Essay Sample on Accounting Ethics and Fraud

Date:  2021-03-29 09:55:40
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There has been an increasing number of fraud cases in recent times. While some organizations implement controls that try to keep individuals who are likely to commit fraud outside the business, others do not do anything with the mentality that no one in their organization can commit fraud. However, fraud can happen in any organization because where there are opportunities, there is a chance that there will be fraudsters (Wells, 2011). The Association of Certified Fraud Examiners (ACFE) outlined three types of frauds that can occur in organizations. These are corruption, asset misappropriation, and financial statement fraud (ACFE, 2010). The sectors that are most affected by these activities are the government and public administration, banking/financial, and the manufacturing sector. However, it is important to note that the type of fraudulent activity defers by region (ACFE, 2010). For organizations to successfully combat fraud, they should take into consideration regional differences when coming up with anti-fraud strategies and understand their corporate ecology so as to tailor the controls and tactics to the nature of the systems that are currently in place.

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Though fraud has existed for a long time, the increasingly interconnected world and advancement in digital technologies have made fraud more prevalent and sophisticated. Likewise, the impact of fraud on organizations, stakeholders and the overall economy has greatly magnified (Kranacher, Riley, & Wells, 2010). Of the three types of fraudulent activities, asset misappropriation is the most common accounting for approximately 85 percent of the total fraud cases in organizations globally (ACFE, 2010). Financial statement fraud is the least common accounting for less than 9 percent of reported fraud cases. Despite this, the different types of fraud occur together about 30 percent of the time. These fraudulent activities occur in all organizations regardless of the sectors and regions that they are located.

There are numerous reported cases of fraud in different organizations located in different parts of the world. Some of the major ones in recent times include the Enron scandal, the WorldCom scandal, the Tyco scandal, the FIFA corruption scandal, and the Toshiba accounting scandal among others. All of these cases violated accounting ethics that exist to ensure that individuals make good and moral choices with regards to how they prepare, present, and disclose financial information of the company. Poor accounting ethics, in turn, has personal consequences, harm the reputation of business, and render financial statement untrustworthy and useless (Kranacher et al., 2010). Such consequences are clearly evident in the cases mentioned above of fraud involving large companies.

The Enron Scandal

One of the biggest accounting scandals of all time was the bankruptcy of Enron which was revealed in 2001. The company shocked the world as it went from being the most innovative company in America to among the biggest corporate bankruptcy of all time. At its peak, Enron was the seventh largest corporation America (Li, 2010). It gave an illusion that it had good and steady revenue which was not the case since a large part of the companys profits were exaggerated. The executives and traders designed morally questionable acts that made it possible to fool many people about the financial status of the company. Eventually, the deep debts, as well as surfaced information about the hiding of losses, resulted in big problems for the company which was declared bankrupt in late 2001 (Li, 2010). The bankruptcy had an impact on more than 21,000 Enron employees and shareholders of the company who lost a huge sum of money. Enrons bankruptcy did not only have monetary implications but also resulted in people losing security to take care of their families as well as shuttering their future due to the loss of pensions.

There are various factors that resulted in Enron being bankrupt with all of them violating accounting ethics. First, the lack of truthfulness by the companys management was one of the leading factors that lead to the scandal. Management has a duty of fully disclosing the financial health of the company regardless of its state. Rather than fully disclosing the status of the company, senior executives believed that they had to be at the top in whatever they did hence protect their reputations and compensations by all means possible (Li, 2010). Secondly, conflict of interest was another factor that resulted in the collapse of the company. This conflict of interest was due to Arthur Andersen being the auditor of the company and at the same time a consultant (Li, 2010). Such a conflict of interest may result in the auditor issuing an incorrect report on the company with many intended accounting errors. Finally, the company used the mark-to-market accounting technique which later backfired. The technique allows companies to pump stock prices and hide losses so as to attract more investments (Li, 2010). However, a company cannot gain long-term operation with such a plan which can be clearly seen as immoral and illegal. The mark-to-market accounting corrupted Enrons books which led to the company eventually collapsing.

The WorldCom Scandal

Another infamous accounting fraud is the WorldCom scandal. WorldCom was at one time a large telecommunication company in the United States until a massive accounting scandal made the executives file for bankruptcy in mid-2002. The company was using dubious accounting practices and incorrectly recorded the capital expenditures which inflated its cash flows and profits by about $12.8 billion (Cernusca, 2007). Also, the company reduced the book value of assets from the companies that were acquired and simultaneously increased the goodwill value with the aim of spreading its expenses. Finally, WorldCom undervalued accounts receivables that it owed to the companies that it had acquired. These accounting practices by the company made it appear as if its financial situation was constantly improving when in actual sense it was the contrary (Cernusca, 2007). The sudden bankruptcy that followed resulted in massive losses for investors, retailers, and employees of the company.

After the WorldCom accounting scandal, no one came out to take up the blame for the questionable practices that led to the company filing for bankruptcy. Arthur Andersen, the primary external auditor of the company, who was also under fire for mismanagement of other large companys audits, was among the persons accused of failing to expose the companys accounting irregularities. Though Andersen claimed that he had no knowledge of the improper accounting practices, WorldCom issued a statement claiming that he knew about the companys accounting practices and that he had no disagreements whatsoever with the management (Cernusca, 2007). Apart from the auditor, most people also blamed WorldComs management for the woes of the company. Several former accounting and finance executives of the company pleaded guilty to fraud charges claiming that the top managers directed them to cover up the worsening financial situation of WorldCom. Eventually, six people were found guilty and convicted for playing major roles in the fraud case (Cernusca, 2007). These included Bernard Ebbers, former CEO of WorldCom; Scott Sullivan, the former chief financial officer; Buford Yates, the former director of general accounting; and David Myers, the former controller among other individuals.

The Tyco Scandal

Apart from the Enron and the WorldCom scandals, the Tyco scandal of 2002 was another case of accounting fraud as a result of unethical business practices. Tyco was a large company that expanded as a result of numerous acquisitions. The Tyco scandal was mainly due to the unethical business practices of several top ranking officials of the company, especially the CEO Kozlowski (Lessambo, 2014). Kozlowski carried out numerous financial transactions which were not incorporated in the companys financial reports. Also, the CEO was involved in unethical business transactions with other top ranking officers of the company to cover the illegal financial dealings. As if this was not enough, Kozlowski got outsiders involved when his second wife got money that he diverted from the company (Lessambo, 2014). The illegal financial transactions were so extensive which eventually led to investors losing confidence in the company thus leading to its decline.

The Tyco scandal shows that ethical issues occur in various sections of an organization. Even outsiders can be part of these ethical problems that companies face. The key ethical issues in Tycos scandal were unethical leadership, unethical business practices and unethical auditing practices (Lessambo, 2014). The unethical business leadership in Tycos case was evident from the practices of Kozlowski who was the main actor in the companys financial troubles and subsequent legal battles. Kozlowski received huge sums of money from the company and influenced other top ranking officials as well as lower ranking employees to be involved in the issue and stay silent to cover up the illegal activities (Lessambo, 2014). On the other hand, the unethical business practices were in the form of top ranking company officials and other subordinate employees knowing of the unethical business practices yet keeping silent in exchange for financial benefits. In essence, they were also involved in financial fraud only that the amount of money they received was smaller as compared to that of the CEO (Lessambo, 2014). Finally, the major issue that resulted in the decline of Tyco Company was the unethical auditing practices. The auditing firm failed to recognize the illegal financial transactions that were occurring in the company and as a result led to the practice becoming extensive and more difficult to stop.

The FIFA Corruption Scandal

Other recent cases of financial fraud include the FIFA scandal and the Toshiba scandal. The FIFA scandal involved corrupt top officials of the world football governing body that compromised the integrity of the most popular sport in the world. In 2015, the United States federal prosecutors charged 16 FIFA officials stating that they were a part of a scheme that spread over a period of 24 years aiming to enrich themselves while overseeing the operations of the world governing body of soccer (Verver, 2015). The officials were alleged to have received bribes worth millions of dollars on several occasions. They took the money and in turn offered marketing rights for World Cup qualifying matches and several Latin American football tournaments. Other officials were also charged with wire fraud, racketeering and money laundering conspiracy.

The core of the corruption case within world football governing body revolved around bribery. There were several cases of bribery during the process of bidding for the potential cities to host the World Cup. Allegedly, the first case was during the selection of the cities to host the 1998 World Cup (Pielke, 2013). The next scandal against the FIFA officials was with the selling of marketing rights for various football tournaments including the Gold Cup which is a tournament that features nations that are members of the CONCACAF as well as several Latin American football tournaments (Verver, 2015). Finally, some of the FIFA officials allegedly sold their votes for the 2010 World Cup which was hosted in South Africa (Pielke, 2013). Such fraudulent activities in a large organization can have devastating effects globally hence the need to find appropriate strategies to avoid such actions. Arresting the officials who were involved in the fraudulent activities is a huge step, but there needs to be controls and measures within the organizations to prevent...

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