What is fraud?
Business fraud also termed as corporate fraud entails illegal and dishonest acts perpetrated by either companies or individuals with an intention to gain the financial outcomes from persons or even the associated businesses. Schemes of corporate fraud tend to appear after the craftiness of real business practices whereby there may be a range crime such as charity fraud, internet auctioneering fraud, re-shipping scheme, etc (Fraud Data Analytics, 2016).
How is the fraud triangle related to the definition of fraud?
The theory of Fraud triangle by D. Cressey is comprised of three parts in relation to the definition of fraud which shows how fraud develops and finally matures leading to enormous loses. The three components of the triangle include; pressure upon the fraudster, opportunity to carry out fraudulent actions, and the ability of a fraudster to rationalize their wrong actions. This leads to a fraud ranging from little to grave embezzlements of billions of dollars (Van Akkeren, 2018)
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Select 1 company who has been convicted of fraud over the years (you may select a company from the power-point) and discuss what happened in regards to fraudulent activity, who was involved within the company, auditor involvement, and the repercussions of the fraud for those involved.
The ENRON SCANDAL of the year 2001 is a good example of business frauds and companies which have been convicted of fraud over the years. The Enron Company was a Houston-based commodity, energy and service corporation which was named as America’s most innovative Company for six consecutive years before the scandal of fraudulence according to the Fortune Magazine. The company had thrived in the sale of oil and gas. In regard to the fraudulent activity, shareholders of Enron lost $.74billion, retirement accounts of thousands of the company’s former workers and investors got lost as well as many employees who ended up losing their jobs. The Fraud case of Enron involved the CEO Jeff Skilling and the Company’s former CEO Ken Lay who allegedly kept huge debts off the balance sheets. The fraudsters were caught through a turn in whistle-blow call from Sherron Watkins and also through suspicions triggered by high stock prices. The Penalty that was given to the Fraudsters involved imprisonment whereby Skilling served 24 years alone because Lay had died before serving time. Also, Arthur Andersen was found guilty of fudging the accounts of the Enron (Denteh, 2011).
What significance has this instance and similar instances of fraud had on the auditing profession? (Hint...Sarbanes Oxley Act of 2002)
The Enron and other corporate accounting fraud scandals which occurred in 2000-2002 prompted the Sarbanes-Oxley (SOX) Act due to the deep roots of fraud. This triggered the urgent need for the control of internal financial flows through regular auditing which cushioned the enactment of SOX to protect investors through enhancing the reliability and accuracy of corporate disclosures in all financial documents and statements. SOX demand all-year involvement of auditing professionals in order that every company must provide an annual report in regard to the internal controls which are in place and their corresponding effectiveness (Lander, 2002). This was a change in how corporates have to deal with financial auditors after Arthur Andersen &Co. had colluded with Enron in its fraudulent behavior. The Enron fraudulent cases thus triggered the need for auditors and corporates to comply with the SOX act as well as increased corporate penalties and executive malfeasance.
Specifically, discuss the impact of the auditing profession on fraud prevention and how it has changed over time, especially with enactment of the Sarbanes Oxley Act.
The impact of auditing on fraud prevention in relation to the enactment of SOX means a lot. First, both auditors and corporates will be required to comply with SOX regulations. The auditor must certify the corporate’s internal controls without the use of specified common audit strategies. Secondly, it implies that auditors have to change the auditing process to match the CPAs understanding of internal controls. Additionally, the auditor will have to attest to the assessment of the management in regard to the effectiveness of corporate’s internal controls as per the Public Company Accounting Oversight Board standards. Another impact is that companies must be prompted by their auditors to commence the process of assessing effectiveness as early as possible. Also, the implication is that auditors are not supposed to involve themselves closely with a corporate’s control assessment in order not to risk impairing a company’s objectivity. The burden of SOX compliance among companies has however changed over time due to critics which focus on cost burden that corporates have to bear to maintain and implement the whole process of SOX compliance. Fewer companies have also gone public due to low investor confidence (Lenard, et.al, 2012).
Finally, based on your research answer the following question, “Is it the audit profession’s responsibility to prevent fraud, or does that lie with management”?
A dense section of literature comes to a consensus that it is the auditor’s responsibility to uncover fraudulent behavior in corporations. Fraud is likely to occur in many instances when the auditor colludes or fails in his part. It is the auditor’s responsibility to report to shareholders all dishonest acts which had occurred and which affected the propriety of the contents of the financial statements. The auditor’s report should be clean and clear enough to show internal controls and their effectiveness (Fraud investigation, 2015).
Once you decide whose responsibility it is, finally discuss what can be done to prevent fraud.
Despite the fact that fraud is a master trickster, it can be prevented. Some of the ways in which we can prevent fraud include: First the manager should know the business employees entirely so as to identify the perpetrators who will always display certain behavioral traits which to a great extent will display their intentions to commit fraud. Secondly is to set a reporting system and make the employees aware of the fraud risky policy. Thirdly it is the implementation of internal controls to safeguard the company assets and ensure the integrity of accounting records. Additionally, it is important to monitor all vacation balances by checking all office progression. Also hiring certified fraud examiners can be a great boost to the financial forensics of a company (Fraud prevention techniques, 2012).
References
Denteh, F. (2011). Enron: Fraud Detection Timeliness. SSRN Electronic Journal . doi:10.2139/ssrn.1920747
Fraud Data Analytics for Payroll Fraud. (2016). Fraud Data Analytics Methodology , 183-204. doi:10.1002/9781119270331.ch8
Fraud Investigation for the Auditor. (2015). Fraud Risk Assessment , 191-202. doi:10.1002/9781119196655.ch15
Fraud Prevention Techniques: Fraud Scoring. (2012). Essentials of Online Payment Security and Fraud Prevention , 183-189. doi:10.1002/9781118386750.ch7
Lander, G. P. (2002). The Sarbanes-Oxley Act of 2002. Journal of Investment Compliance , 3 (1), 44-53. doi:10.1108/15285810210812619
Lenard, M. J., Petruska, K. A., Alam, P., & Yu, B. (2012). Indicators of audit fees and fraud classification: impact of SOX. Managerial Auditing Journal , 27 (5), 500-525. doi:10.1108/02686901211228002
Van Akkeren, J. (2018). Fraud Triangle: Cressey’s Fraud Triangle and Alternative Fraud Theories. Encyclopedia of Business and Professional Ethics , 1-4. doi:10.1007/978-3-319-23514-1_216-1
