Frauds are devastating for any organization particularly in advancement in technology; they are becoming more and more complex in nature. Very many companies that had made huge strides in terms of their growth over many years have ended up collapsing due to the occurrence of fraud within their operations. As such, it is important for an organization to have in place measures to which any event of any fraudulent activity is easily noticeable before it is too late.
WoolEx Mills is an Indian based company and is among the leading manufacturers and exporters of woolen textiles. The company has a turnover of about INR 8000 million which had grown over the years into its current position. Despite this growth, its profitability was mainly seen at its operational level and no other sectors within the firm. Following claims of fraudulent activities by management, there a need for further investigation into the allegations. In this case, the findings confirmed that indeed, the management had a role to play in the committing of fraud.
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The type of fraud that occurred at WoolEx refers to as business fraud. The fraud is at times referred to by various names such as corporate fraud, occupational fraud, employee dishonesty or internal fraud (Wang et al., 2010).The senior management at WoolEx had a role to play towards the fraud that occurred within the firm's premises thus it was a business fraud. This fraud is categorized into three main areas; asset misappropriation, financial statement, fraud and bribery, and corruption. In the case of WoolEx Mills, it was affected by the assets misappropriation and financial statement fraud.
In assets misappropriation, the employees of the company abuse their positions so as to steal from the organization’s coffers (Kwok, 2005). In the case of WoolEx Mills, the senior management played a role in this type of fraud. The ultimate result of asset misappropriation is usually the business cash flow that is affected (Kwok, 2005). This is seen in the case whereby the firm still used outdated technology to run its operations thus leading to poor quality products. The company also had expenditure for coal yet the steam boiler that was to utilize the coal had been stocked for about six months without operating. This means that the senior management was involved in some form of embezzlement of the firm’s finances.
The primary fraud at the firm was financial statement misappropriation (Kwok, 2005). This begun at the budget formation stage till when economic data was recorded in the financial books. The accounts receivables were high and outdated on a monthly to monthly basis. The customers also took about 130 days so to clear their payments. Some offered discounts were not recorded in the financial books which also were not accompanied by any credit notes. The prices for the wool used had a 65% increase in prices, yet management did not take that into account. Raw materials were bought through advance payments, and they accounted for 50% of the selling price. As such, the company faced major setbacks in terms of its financial stand. Had the company been recording correct financial statements which were in line with their conditions at the time, it would have been easy to point out the mistakes.
Most often business frauds are carried out by insiders. In the case of a small business, they occur due to the nature of small employees characterized by less oversight as well as no checks and balances in place. Most small business relationships are formed among friends or family members thus making it possible for fraudulent activities to occur. In large organizations such as WoolEx Mills, there are formalities in place, but still, business frauds are evident. At times, the business frauds may be split between the insiders and organizations. In the case of large business, they tend to purchase a lot of items; thus they may involve themselves in fraudulent activities against the company. The management of a company at times has knowledge of how the different operations of an organization run. As such, they have the upper hand when it comes to perpetrating various schemes of which they can go for years undetected.
The main point where internal controls break down is when the management and employees are not ready to take responsibility for their actions (Kranacher et al., 2011). These two groups of people should always be aware of the fact that, whatever they do regarding the company will determine its future. This tone of responsibility should be set straight from the top because if not, the company is at risk of increased unethical behavior. The company has only detective controls in place. It means that they can only spot problems after they have occurred. This is seen from the point whereby the WoolEx Mills carried out an investigation after years of fraudulent activities in the firm. As such, preventive controls should be implemented at the organization so that they can reduce the risk of occurrences of any fraudulent activities (Kranacher et al., 2011). Poor reporting of the financial information increases the risk of fraudulent activities. The point whereby WoolEx Mills did not record the discounts it offered lay ground for more financial frauds. As such, financial information reporting and communication should be communicated appropriately and on a timely basis.
During the assessment of a business fraud, it is not an easy task, and it requires one to have knowledge about how it can become committed, concealed and who the fraudsters are and why they engage in the vice. As such, the Fraud Triangle can offer one the perfect foundation upon which this determination is entirely solved (Lou and Wang, 2011). One should first determine what opportunities make it possible for an individual to commit fraud (Lou and Wang, 2011). It is through these opportunities that form the organizational weakness in preventing fraud such as having inadequate internal controls, access to information and assets that make it possible to commit crimes and poor management oversight and review procedures. One should also determine the pressure that causes one to commit a fraud (Lou and Wang, 2011). The pressure can also originate from the desire to cover up losses as seen in the manipulation of financial statements by not recording discounts offered. Pure greed can also be a driving factor towards fraud. Rationalization can also drive an individual into committing fraud (Lou and Wang, 2011). Some fraudsters may convince themselves that they are “borrowing” money and they will repay it back. Other believes that the company does not need the assets thus it can bring about others and will not feel any effects.
A major important element of the auditing process is the use of analytical procedures and other detection methods. They range from artless assessments to intricate affiliations made up of data elements. The procedures allow for an auditor to carry out valuations of the financial information which is determined by a careful examination of the probable associations among the non-financial and financial statistics. In this type of fraud, one can check the differences in the budget or forecasts with current financial stand, relationships between various elements of financial data within a particular time frame and any information regarding the industry the firm is operating such gross margin information. Examples of analytical procedures include determining the revenue financial ratios. This will involve using financial data from previous years and selecting of competitors industry standards. This will allow an auditor to determine the gross profit percentage of the company in relation to its competitors (American Institute of Certified Public Accountants, 2012).
During the uncovering of fraud, an auditor must ensure that they withstand any normal predispositions that might come up such as being over-reliant on client exemplifications and prejudices. They should also approach the process with a skeptical attitude and questioning mind. Auditors should ensure that they put aside any relationship formation capabilities by understanding that their clients might not be honest with them. During the assessment of the fraud, the auditor should collect data that will provide a link to the fraud, assess the risk caused by the fraud and respond to the results (Samociuk and Iyer, 2012). The auditors can help the organization in coming up with proper internal controls through reviewing weak procedures and evaluating the management oversight. They can also look out for any work-related pressures such as unrealistic targets and help the firm in coming up with better goals. They can also help the company in setting up fraud awareness training programs.
So as to prove that fraudulent activity is valid, it has to be backed by many evidence which can include, witness statements, documents and data, tangible evidence and demonstrative evidence. As seen in the case of WoolEx Mills, the investigators relied on former employee’s witness account so that they could launch their investigation. In the process, they took control over the personal phones and laptops and the company computers including the servers and other data so that they could substantiate the employee’s claims. The importance of having evidence, both tangible and intangible is that, it will help one in determining whether it is true a fraud occurred and if that’s the case, it brings out the magnitude of the scam.
American Institute of Certified Public Accountants. (2012). Analytical procedures, with conforming changes as of March 1, 2012 . New York: AICPA.
Kranacher, M. J., Riley, R. & Wells, J. T. (2011). Forensic accounting and fraud examination . Hoboken, N.J: John Wiley.
Kwok, B. K. B. (2005). Accounting irregularities in financial statements: A definitive guide for litigators, auditors, and fraud investigators . Aldershot, Hants, England: Ashgate.
Lou, Y. I. & Wang, M. L. (2011). Fraud risk factor of the fraud triangle assessing the likelihood of fraudulent financial reporting. Journal of Business & Economics Research (JBER) , 7 (2).
Samociuk, M. M. & Iyer, M. N. (2012). Fraud and Corruption: Prevention and Detection . Farnham: Gower Publishing, Ltd.
Wang, T. Y., Winton, A. & Yu, X. (2010). Corporate fraud and business conditions: Evidence from IPOs. The Journal of Finance , 65 (6), 2255-2292.