Introduction
More often than not, deliberate fraud in the companies' accounting records has been realized in the different parts of the world. Some of the reasons underlying accounting fraud are as follows. Firstly, financial strain in a previously performing company in the financial sector can lead to the leaders committing fraudulent actions to try to solve the situation. According to Nisen and Groth (2013), the company leaders that are involved in accounting fraud do not necessarily have to be guilty of the offense in the past. Summatively, blindly following tunnel visions leads to the employees focusing on a specific goal without seeing the bigger picture of maintaining their ethical standards. That would lead to accounting fraud too. Financial fraud is also perpetrated by the act of making the mistakes seem less of infringements and more of acceptable behavior. In the spotlight, the employees who view themselves as a collection tend to be unethical because they neglect their individual goals at the organization (Nisen & Groth, 2013).
Analysis
Description of fraud
One of the organizations that have been affected by accounting fraud in the recent past is Caterpillar Inc. caterpillar Inc. is headquartered in Deerfield, Illinois, in the United States of America. The company was founded in 1925 in the Californian state of the United States of America. Being among the Fortune 100 companies in America, Caterpillar Inc. operates under the financial services, heavy machinery, and equipment industry. The company's target market spans the whole world, with its extensive scope of subsidiaries. Additionally, the company had more than 98000 employees in 2017 (Caterpillar Inc., 2018). Recognizable by its yellow colored machinery with a "CAT" sign on them, the company also licenses and markets workwear boots under the brand name "Caterpillar." Notably, the company has been highly performing in the industry has made a net income of US$ 754 million. The company owns assets worth US$ 76.792 billion (SEC, 2017). Historically, the machinery made by the traditional Caterpillar Inc. were useful in the world war one where the tractors were shipped to England even before the united states of America officially joined the battle.
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Oyedele (2017) expounds on the accounting fraud that hit caterpillar Inc. caterpillar Inc. was accused of failing to comply with the United States tax and financial reporting requirements. Reportedly, the company did so in an attempt to maintain its high stock prices. A report by a Dartmouth college's accounting professor indicated that the machine-maker in Deerfield failed to comply with the taxation rules and regulations in the country intentionally. The main reason, as aforementioned, was to keep up with the already high share prices in the company. The professor to the New York Times submitted the report regarding the fraud before it got to Caterpillar Inc. in apparent retaliation, the accused company stated that it would not comment on a statement it had not yet seen. After the report was made, the company had a 3% drop in the shares according to the premarket reports.
Financial analysis
Caterpillar Inc. is one of the multinational corporations involved in heavy machinery that has one of the highest profits in the world. In 2013, Caterpillar Inc. made a profit of $6,556,000,000. In 2014, the profits of the company stood at $2,452,000,000, which was a tremendous drop from the previous year. The profits grew a little in 2015 to total to $2,512,000,000. A huge downfall occurred in 2016 when the company incurred a loss of $67,000,000. The company rose from the ashes in 2017 and posted a profit of $754,000,000. The motive to increase the profits due to the pressure of maintaining an excellent financial performance could be one of the reasons that made caterpillar Inc. engage in fraudulent accounting. The following is a tabular depiction of the profits of the company from 2013 to 2017.
| Year | Profit/loss |
| 2013 | $6,556,000,000 |
| 2014 | $2,452,000,000 |
| 2015 | $2,512,000,000 |
| 2016 | ($67,000,000) |
| 2017 | $754,000,000 |
The following is the graphical representation of the same information.
Clearly, the company has staggered downwards on its profitability segment and needed to maintain its name and global recognition (SEC, 2017).
The shares of Caterpillar Inc. also indicated a skyrocket in November 2017 that was preceded and followed by a tremendous drop. The sudden increase in the stocks purchased in November could have raised a concern, which was relatable to the fraudulent accounting that the company had to deal with earlier in the same year. The following is a tabular representation of the shares bought at Caterpillar Inc. from October 2017 to December 2017.
| MONTH | STOCK BOUGHT |
| October 1-31, 2017 | 127 |
| November 1-30, 2017 | 1819 |
| December 1-31, 2017 | 95 |
The following is the graphical representation of the same information.
The sudden rise in the shares bought; according to the annual report of Caterpillar Inc. may raise questions regarding the ethical considerations of the company pertaining fraud in the company's accountancy.
The following is the current ratio analysis for Caterpillar Inc. from the financial year 2015 to 2017. The current ratio for Caterpillar Inc. in 2015 was 1.28. The current ratio reduced to 1.22 in 2016. The current ratio for Caterpillar Inc. rose to 1.35 in 2017. The ratio tremendously increased between 2016 and 2017. Notably, the company was involved in fraud. The main reason why it was included was to try to rush back to the top that the company used to be. That explains the increase over 2017. The following is the graphical representation of the current ratio performance in Caterpillar Inc. from 2015 to 2017.
Red flags for the fraud
The signs of fraud in the accounting of the Caterpillar Inc. were quite clear and outspoken in the case involving the wrong reporting of the stock performance and the taxation noncompliance. The first noticeable sign of the non-compliance in the tax policies in the United States of America was the failed liaison with Pricewaterhouse Cooper to come up with mechanisms to lower the taxation levels between the United States of America and the company's affiliate in Switzerland in 2014. The setup is said to have helped Caterpillar Inc. cut down its taxation by $2.4 billion in less than ten years (Cameron, 2017).
The second sign of the fraud was the reporting of income disguised as loans. The Internal Revenue Services (IRS) delegated a professor at Dartmouth College to review the suspected fraudulent actions at Caterpillar Inc. the professor, Leslie Robinson, discovered that Caterpillar Inc. had brought $7.6 billion into the United States of America. The plan was for the company to evade the taxation in the country and, therefore, recorded the amount as loans. Ms. Robinson reviewed the financial documents and found out that the company had made more revenue overseas than the posted amount. She asserted that the actions of Caterpillar Inc. in the non-compliance of tax policies were deliberate (Cameron, 2017).
The third signal of the accounting fraud by Caterpillar Inc. was the reaction of the company after Ms. Robinson posted a report to the financial monitoring organizations. The spokesperson of Caterpillar Inc. stated that the company would not comment on a report they have not seen. Corrie Scott, the spokesperson of the company, stated that no formal investigations had been done on the company yet. All the same, the financial research institutions in the United States of America, according to Cameron (2017), had already discovered the case regarding fraud.
Approach to fraud examination
The path to the review of fraud is a vital process in the determination of the presence or absence of fraud in a company. It is procedural. The first step is to identify the type of fraud that has occurred. For instance, in the caterpillar Inc. tax noncompliance situation, the first step towards the examination was to determine that the fraud involved taxation issues. The determination of the type of fraud that has occurred would help me in coming up with the right contacts to help me deal with the fraud. The connections would function at the federal, state, or local levels in the United States of America. The second stage of the fraud investigation is to come up with a plan to investigate the kind of fraud committed. A plan organizes the documents involved in the discovery of a fraudulent case. Coming up with an investigative procedure for a fraudulence case saves the time needed to investigate the presence of fraud.
The third stage in the investigation of fraud is to interview the suspected victim. The interview is done as a series of interviews to ascertain that the company either committed the crime or not. Furthermore, the interviews provide a background for the company's performance and possible exposure to fraud in the past. That also counts in the determination of the presence of fraud in an organization. The last step in the examination is the securing of the available evidence surrounding the fraud. Conventionally, the bank documents for the company make up the most significant percentage of the evidence needed to investigate a fraudulent claim. Therefore, having the documents secured with helping me in the investigation of the fraud case.
Conclusion
Many companies have been involved in accounting fraud in an attempt to maintain their high performance and reputation across the globe. Those were some of the chief reasons surrounding the non-compliance in tax policies in the United States of America in the case of Caterpillar Inc. the stock of the company was misreported to indicate a smooth increment in its performance, which was not the case. The income from outside the United States of America to the company was also disguised as loans to avoid taxes on the company's revenue. Several signs led to the suspicion of fraud at Caterpillar Inc.
References
Cameron, R. (2017, March 10). Caterpillar Inc. (NYSE: CAT)| Modest Money . Retrieved from https://www.modestmoney.com/caterpillar-inc-cat-stock-shares-head-lower-alleged-tax-accounting-fraud/37614/
Caterpillar Inc. (2018). History. Retrieved from https://www.caterpillar.com/en/company/history.html
Nisen, M., & Groth, A. (2013, May 28). 25 Psychological Traps That Lead 'Good' People To Commit Fraud. Business Insider . Retrieved from http://www.businessinsider.com/why-people-commit-fraud-2013-5?IR=T
Oyedele, A. (2017, March 8). Caterpillar slides following a report that accuses it of tax and accounting fraud (CAT). Business Insider . Retrieved from http://www.pulselive.co.ke/bi/finance/finance-bi-caterpillar-slides-following-a-report-that-accuses-it-of-tax-and-accounting-fraud-cat-id6337124.html
SEC. (2017). Caterpillar Inc. Retrieved from https://www.sec.gov/Archives/edgar/data/18230/000001823018000042/cat_10- kx12312017.htm#s68ED144112675DA4AA05C4BE849D8235
Appendices
| Current ratio= current assets/ current liabilities | ||||
| Current ratio for Caterpillar Inc. in 2017 | ||||
| Current ratio= 36,244,000/26,931,000 | ||||
| Current ratio= 1.35 | ||||
| Current ratio for Caterpillar Inc. in 2016 | ||||
| Current ratio=31,967,000/26,132,000 | ||||
| Current ratio= 1.22 | ||||
| Current ratio for Caterpillar Inc. in 2015 | ||||
| Current ratio= 33,508,000/26,242,000 | ||||
| Current ratio= 1.28 | ||||
