...Financial fraud can be broadly defined as an intentional act to deceive individuals/groups using financial transactions for purpose of personal gain1. Financial fraud involves activities undertaken by an individual or company that is done in an illegal manner which is designed to give an advantage to the perpetrating individual or company2. Fraud cases can involve complicated financial transactions conducted by ‘white collar criminals’ such as business professionals making financial fraud difficult to prevent and catch1. In this document we will look at several types of financial fraud cases including the cases on Bernard Madoff, Firepower, Storm Financial and Robert Blanshard. When looking at an investment opportunity it is important to do your due diligence to ensure your money is going into a safe and legal investment proposal. Due diligence is essential for individuals, groups and/or companies looking for investment opportunities as there are a number of scams and threats in financial markets. In analysing the cases mentioned above we will see what made these scams successful as well as look at how we can spot a scam using these 12 indicators: unusual high/constant returns; a dominant individual; luxurious and prolific spending by the individual; frequent legal action against the individual or company; exclusivity; social network based; secrecy of strategies; redemption issues; paperwork issues; difficulty contacting the company; indifference of those with oversight...
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...When examining the many different aspects of fraud one common trend is usually found. This is concealment or some sort of alteration of financial statements. Financial statement fraud is usually committed by those individuals that have influence over a company or have some sort of opportunity to do so. These individuals include C-level management, controllers, and anyone else that has to do with the information that is placed in the financial statements. These individuals will make these alterations to meet the demands of the markets, to increase their financial bottom line, to increase stock price allowing for their own portfolios to be enhanced, and to overcome current financial losses (Albrecht, Albrecht, Albrecht, and Zimbelman, 2012, p.360). With financial statement fraud there are numerous ways to commit it. This can be through revenue, inventory, expenses, and even subsidiary reporting. Financial statement crimes over the past decade, and possibly longer, have similar characteristics that individuals should look for and should be aware of the effect of them. According to the text “Fraud Examination” COSO (Committee of Sponsoring Organizations), released a study that showed these traits. The traits are the average fraud lasts two years, improper revenue recognitions, have an average impact of $400 million dollars, CEO involved in 89%, median assets involved are at $100 million, change in auditors, and press coverage leading to dips and/or decreases in stock price (Albrecht...
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...According to the complaint filed by the Securities and Exchange Commission, HealthSouth used its auditing firm’s own processes against it to perpetrate financial statement fraud. HealthSouth executives knew that the auditing firm did not question fixed-asset additions below a certain dollar threshold (materiality), so it made random entries to its balance-sheet accounts for fictitious assets worth less than the known materiality amount. HealthSouth’s senior accounting personnel then created false documents to support cash accounts that were overstated by a combined total of $300 million. This overstatement represented 20 percent of the originally identified $1.5 billion fraud (Securities and Exchange Commission, 2003) Why was the fraud committed http://ruby.fgcu.edu/courses/cpacini/courses/common/fraudandcorporate.pdf It was found that HealthSouth’s financial statements had been falsified since 1986 when the company went public this was done by overriding internal controls and daunting the external auditors. By 2003 HealthSouth had overstated earnings by at least $2.7 billion....
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...Accounting Fraud” written by Jonathan B. MacKenzie (http://www.law360.com/articles/460715/sec-s-new-focus-on-accounting-fraud-what-s-on-its-radar). Accounting fraud cases brought by the SEC have been decreasing in recent years. As shown in the graph below, the financial fraud matters brought by Enforcement became 11% in 2012 fiscal year compared to 29% in 2003 fiscal year. During those years from 2003 to 2012, the total enforcement actions by the SEC did not decrease. Data source: http://www.sec.gov/news/newsroom/images/enfstats.pdf From the decline trend of percent, there could be two main questions. First, what are the causes to this decline trend? The next one is how long it will keep the momentum. The decline trend in recent years seems to be logically explained by two possible scenarios. One is that financial reporting has actually improved after the Sarbanes-Oxley legislation in 2002. The other is that financial fraud remained the same level as before, but less fraud has been detected due to shifted priorities at the SEC. The examples include restructuring of the Enforcement Division, in 2009, into five specialized units, missing emphasis on detecting financial fraud and disbanding the Financial Fraud Task Force, established in 2000, in 2010. I think the recent decline trend of fraud matters brought by the SEC is the result of both of improved financial reporting and the shifted priorities at the SEC. Running single regression model for Financial Fraud/Issuer...
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...Final Paper: Case Study of WorldCom Financial Statement Fraud Introduction This paper will discuss the financial statement fraud committed by WorldCom by examining what led up to the fraud, who committed it and why, and the impact it caused on various stakeholders and the economy. WorldCom applied aggressive and undisclosed accounting tactics to provide financial statements that reflected a $10 billion profit for the years 2000 and 2001, rather than the actual combined loss of $73.7 billion that occurred (Romar, 2006). Opportunity, pressure, and rationalization were all present in this severe example of financial statement fraud which had a devastating impact on stakeholders globally. Basis for Understanding Financial Statement Fraud Prior to taking a deep dive into this specific example, it is important to first understand what constitutes financial statement fraud. Financial statement fraud can be defined as “deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors” (Wells, 2011, p. 299). Financial statement frauds can be broken down into five distinct categories: fictitious revenues, improper asset valuations, concealed liabilities and expenses, timing differences, and improper disclosures” (Wells, 2011, p. 292). The History of WorldCom “WorldCom began in Mississippi as a small provider of long distance telephone services” (Lyke, 2002). However, due to deregulation...
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...The Role of Power in Financial Statement Fraud Schemes Chad Albrecht • Daniel Holland • Ricardo Malaguen˜o • Simon Dolan • Shay Tzafrir Received: 24 June 2011 / Accepted: 12 December 2013 Springer Science+Business Media Dordrecht 2014 Abstract In this paper, we investigate a large-scale financial statement fraud to better understand the process by which individuals are recruited to participate in financial statement fraud schemes. The case reveals that perpetrators often use power to recruit others to participate in fraudulent acts. To illustrate how power is used, we propose a model, based upon the classical French and Raven taxonomy of power, that explains how one individual influences another individual to participate in financial statement fraud. We also provide propositions for future research. Keywords Financial statement fraud Organizational corruption Recruitment Collusion Power and influence Introduction In recent years, fraud and other forms of unethical behavior in organizations have received significant attention in the business ethics literature (Uddin and Gillet 2002; Elias 2002; Rockness and Rockness 2005; Robison and Santore 2011), investment circles (Pujas 2003; Albrecht et al. 2011), and regulator communities (Farber 2005; Ferrell and Ferrell 2011). Scandals at Enron, WorldCom, Xerox, Quest, Tyco, HealthSouth, and other companies created a loss of confidence in the integrity of the American business (Carson 2003) and even...
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...17 Appendix 18 Bibliography 19 Abstract Financial statement fraud is a very costly type of fraud and has a significant financial impact on the company businesses and also individuals, as well as influence investor confidence in the markets. In this project, our group will going to present on a case study in Financial Statement Fraud by a company that we choose. First of all, in this report we will investigate on our background of the Case Study Company which is MEMS TECHNOLOGY BHD. In the case study, we will determine the current status of the company and how the financial statement fraud will give impact to the organization by referring to the company’s annual report 2009. Hence, in this report we will give some practical guide on the different schemes and components that are used for detection on the Financial Statement Fraud that might be probably incurred in the company annual report 2009. 2.0 Introduction Financial reporting frauds and earnings manipulation have attracted high profile attention recently. The generally accepted definition of the financial statement fraud is the deliberate, misrepresentation, misstatement or omission of financial statement data for the purpose of misleading financial statement users and also creating a false impression of an organization's financial strength. The purpose of this financial statement fraud committed by the public businesses is to maintain the investor confidence...
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...Financial Statement Fraud ACCT 710: Assignment 6-2 Shannon Baxley David Welch September 24, 2011 Table of Contents Abstract………………………………………………………………………………………3 Introduction…………………………………………………………………………………..3 Literature Reviews……………………………………………………………………………5 Conclusion…………………………………………………………………………………..16 References…………………………………………………………………………………...18 Abstract This paper describes financial statement fraud (FSF) and how it may occur within companies. The reason of this study was to research FSF detection and prevention. Research was also done to determine any influences that SAS (Statement on Auditing Standards) No. 82 and SAS No. 99 had on audit programs and the analysis from external auditors. Thirteen scholarly journals were reviewed in order to analyze SAS No. 82 and No. 99 and to show ways to detect and prevent fraud. Results found that managers and/or auditors can create fraud intentionally and unintentionally. There are ways to prevent fraud and educating managers and/or auditors is a good way to make sure fraud does not occur. Introduction Financial statement fraud (FSF) involves the premeditated issuing of phony information on a financial statement (financial statement fraud, 2011). FSF occurs when a company exaggerates assets or revenue, or when it devalues liabilities and expenses (financial statement fraud, 2011). The American Institute of Certified Public Accountants or AICPA defines fraudulent financial reporting as “intentional misstatements or omissions...
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...Stanford Financial Group Scandal HARD WORK, CLEAR VISION, and VALUE for the CLIENT were the leading slogans for the former jet-setting Texas tycoon Robert Allen Stanford’s business, Stanford Financial Group (Brear). Stanford Financial Group provided a wide variety of services ranging from brokerage and investment advisory, private and commercial banking, investment advisory, trust, real estate investment services, and investment banking services (Businessweek.com). This eight billion dollar Ponzi scheme came to a halt in 2009 when the SEC noticed an abundance of red flags. The fraudulent success of Stanford Financial Group did not happen overnight, nor did it occur without major help from the lack of independent auditors. Robert Allen Stanford was born on March 24, 1950 in the little town of Mexia, Texas. As a kid, family and friends said it became apparent he had an entrepreneur mindset and was destined for something, whether good or bad (chron.com). In 1974, he graduated Baylor University with a BA in finance. After college, he opened a chain of athletic clubs in Waco, which went bankrupt by 1982 (Blodget). He soon shifted his business strategy from an unprosperous gym owner to a flourishing banking tycoon. Stanford Financial Group can be traced back to an insurance company started by his grandfather in 1932. While the new business had nothing to do with insurance, he used the name and contacts to start the new Stanford business. His primary contact and new boss in...
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...Topic: The biggest scams in the banking history Course: Banking Students: Nino Vepkhvadze, Gohar Trchunyan, Giorgi Menteshashvili & Giorgi Paksashvili Date: 04.06.2012 A fraud, by definition, is the act of deliberate deception of people to secure an unlawful gain. These are mainly for the purpose of defrauding money as well as prestige rather than immediate financial gain. A study by BBC has revealed that the average woman lies twice a day while a man tells three lies a day. However, the lies they tell differ from each other a lot, both in essence and the results yielded. This is why we decided that the frauds and scams of the banking industry as well as their influence on other financial institutions would be quite interesting and intriguing. Let us together investigate how far a human mind can go to earn as much money and glory as we desire. Jerome Kerviel’s case-Societe Generale on the edge In January 2008, A French court sentenced former Société Générale trader Jérôme Kerviel to three years in prison for his role in one of the world's biggest-ever trading scandals and ordered him to repay his former employer €4.9 billion—a sum it would take him 180,000 years to pay at his current salary. In convicting Mr. Kerviel of breach of trust, forgery, and unauthorized computer use, the judge also handed Mr. Kerviel a lifetime trading ban. The prison sentence handed to Mr Kerviel is for five years, of which two years were suspended. Throughout the trial, Mr. Kerviel and...
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...Cendant Corporation Evaluating Risk of Financial Statement Fraud and Assessing the Control Environment • Describe the auditor's responsibility for considering a client's internal controls • Describe the auditor's responsibility to detect material misstatements due to fraud • Identify red flags present during the audits of CUC International, Inc.'s financial statements, which suggest weaknesses in the company's control environment (CUC was the predecessor company to Cendant Corporation) • Identify red flags present during the audits of CUC's financial statements suggesting a higher likelihood of financial statement fraud • Identify management assertions violated as a result of the misstatements included in CUC's 1995 through 1997 financial statements (prior to its merger with HFS, Inc.) • Identify audit procedures that could have been performed to detect misstatements that occurred One can only imagine the high expectations of investors when the boards of directors of CUC International, Inc. and HFS, Inc. agreed to merge in May 1997 to form Cendant Corporation. The $14 billion stock merger of HFS and CUC, considered a marriage of equals, united two large service organizations. CUC was a direct marketing giant with shopping, travel, automobile, and entertainment clubs serving more than 68 million members worldwide, whereas HFS was a franchisor of brand-name chains such as Ramada, Days Inn, Avis, and Century 21, with more than 100 million...
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...problem is fraudulent financial reporting? Fraudulent financial reporting is something that affects everyone: employees of the company, stockholders, and the surrounding community. COSO’s report showed that there has been an increase of the magnitude dollars stolen by ways of financial reporting fraud. While the amount of cases where fraud was found were similar when compared to the report published ten years ago, the amount of dollars in error has changed drastically – moving from a mean per case of $25 million to a staggering mean of $400 million. Most cases of fraud come from an overstatement of assets or overstatement of revenues. Who are the perpetrators? Fraudulent financial reporting can happen to any company at any level. The COSO study found that the median revenues and total assets were about $100 million, which is a large increase from the previous study done ten years ago, which found the median to be around $15 million. That is not to say the majority of all offenses occurred with companies in the medium range – fraudulent reporting was found in companies ranging from $400 billion in assets and revenues to startup companies with no revenue or assets. Most companies that committed fraud were either close to break-even positions or were posting net losses. The industries fraud is committed in is widespread, with companies in virtually every sector committing fraud. In 72% and 65% of cases, CEOs and CFOs were found being associated with fraud, respectively. What...
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...| Accidents caused by human carelessness, failure to follow established procedures, and poorly trained or supervised personnel, innocent errors or omissions, lost, erroneous, destroyed, or misplaced data, logic errors, systems that do not meet company needs or are incapable of handling tasks. MOST LOSSES OCCUR HERE! | Sabotage, which is destroying a system, computer fraud, misappropriation of assets, financial statement fraud, corruption. Deliberate destruction to harm a system. (Cookie: data website store on your computer that identify the site & you do not have to log on each time you visit the site) | * The Association of Certified Fraud Examiners (ACFE) 2014 Survey Results Show: * 5% of revenues are lost to fraud (≈ >$3.7 trillion lost globally) * Median loss: $145,000 (22% of cases involved with losses > $1,000,000) * Most frauds are fairly small in scope * Median fraud scheme lasts about 18 months * What is Fraud? * Gaining an unfair advantage over another person. All five of the following elements must be present for it to be legally considered fraud: 1. A false statement, representation, or disclosure. 2. A material fact that induces a person to act (influences the decision process). 3. An intent to deceive (not accidental). 4. A justifiable reliance; that is, the person relies on the misrepresentation to take an...
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...Fraud is a serious problem for most businesses today and often technology compounds the problem. In addition, the role of the independent auditor in the detection of fraud is often questioned. (http://www.swlearning.com/accounting/hall/ais_4e/study_notes/ch03.pdf) Fraud is dishonest activity causing actual or potential financial loss to any person or entity including theft of money or other property by employees or persons and where deception is used at the time, immediately before or immediately following the activity. (http://about.curtin.edu.au/definitions-impact.cfm) * Types of Fraud (http://www.auditsol.com.au/media/Fraudw.pdf) 1. Employee fraud Is internal or employee frauds are when fraud is committed against the company or organization a person is working for. Internal frauds can include: * payment fraud Payment fraud is any fraud that involves falsely creating or diverting payments. Payment fraud can include: * creating bogus customer records and bank accounts so that false payments can be generated * intercepting and altering payee details and amounts on cheques and Payable Orders, then attempting to cash them * creating false payment and financial information to support fraudulent claims for benefits * processing false claims by accomplices for benefits, grants or repayments self authorizing payments to oneself. * procurement fraud Procurement fraud is any fraud relating to a company purchasing goods,...
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...• ACFE= Association of Certified Fraud Examiners; conducts comprehensive fraud studies; Report to the Nation on Occupational Fraud & Abuse • Fraud - deception that includes: a representation, about a material point, which is false, and intentionally or recklessly so, which is believed, and acted upon by the victim to the victim’s damage. Fraud is an act of dishonesty with the intention to deceive or cover the truth to gain an advantage. Most critical element: confidence. Fraud can be classified as (in terms of organization): against or on behalf of • Occupational fraud - use of one’s occupation for personnel enrichment through deliberate misuse or misapplication of the employing org’s resources or assets. Categories: Asset misappropriation (steal asset), f.s fraud (manipulate f.s), Corruption scheme (misuse connections). • Employee embezzlement-can be: direct (e.g: asset misappropriation, making dummy company and making employer pay for goods not actually delivered) (from perpetrator to employer); or indirect (corruption, taking bribes from outside) (3rd party involved) • Management fraud- aka financial statement fraud; involves top management’s deceptive manipulation of f.s.; more inclusive • Investment scam-consumer fraud: Ponzi scheme, telemarketing, identity theft, money scam, advance fee scam, letter of credit fraud, etc. • Vendor fraud-overcharge, send inferior goods, charge for goods not shipped; • Customer fraud-not pay, shoplift; • Miscellaneous¬-other ...
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