of sustainability, by their public profile, or by the number of years they have been in existence.” The consequences of fraud can prove to be dire for any organisation, from irreparable damage to reputation to possible bankruptcy. As per the Association of Certified Fraud Examiners (ACFE) Global Fraud Study 2014, survey participants estimated that the typical organization loses 5 per cent of revenues each year to fraud. If applied to the 2013 estimated Gross World