...The Culpability of Accounting Fraud: Auditors, Managers or Both ACC 503 – Accounting for Management Abstract The purpose of this term paper is to provide insight to the reader about accounting fraud and on whom the responsibility lays whenever there is an allegation of accounting misconduct. Based on the rash of accounting fraud by major respectable corporations in recent years, no one organization is immune to accounting fraud and it is prevalent in the Federal Government down to the smallest neighborhood business. This paper will, discuss the responsibility of managers and auditors in preventing accounting fraud, show the relationship between internal and external auditors in identifying and preventing fraud, and the responsibility for managers to have strict internal controls within their accounting processes. Introduction Enron, WorldCom, Lehman Brothers, and Waste Management were three of the biggest corporations plagued by accounting improprieties. These companies were at one time multi-billion dollar entities that seemed to have unlimited growth prospects. They also were mega companies that have been involved in some sort of accounting scandal or an instance of accounting fraud. The Journal of Finance and Accountancy lists the definition of fraud as “All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions...
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...TONE at the Issue 55 / April 2012 TOP Exclusively for Senior Management, Boards of Directors, and Audit Committees Ethical Dilemmas What rationalization does a company make to justify a corporate culture where ethics are ignored? In recent years, greed, fraud, and a lack of ethical conduct have led to the collapse of many organizations. A variety of internal and external pressures can lead companies down the wrong path. And once the first misstep is taken, it’s a slippery slope to hurting stakeholders, the community, and your reputation. This turmoil and damage could have been avoided if organizations had chosen to maintain an ethical corporate environment, exercising integrity-rich behavior and ensuring the tone at the top was above reproach. This issue of Tone at the Top presents suggestions for creating and promoting an ethical corporate climate and the role internal auditors can play in helping ensure the environment supports ethical decisions and behavior. Code of Ethics It’s important to note that internal auditors adhere to their own Code of Ethics, which is included in The IIA’s International Professional Practices Framework (IPPF). The Code of Ethics mandates that internal auditors behave and practice with: n Integrity. n Objectivity. n Confidentiality. n Competency. It also delineates rules of conduct under each of the principles. A code of ethics is necessary and appropriate for the profession of internal auditing, founded as it is on the trust placed...
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...Auditing and Assurance services (C05118) SUBMITTED TO: Lecturer Mrs. Robyn Parry Due Date: January 25, 2011 SUBMITTED BY: Student Name Student ID Anil 12348982 TABLE OF CONTENTS 1. Control related terms………..……………………………………………….. 3 2. Tone at the Top............................……………………………………………...8 3. Conditions of the fraud......…………………………………………………….10 4. Control reliance testing………………………………………………………..11 5. Control deficiency..............................…………………………………………12 6. Promoting personnel across functional departments………………......………14 7. Audit Materiality...……………………………………………………………..15 8. References……………………………………………………………………..16 1) CONTROL RELATED TERMS • CONTROL ENVIRONMENT It is the main component of the internal control that management designs and implements to provide reasonable assurance that their objectives would be met. The control environment consists of the actions, policies and procedures that reflect the overall attitudes of top management, directors and owners of an entity towards internal control and its importance to the entity. It provides discipline and structure, and encompassing both the ethical values and technical competence. Management has to be serious and provide indications to the employees that they are very serious about the policies and...
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...Organizations begin with “The Tone at the Top” Executive Summary Unethical behavior in organizations creates many intractable problems which climax in fraudulent acts. When behavior in an organization is not ethical regulations are broken, and the likelihood of legal suits increase. Fraud in Enron and Adelphia in the early 2000s led to big bankruptcy filings resulting in huge losses in investments. Employees also lost jobs as well as significant portions of their retirement savings. Most of the fraud in these companies were committed or influenced by senior management. Executives did not demonstrate ethical leadership by sounding ethical tones at the top. The “tone at the top” has a trickle down on employees. If top management is comprised of ethical leaders, the employees are likely to behave ethically. Such leaders lead by example, and one important way to cultivate an ethical organization is to have an organizational code of ethics that is followed by all. However, these codes can only be as good as those who are responsible to enforce them. The Securities and Exchange Commission (SEC) has placed high importance in codes of ethics. In spite of the aforementioned disadvantage that is hinged on the values of unethical leaders, codes of ethics are good internal controls. Leaders can act morally and avoid unethical behavior if they also avoid setting unrealistic goals. If daunting goals are set for employees, they are likely to commit fraud. Embracing an unethical behavior...
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...Case 1: The Fraud Continues July 17, 2011 Abstract Focusing on the internal control weaknesses that existed at MCI, which contributed to the commission of Walt Pavlo’s famous multi-million dollar fraud. Discussing the approach that should have been taken if fraud was suspected and applying one theory related to crime causation of this case. As well as critiquing the ethical behavior of Pavlo and MCI – discussing what actions could have been taken to prevent the crime. 1. Discuss the internal control weaknesses that existed at MCI that contributed to the commission of this fraud. When we listen to Pavlo and outside sources, like ethics professor Stephen Henn in his book “Business Ethics,” we hear of employees concealing bad debt in Pavlo’s department. It seems that “unethical decisions were commonplace” (Henn 2009). We see an upper management that, when notified of large amounts of bad debt, completely denied any problem. Pavlo states, “I sent a memo to senior staff telling them that we had about $180 million of bad debt…. and asking how we were going to address it…The response was that the bad debt budget…was going to remain at $15 million and that we would just have to work through whatever issues we had.” (Jacka 2004) An ‘Internal Auditor” article from 2004 goes on to report that in one account “a customer who owed MCI US $100 million was allowed to sign a promissory note, which turned the receivable into a short-term asset.” These examples are perhaps the most...
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...convicted of six counts of fraud and conspiracy along with four counts of bank fraud. He died of a heart attack prior to the sentencing. Jeffrey Skilling was convicted of conspiracy, fraud, and insider trading. He was sentenced to 24 years in prison. Eventually, the sentence was reduced by 10 years and he was required to pay $42 million to the victims. Andrew Fastow plead guilty to counts of wire fraud and securities fraud. He served four years in prison. As a result of the Enron scandal, congress passed the Sarbanes-Oxley Act of 2002. The act was created to protect investors from accounting fraud and increase investor confidence. The act includes two key provisions. Section 302 mandates that senior management certifies “(1) the report does not contain untrue statements or material omissions; (2) the financial statemen fairly present, in all material respects, the financial condition and results of operations; and (3) such officers are responsible for internal controls designed to ensure that they receive material information regarding the issuer and consolidated subsidiaries.” (Sarbanes-Oxley Act of...
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...ACCOUNTING | Case Study 1: And the Fraud Continues | SOLIAT KOSOKO | | Professor: Dr. Timothy Franklin Deleanor Brown | 1/20/2013 | Introduction This case demonstrates organized crime, occupational fraud and abuse. This crime is commonly seen among individuals and organizations that are in a lot of social and financial pressures. Some of the crimes involve organize crime are money laundering, mail and wire fraud, conspiracy and racketeering. Any organization that has weak or no internal control gives employees the opportunities to commit fraud or use company assets without permission. In this case there were multiple internal control weaknesses that allowed Pavlo to carry out the fraud and the different tricks he used to cover the whole scam. In this paper I would be discussing the internal control weaknesses that existed at MCI and contributed to the commission of this fraud, identifying and justifying the approach I would take if I suspected fraudulent activity within an organization, the ethical nature of Pavlo’s actions in this case and the theory related to crime causation to this case. Discuss the internal control weaknesses that existed at MCI that contributed to the commission of this fraud. Internal Controls is an integral part of any organization's financial and business policies and procedures. Internal controls consists of all the measures taken by the organization for the purpose of protecting its resources against waste, fraud, and inefficiency; ensuring accuracy...
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...summarizes accounting fraud in the United States. I explain why each aspect of communication skills and report writing is vital to an accountant’s professional career. | Table of Contents I. Executive Summary 1 II. Introduction 1 III. Review of Literature 1 IV. Analysis 1 V. Recommendations 1 VI. Summary and Conclusions 1 VII. Appendix x 1 VIII. References 1 I. Executive Summary Accounting fraud is the deliberate manipulation of accounting records in order to make an organization's financial performance or condition seem better than it actually is. There are many examples of accounting fraud. * Merging short and long term debt into one amount for improving the perceived liquidity of the organization or a company. * Failing to disclose the risky investments or creative accounting practices. * Over-recording the sales revenue. * Under-recording expenses i.e. depreciation of expenses. From Enron, WorldCom and HealthSouth, it appears that accounting fraud is a major problem that is increasing in frequency and severity. research evidence has shown that a growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic loses, and destroyed investors' confidence regarding the reliability of financial statements. The increasing rate of white-collar crimes demands stiff penalties and strong punishments. II. Introduction New laws and guidelines have helped reduce, but not eliminate fraud. Enron, WorldCom...
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...Enron was going to become the world’s leading company, but due to a lot of fraud and corruption that was happening inside the company. Fraud at Enron reached a place when they collapse that they couldn’t prevent it anymore even if they want to. They were covering a fraud with another fraud like when Andrew Fastaw who is the CFO of the company introduced a new way of trading concern called a special purpose vehicle or entity, which is Enron can sell an asset to another entity, but the asset will remain at its place, The SPV would pay cash for the asset and Enron can then show the transaction as a sale which would boost its reported profits. Well, whether Enron could have detected the fraud or not, the fraud could easily be detected by any accountant that was working at Enron, but because fraud was coming and committed from the top level management, management up there was doing fraud and letting or forcing everyone else in the company to believe that this is the best way to manage the company and to create profit. Employees were afraid to talk about what is happening in the company and they were applying something called tone at the top. Also, if the independent members on the audit committee were really independent, this could also help in detecting the fraud. Fraud could be detected if there is a will to detect it, when employees are not working under pressure and there is a transparency of information inside the...
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...Jenna McMorrow Accounting 249 Linda Amman Ethical Paper 4/09/2015 Fraud An Oak Brook Chicago attorney, Kathleen Niew age 59, was once known as a successful real estate attorney and a popular radio host. Now known as crooked and corrupt behind the scenes. She used her law license to lie and steal from clients. Kathleen Niew used to host call-in radio shows on WIND-AM 560, and she offered estate and financial planning advice. Mrs. Niew also wrote multiple books about financial advice and lead countless seminars regarding how people can improve their finances. Kathleen Niew was offering advice to society, however behind the scenes she was bilking more than $2.3 million dollars from a Chicago couple who entrusted Kathleen with their life savings. Instead of investing and getting real estate deals for the married couple like they had asked, Kathleen diverted the money into her own investors. Unfortunately these clients of Kathleen’s are not alone, she has robbed multiple clients that came to her for help regarding their finances. She wired millions of dollars to a gold mining company in Australia, hoping to get a commission for herself in the deal. Kathleen had used the couple’s money for her own desires instead of theirs. Mrs. Niew pleaded guilty to 10 counts of wire fraud in 2014. Which resulted in her getting 70 months in prison, has been ordered to pay restitution of $2.34 million to all the victims of her fraud, and has to forfeit assets related to the crimes. She committed...
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...INTERNAL CONTROLS AND FRAUD PREVENTION IN NON-PROFIT ORGANIZATION WRITTEN BY DAVID SANNI Designed to provide information on key areas that can strengthen the internal control system of VI-MID-ISLAND SERVICE (VIMS) Submitted To VANESSA OLTMAN Faculty of Management Vancouver Island University Nanaimo, BC, Canada (Nov/15/2012) Table of Content 1.0 INTRODUCTION 3 2.0 NATURE OF FRAUD IN CANADIAN NON PROFIT ORGANIZATION 3 2.1 TYPE OF FRAUD IN NON PROFIT ORGANIZATIONS 3 2.2 PERPETRATORS OF FRAUD IN NON PROFIT ORGANIZATION 4 2.3 IMPACT OF FRAUD TO NON PROFIT ORGANIZATION 4 3.0 COMPREHENSIVE APROACHE TO REDUCE FRAUD 5 3.1 UNDERSTANDING INTERNAL CONTROL 5 3.2 BENEFIT OF INTERNAL CONTROL 5 3.3 LIMITATIONS OF INTERNAL CONTROL 6 3.4 CONTROL MEARSURES IN PREVENTING FRAUD 6 3.5 SUMMARY AND CONCLUSION……………………….………………….8 4.0 REFERENCE…… ……………………………………………………………9 1.0 INTRODUCTION The Canadian non profit sector has one of the largest populations in the world, accounting for over 7% GDP and creating 2 million full time jobs for Canadians. Further discoveries was made that 78% Canadians donates money to non profit Organization irrespective of all walks of life and income bracket. These donations are received to address core issues...
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...As is mentioned in the “The CPA Journal”, “many studies suggest fraud is more likely to occur when someone has an incentive (pressure) to commit fraud, weak controls or oversight provide an opportunity for the person to commit fraud, and the person can rationalize the fraudulent behavior (attitude).” This is known as the fraud triangle. There are two types of fraud: fraudulent financial reporting and misappropriation of assets. For the first one, this kind of frauds came from the top management. Most of the pressures are the decline in earnings, which may influence the financing as well as the stock price. Moreover, the top management is afraid to get fired. At the same time, since the financial statement include many significant judgments or estimates, which maybe the opportunity for the top management to commit frauds. For the attitude, the top management displays a significant disregard for the financial report process. These factors will increase the risk of fraud. Secondly, misappropriation of assets, this kind of frauds came from the employees, such frauds like this may not have a great impact on the company. The employees with much more financial pressures when the economic situation getting bad. Moreover, the weak internal controls are the major source of opportunity to the employees; the examples include the inadequacy of the assignment of responsibility. And for the rationalization, the top management displays a significant disregard for controls and ethical conduct...
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...This paper is information on preventing acts of fraud against corporate executives and the preventive measures that can be used for that purpose. Probably the most important step in protecting against fraud is to start with the top executives to set the tone for not tolerating any type of fraud within the company. A great way to start is by educating the employees of the company in ways of detecting different types of fraud because the employees can be, by far, the best line of defense against fraud for the company as well as the top executives. Another effective but rarely used method is to have surprise audits. Surprise audits can be very successful in detecting fraud before it gets out of control. Probably the most important benefit of surprise audits is preventing fraud by creating the perception that fraud will be detected. Check and double check employee backgrounds. This means, that companies should confirm all work history and education listed in any potential employee’s or executive’s resumes as well as following up with all references listed also. Any undisclosed or misleading information should be considered a red flag. The same scrutiny should be used to screen new and existing executives, suppliers, customers, and any business partners. With the help of an outside source such as the Association of Certified Fraud Examiners for example. I believe that creating a fraud detection education program for top executives as well as the company employees would...
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...Case 3.4 Sunbeam: Incentives and Pressure to Commit Fraud 1. Consult paragraph 9 of PCAOB Auditing Standard No. 5. Based on your understanding of inherent risk assessment and the case information. Identify three specific factors about Sunbeam that might cause you to elevate inherent risk. The fact that the structure of the organization was in major flux and that the employees were probably in chaos mode with all the terminations in management, I am sure that the overall tone from the top was not a good one. I would assume that employees felt that fraud would be accepted if it meant the bottom line numbers were impressive so this would definitely cause me to elevate the inherent risk level. Especially since replacement employees were given strong monetary incentives to have stock prices raise. There is also rapid change happening in the entity. Not only was there a huge turnover of staff but there was also the elimination of 87% of products. Headquarters were even closed and consolidated into one. On top of all of that there were huge sales projections along with the introduction of new products. This rapid change should set up a red flag for any auditor and cause them to continue to raise the inherent risk level. All of these changes and projections caused the stock prices to rise. Since it was known that top management had a personal stake in these stock prices this would also cause an alarm to go off. Especially as it was stated before employees were encouraged...
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...INTRO Fraud has plagued the world of accounting since the establishment of the profession. Fraud can be committed against an individual or a business. In order to identify fraud, an auditor must be able to differentiate between what is considered fraud and what is considered error. Fraud as defined in our textbook as “intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.” On the other hand, error is “unintentional misstatements or omissions of amounts or disclosures.” This simply means that fraud and error can have the same affect on a company and its books, the main difference between the two is the intent of the perpetrator. This paper will explore the basic types of fraud, preventing and detecting fraud, an example of a major fraud committed in United States history and the governments reaction to the prevalence of frauds in the 1990s and early 2000s. TYPES OF FRAUD There are three basic types of fraud perpetrated by employees. They are misappropriation of assets, bribery and corruption, and fraudulent financial reporting. Misappropriation of assets is the theft or misuse of assets that belong to a company. Misappropriation of assets is the most common type of fraud; statics show that it has occurred in over 91% of fraud schemes. It is also the simplest type of fraud to understand and commit which might explain its prevalence in many business fraud schemes. Asset misappropriation is also the least expensive...
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