Synthesis On Effects Of Accounting Fraud

Topics: Enron, Accounting scandals, Fraud Pages: 27 (7226 words) Published: February 10, 2015
Executive Summary
This paper objectify and evaluate the events that occurred prior (causes) and subsequent (outcome) to the fraud, and the accounting schemes employed to get the fraud done. It presents examples of companies who have used inappropriate accounting practices. Enron, WorldCom, Tyco, HealthSouth and Adelphia were selected for analysis because of the availability of information regarding specific events occured before, during and after the fraud period as well as the ethical issues involved . There is abundant literature presented on the Enron and WorldCom scandal. Tyco, Adelphia, and HealthSouth were selected to expand and support the information available in the WorldCom and Enron cases. Throughout the research process, the key findings collected suggest that: • Plans and designs of a good ethical work culture already exists, their implementation is what companies failed to do and continued to monitor in the entire business operations.

• The scandals at all five firms involved fraudulent practices as well as a number of unethical activities carried out by top managers and executives (CEO, CFO, Chairman).

• Need and greed were the most motivating factor in committing fraud. • Weak internal controls enabled these frauds to take place. • It took 3-15 years before these frauds were being discovered. • It is clear that by implementing a code of ethics and improving awareness of how other organizations have suffered from fraud and the lessons they have learned, an organization can become more proactive and put in place preventative and detective measures that can mitigate the extent and impact of fraud.

Organizations of all types and sizes are subject to fraud. There are television and newspaper stories almost every day about all kinds of corporate schemes, scams and deceptions. . According to the Association of Certified Fraud Examiners (ACFE), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party”. How a corporate fraud is accomplished and who does it underlies a person or a group of people who has taken what is not theirs. And in order to help prevent future accounting fraud scandals, it is important to understand how past frauds were perpetrated and how they went undetected for so long.

Fraud Triangle
According to Romney & Steinbart (2008), three conditions exist in the occurrence of fraud: pressure, opportunity, and rationalization. Albrecht & Albrecht (2004) state that auditors focus more on the elimination of opportunity by ensuring strong internal controls, however, they often fail to focus on the motivation or rationalization of the perpetrators. Pressure is a person‟s motivation to commit fraud. Financial, Emotional, and Lifestyle pressures are common types of pressure that exist for perpetrators . Opportunity is the condition or situation that allows a person or an organization to: “commit the fraud, conceal the fraud, and convert the theft or misrepresentation to personal gain”. The final element of the fraud triangle is rationalization: a form of justification in the mind of the perpetrators of their illegal behavior (Romney & Steinbart, 2008). Once these three fraud factors have been established, fraud will most likely be committed. As previously stated, it is most important to prevent opportunity from arising. For purposes of understanding the methods by which these past corporate accounting fraud cases were committed, schemes are broken down into two broad categories. First, asset misappropriations are those schemes in which the perpetrator steals or misuses an organization’s resources. Examples include skimming cash receipts, submitting false invoices for payment, and forging company checks. Second,...
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