Financial Fraud Analysis - Essay Example

Forensic Accounting Review Questions Question The team project was very informative and helped me understand several diverse aspects of fraud relating to a financial statement and revenue. Through the research we did, we drew common conclusions as a group; the most striking thing was the understanding on the motivations behind fraudulent activities. The following outstood as the causes of financial fraud, the need to make an extra income, ease in capital acquisition, concealing unpleasing news from the relevant stakeholders of the organization, cover-up of illegal financial activities and the attempt to make the company’s position unknown to the public. Either the management or the accounting team are the most prone to engaging in these acts. Lack of business ethics and personal morals are the breeding grounds for these fraudulent activities. It has been clear that individuals engage in fraudulent activities because of diverse motivations and stimulations. When it comes to revenue fraud, the likelihood is for the company to overstate and understate various parameters, we found that this is done by manipulating the sales, recognition of conditional sales, sale of consignments, misstatement of the percentage of completion, abusing of the cut off dates, unauthorized shipment and premature recognition of revenue. Concerning the same issue of revenue, the collusion by the fraudsters can result to situations such as understatement of bad debts, overstatement of ending inventories, overstatement of the assets’ worth, and understatement of the liabilities among other dubious means. All these aspects are under the motivation of the need to cover up mistakes or misrepresentation of the financial position of the company. The knowledge acquired is very helpful to my future employer and me as an individual. In the workplace, we have diversity of people, some of whom can manipulate situations to their advantage. It is important to aware of what is ethical in the workplace in order to avoid being trapped on such situations. Sometimes the management may coerce an employee to engage in a fraudulent activity, without such knowledge one is likely to commit fraud unknowingly. Another thing is that lessons learnt stirred my curiosity in understanding business law; it has prompted me to start engaging this area since it can easily result to personal and organizational damages. In addition, it has opened my mind to the understanding business of dynamics, including the manipulations that are likely to be made in order to misrepresent information for a particular organization. The group was very influential in the understanding of the topic. I participated in the group activity by handling the section that I was assigned to research on and went ahead to help in the report writing. The group members were very cooperative hence facilitating timely achievement of results. I also presented a fraudulent case scenario that enhanced the understanding of the topic. The case had featured in one of the local dailies; it helped us relate very well what we learnt in class. Each member of the group completed the task assigned to them on time hence the ability of the group to finish the project on time. Despite the many lessons learnt some of the topic areas were challenging and presented some level of difficult. During the lecture sessions I found difficult in understanding the legal provisions of that are related to fraudulent activities. However, after extensive and repetitive reading I was able to comprehend the sub-topic. Question 2 Fraudulent activities are not easily identified, it is highly unlikely that a fraudulent activity will be realized unless the parties involved leak information or some auditing system unearths it. These are the likely means through which tips come along, without which it may be impossible to recognize a fraudulent activity. I do not think a fraudulent activity is recognized in the first instance. The high level of secrecy that is involved hampers the process of detection. Whenever a fraudulent activity occurs, it is mainly linked with senior personnel in the hierarchy of an organization. These individuals are the policy makers and the final decision makers of the organization; any individual rarely challenges their authority. The parties that regulate them include the government and the auditors; however, they seem to have influence over these two parties. Firstly, they are the sole authority that hires private auditors; to fit their interests the management can customize these private auditors to fit their interests. This greatly creates a room for the managers and the proprietors to engage in fraud for the benefit of the organization. Despite the oath of duty that is taken by these professionals to adhere with professionalism in discharge of their duties, they can be corrupted through giving kickbacks. Another dimension is that it may not be the wish of the auditing company but the personal morals of the auditing individual might prompt them to accept favours from the management hence accepting to corrupt the books of account. The second view entails compromise by the government agencies in delivering what should be rightfully done. In some cases, government officials have been corrupted hence complying with the pleas of the company policy makers. The kickbacks that the government officers get from the interested parties makes them corrupt documents and give a leeway for the company officials to manipulate documents to their benefit. These aspects make it clear that it is very unlikely that a fraudulent act will be unearthed unless the involved parties play a role. Fraud in organizations or in the public sector by employees fails to be realized because of the trust that exists in the organization. For example where there is need to sign, some employee may forge a signature to cover for someone else in absentia and still no follow up is done because of the trust that takes place in the organization. Another aspect is that any incidence of fraud is accompanied by very stringent measures to conceal the evidence; the chances of establishing the truth are minimal. The inability to detect fraud is an aspect that remains in the hands of the whistle blowers who also have to rely on some source or make a suspicious observation. If this does not happen, then the fraud remains undetected. Despite the complexity of fraud detection, some measures can be adopted to increase the chances of detection. Tipping has been one of the main ways of exposing fraud but it is not enough and most of the times tipping occurs when the criminal activity is at advanced stages or almost being forgotten. This makes tracking difficult hence, the method has thee same chances of failure as success. Firstly, is enactment of policies for regular and impromptu surveillance by independent parties. These parties should be provided for under government regulations and should be unknown to the individuals being audited. The same personnel should not conduct the surveillance repeatedly; however, this strategy is weak in that it still involves individuals that can be corrupted hence compromising fraud detection. Once the surveillance team find any hint of fraud, the team should inform the police immediately and a forensic audit carried out as a matter of urgency. Such a move will even scare away fraudulent individuals from participating in such. The second way in which this can be done is to entrench the principles of morality in the society. Education and training has been a major source of influence to the lives of people. When young people understand the need to adhere to legal as well as ethical issues, then it means that they will entrench such values in their adulthood hence the society may be transformed through this strategy. Fraud is an unethical issue that emanates from lack of morality. A morally upright society will have a number of whistle blowers and virtuous individuals who will not sit back and see fraud taking centre stage. A complete transformation of the society may not be the solution but the section that stands by the principles of ethics and justice shall be able to force the other faction to adhere to their principles of morality. Stringent measures upon detection of fraud and huge rewards for whistle blowers while concealing their identity can be done to reduce chances of its occurrence. Fraud has been treated with a lot of leniency and the rules are very user friendly. Extending the jail term and the punishment thereof can scare many to engaging in fraud. Some have engaged in the unlawful activity just because they feel that chances of detection are minimal, some of these people are those in authority and those capable of manipulating situations. If individuals such as secretaries in a company or in government and other employees get to find some fraudulent information and are assured of their confidentiality, they are likely to expose fraudulent schemes that comes their way. Creation of a common database that is under the regulation of a federal agency can encourage transparency and openness on the side of the management and other bodies and individuals that are likely to engage in fraudulent activities. The database should be used for checking whatever comes in and whatever checks out from a particular entity. The database will be universal and capable of capturing every transaction and development that happens in an organization and be able to detect any fraud courtesy of fraud detection software. The software can be developed such that it is capable of tracking any inconsistent transaction, such should then be checked of potential fraud and if found the stringent measures of fraud are adopted. Another way that fraud detection can be made possible is through fraud detection training for individuals, agencies, businesses, corporations, and governments. Adoption of these strategies will make it possible to avoid over reliance on tipping. Question 3 Financial statement fraud is a type of fraud that involves the alterations of the accounting documents with a view of stealing from the company, deriving personal benefits, profiting the company, or creating a particular public image of the company. The accounting officers in their own capacity or that of the management may find an opportunity to change the information in the books of accounts by understating or overstating certain accounting parameters. The data can be altered to make the income statement look impressive in an attempt to attract investors in the company. In addition, governments can alter their financial statements to disguise that they are in a path to economic development. When the income is good there are many benefits that comes in, it becomes possible to obtain financing from the banks. This means that fraud based on these aspects creates a mental impression of wellbeing of the organization hence attracting stakeholders to the organization. Some opportunity may present itself in an organization where the officers in charge foresee a loophole in the financial management system. The individuals capitalize on such opportunities and take advantage of organization or government’s resources. The window of opportunity that appears is usually understood well by the involved parties hence making the chances of detection minimal. They strategize, make a fraudulent deal and conceal all the potential holes that may lead to their detection. Way after the persons have left the organization some inconsistency may be found but it proves difficult to understand how they came by. The second factor that comes into play for individuals to effectively engage in fraud is the motive behind a certain desire. The management would like to see the organization progressing well. Some of the organizational leaders would do anything to keep the company on a positive trend especially concerning profitability and public confidence. Lack of morality and ethics makes individuals to corrupt the books of the account either through coercion, persuasion or in an agreement to earn some incentive. These fraudulent strategies may be applied to either the employees, regulatory agencies or the auditors. In order to benefit from the fraudulent activities, these persons will give in to the will of the organization’s management hence compromising on the quality of the work that they deliver. This is not only a fraudulent behaviour that can be charged in a court of law but also it goes against the spirit of professionalism. In an attempt to rationalize, the company’s effort or individual effort money or assets are presented in an incorrect way in order to steal some or show wellbeing for the case of company. People often put themselves in classes based on their income and net worth. To demonstrate that one belongs to a certain class they are tempted to engage in fraudulent activities that will lead them towards getting to their presumed social class. The individual will try to look for opportunities, capitalize on them and try to conceal all the evidence that may come to the unearthing of their acts. An organization can also be tempted to create a wrong impression of what it is worth. It may conceal negative news to the customers as well as covering up illegal activities such as tax evasion, understating or overstating some financial parameters to suit their preferred interest. As the company management engages in such a thing, the risk comes from the staff that are used in the advancement of the scheme. Most of the time the employee is coached and warned in order to prevent whistle blowing or giving tips that may bring the act to light. Technology has facilitated financial fraud in several ways. However, it has also helped curb fraud in several ways. Computers and software are a human creation that is easily manipulated by people to suit their interests. Once the information is entered in the system it can be manipulated anyhow only with application of some accounting principles. Again, information can easily be tampered with before it finds its way into the quick books or the financial management systems. This presents a situation where the certainty of relying on technology becomes questionable. There are red flags that support the predication of financial fraud in an organization or the government. It is possible to establish a possible fraud in the financial books through several ways. Firstly, the presence of weak accounting systems that does not take a collective view of the expenses and the income as well as every other transaction in the organization means that there will be a compromise in the overall financial outcome. If such happens, then it means that there could have been a potential financial fraud. Secondly, the lack of poor definition of the roles of the accounting personnel, for example a situation where the financial manager fails to delegate responsibilities that are not meant to be theirs, then it means they may be scheming to commit a fraud or to conceal a financial fraud. Thirdly, lack of regular financial auditing system or where the auditors are suspected to be colluding with the management can raise a red flag on the possibility of a financial fraud. Fourthly, where there is no authority whatsoever that regulates financial affairs of certain personnel or organization, then there might be a potential financial fraud. Finally, where the organization fails to present its financial reports regularly to the regulatory bodies, then there might be a potential fraud committed. Read More