Accounting Fraud

Topics: Enron, Fraud, Accounting scandals Pages: 7 (2205 words) Published: April 6, 2014


Accounting Fraud: A White Collar Crime

Accounting Fraud: A White Collar Crime
The CEO and CFO of a Swiss security systems company named Tyco, stole 150 million dollars from their company before being caught in 2002. At the height of the scandal, the CEO threw a 2 million dollar birthday party for his wife on a private island with guest performer Jimmy Buffet. After being caught, the CEO and CFO were sentenced to 8-25 years in prison and Tyco had to repay its investors 2.92 billion dollars (The 10 Worst, n.d.). In the last decade-and-a-half, accounting fraud has earned a place among the common themes in our culture. It’s prominence in today’s business world has led to changes in laws, stronger restrictions, and new methods for detection. Despite all these roadblocks, individuals within corporations still find ways to commit financial malfeasance for personal or corporate gain. The majority of the public is familiar with companies like Enron or WorldCom, whose wrongdoings in this matter were highly exposed to the public eye. Government sections, like the Security and Exchange Commission (SEC), have been continuously working to create programs and guidelines to restrict fraud, encourage whistleblowers, and expand the criminal prosecution for those who do commit fraud. By understanding the causes and complexities associated with accounting fraud, the court system along with the SEC can work to put laws in place to prevent fraud and punish those who commit it. On paper, the term accounting fraud might seem very basic, however, in practice it can be accomplished in many numerous ways. In the article, “The Causes and Consequences of Accounting Fraud” by Mason Gerety and Kenneth Lehn, they suggest the term “disclosure violation” (Gerety, Lehn, 1997, p. 588) may be more appropriate. The authors continue by explaining that they originally attempted to create an all-inclusive data set incorporating all the ways accounting fraud has been committed, but the sample was too large. They then narrowed the sample down to types of fraud and excluded accounts that lacked data. Overall, their findings proved that the term accounting fraud can pertain to so many situations in the processes of a company’s finances that it is impossible to define it as one or even a few certain acts. In a very broad definition, accounting fraud can be defined as an intentional misleading of a company’s financial statements that alter factors such as revenues or expenses to avoid negative implications from shareholders or to create a financial gain on a personal or corporate level. In reality, the causes and carrying out that go into fraud, are really very complex and detailed. There may be several reasons the fraud has taken place and multiple ways it has occurred. As an example, Gerety and Lehn refer to the case SEC v. McCormick & Company. In this occurrence, McCormick & Company was accused of inflating revenues by deferring expenses related to advertising and recognizing revenue in a fiscal period prior to when it was earned. The CEO of the company was able to shift his bonuses forward each period because his bonuses were based off of bottom line accounting numbers (Gerety, Lehn, 1997, p. 588-89). This example is only one way fraud has been committed. The wide variety of methods used to carry out accounting fraud are only a portion of the difficulty faced when trying to categorize the occurrence and to break down the example in order to determine why the crime was committed and what exactly lead to the guilty party being caught. When it comes to understanding the reasons and motivations behind fraudulent accounting, it’s hard to determine where to begin. The causes are usually vast and made up of numerous factors that fit together like puzzle pieces. In the article, “Current Trends in Fraud and its Detection”, the authors call this scenario “The Perfect Storm” (Albrecht, Albrecht & Albrecht, 2008, p. 3). All attributes that lead up to the perfect...


References: Albrecht, W., Albrecht, C., & Albrecht, C. C. (2008). Current Trends in Fraud and its Detection. Information Security Journal: A Global Perspective, 17(1), 2-12. doi:10.1080/19393550801934331
Gerety, Mason, and Kenneth Lehn. "The causes and consequences of accounting fraud." Managerial and Decision Economics 18.7-8 (1997): 587-599. Print.
Giroux, Gary. "What Went Wrong? Accounting Fraud and Lessons from the Recent Scandals." Social Research 75.4 (2008): 1205-1238. Ebscohost. Web. 15 Feb. 2014.
RECENT LEGISLATION. (2002). Harvard Law Review, 116(2), 728.
Sarbanes-Oxley Basics. (n.d.). Sarbanes-Oxley Basics. Retrieved February 17, 2014, from http://www.sox-online.com/basics.html
The 10 Worst Corporate Accounting Scandals of All Time. (n.d.). Accounting- Degree.org. Retrieved February 20, 2014, from http://www.accounting- degree.org/scandals/
Verschoor, C. C. (2013). Whistleblowers Need Encouragement, not Roadblocks. Strategic Finance, 95(10), 12-61.
Wilson, A. C., & Key, K. G. (2011). Enron Audit Failures: A Compromise of Ethics. Conflict Resolution & Negotiation Journal, (1), 100-112.
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