Deliverable # 1 – Assignment – Week 3 FOR CORRECTION

Running head: Project Deliverable #1 1

Project Deliverable #1 8

Accounting Fraud Criminology and Ethics

15 November 2020

Scene 1

Outline of the conversation between Scott Tensar and Filippe Arizmendi

According to Tensar's perspective, as the chief audit executive, the audit department is under high pressure because he suggests that the entire team is working on a tight schedule and having additional staff would be a great favor. Scott proposes that with the new changes in the company, a lot needs to be done to ensure proper control has been established. Scott adds that his fears are that there is a possibility of missing a potential threat to the company finances with the new changes in the company. He suggests that although the annual audit is competitive, it is not clear if there is anything the audit team may have missed. As professional personnel in the company, Scott is worried that they could be some weaknesses that have not been detected, contributing to unknown fraud activities. On the other hand, Arizmendi, LDC Cloud System chief Finance officer, completely understands the internal audit team's pressure. While having a conversation with Scott, he seems to sympathize, but on the same note, his hands are tired, and he could not fulfill Scott's request for staff expansion at the time. He recommends to Scott that although the executive time is very sensitive, the internal audit department should not lose its focus.

Pew Research Center (2017) suggests that for an internal audit to be effective in an organization, it must ensure that its staff is properly qualified for the job and well familiar with the organization of business activities and development planning strategies for the company. This implies that the accounting and auditing internal department must be able to determine the advantage and disadvantages of every business and not-financial operation carried out. Understanding these aspects allows the internal audit department to have an apparent picture of potential exposure to risks that can hurt an organization's financial level.

When the internal audit establishes a proper approach for in-depth analysis of business processes, it has a better chance to submit detailed and precise reports that foster accuracy in anticipating an organization's future events and performance. Nonetheless, it is not as easier as it seems because accounting and internal audit professionals are faced with several challenges that limit their capabilities. This includes technology impact, complexity in adapting to rapid changes, difficulties in advisory services, changes in a legal requirement, and emergency of new complex issues such as cybersecurity threats, distrust, and difficulties in finding the right talents (M Šestović, 2015). Based on the comparison between this context and the Scott and Arizmendi conversation, the accounting and internal audit department in LDC Cloud System Company has been experiencing challenges in adapting to the company's rapid changes and delivering additional value. From the conversation, Scott feels that his department needs more workforces to deliver the executive team's value. Although Arizmendi understands the situation, it seems difficult to fulfill Scott's request for more staff. This means his team will have to figure out how it delivers additional values to the company under its current and future pressure for more responsibility as the company grows and develop. Additionally, the company's growth is one of the rapid changes. Due to the need for more insight into the business process, the external auditor is expected to have more responsibility and accountability for comprehensive and additional insights into the company's performance in the new scope of business operations.

Whenever an individual engages in fraud activities, there is usually a motive that contributes to such action. Ardana (2018) suggests that the fraud triangle's core objective is to determine and explain the different motives behind an individual decision to commits fraud. According to this theory, three components contribute to the high risk of fraud in an organization. These components include opportunity, incentive, and rationalization. Each of these components has several elements that increase the possibility of fraudulent activities. For instance, according to the opportunity component's perspective, an individual may find incidences such as weak internal control, poor tone at the executive management, and inadequate accounting policies as a circumstance to engage in fraudulent activities (Ardana, 2018). From the incentive perspective, some of the circumstances that can lead to a fraud mindset in employees include bonuses in terms of financial metrics, excess pressure from the executive expectation to deliver value, and personal motives such as higher earnings and poor earnings self-management. The rationalization component is a hypothetical notion in which an individual tries to justify their fraudulent actions. According to Ardana (2018), an individual can rationalize that they committed fraud because the organization treats them unfairly; it is the only solution, or because the executive team is doing it.

From the case study, it is apparent that the company is not willing to expand its workforce. Yet, there are additional values that the internal audit term and other personnel are expected to deliver. Generally, it is essential to optimize maximizing the use of resources in an organization, but there is a limit. For instance, if an organization continual to demand more from its workforce, it must also ensure that they have the potential and capability to do so. Otherwise, pushing employees to hand may lead to excessive pressures, which increase the possibility of weak internal controls that contribute to increased opportunity for employees (internal audit personnel of LDC Cloud System Company) to engage in fraud as the easy way out of the stressful situation. This means that the chief audit executive and the entire internal audit team are responsible for ensuring that the company has adequate control through the professional separation of duties, consistent supervision, and proper documentation of processes carried out by the department.

Scene 2

In this scene, the case involves a conversation between Latham Asper, External Audit Partner, and Lester Darnal, Audit Committee Chair. During the conversation, the person agrees that the company's staff is very business, and there is a lot in the company at the moment. Asper also adds that the company every individual is under busy for their job. The CEO, Shep Leduc, indicates that the company is a fast-growing startup by including that LDC is on the leading edge of fast-moving technology and industry hence the need and reason why accounting and the internal audit are busy and under pressure for every staff to keep up.

Khemakhem & Fontaine (2019) suggest that the role of audit committee chair has multiple duties and responsibility in an organization, including: provide leadership, ensure the audit committee has the right composition/dynamics, emphasize continuous improvement, assess the tone, support CFO, set a clear expectation for auditors, understand the business/its inherent risks and participate in setting the agenda. According to Khemakhem & Fontaine (2019), an audit committee chair is responsible for ensuring that all committee members understand the business and the inherent risk involve in the business processes. To accomplish this, he must be proactive to emphasize the importance of meeting with key stakeholders from different departments such as finance, risk management, operations, and auditing. He should also try to encourage the committees to be more committed by been oriented towards mitigating cultural/behavioral risk.

Due to this responsibility, the LDC audit committee must be more proactive in understanding the problem facing different stakeholders and help them overcome them. He can engage with the internal auditor by asking them about their relationship with the external audit, area of concern in the business processes, and whether the management considers their concerns. From the external auditor, the audit committee chair can ask a question concerning their opinion on financial statement fairness, compliance to accounting standards of the organization, and the effectiveness and logic of the internal control measures. According to Khemakhem & Fontaine (2019), an audit committee chair should support the CFO by establishing trust before crisis incidents. With this in mind, the audit committee chair can ask the CFO about their opinion on the audit process's effectiveness, the best response to control failures, and inappropriate behaviors.

Scene 3

The CEO of LDC plays a significant role in setting the top's tone by acting as the ultimate role model, committee, and visionary leader. For instance, during the meeting, the CEO states that he finds some employees are also working on some days when he is closing for home, meaning that he understands the pressure they are facing because he is part of the team. The CEO also ensures that all the member presents in the meeting to understand why it is essential for every member to be committed to fulfilling their responsibility. He clearly and openly communicates with the executive member to make sure that they understand the value and the standards which match perfectly. In the CEO message, there is a sense of value on every individual commitment and dedication, which supports the company's survival and success in the long run.

Since it seems mandatory for every stakeholder in the company to remain committed, some people can rationalize no other solution. As a result, employees may fear that failure to meet their respective executives' expectations will result in losing everything (Medcraft, 2016). This kind of a mindset is dangerous and may cause some employees to commit fraud to achieve the objective, and this means that as much as the CEO emphasizes the need for commitment, every employee should feel safe to confidently show what they have actually achieved without been criticized (Medcraft, 2016). This means that the need for employees’ commitment should be modified to ensure that to commit fraud.

Scene 4

In this scene, the conversation every Sheel (investigator) and Ross Trela (the general counsel. In the conversation, Sheel states that she uncovered a payment that may be perceived as a bribe for building permits in the LDC's Asian operations. When Trela asked why this was the case, Sheel replies that the employee most likely people did their best to avoid obstacles that would prevent them from completing the project on time as expected the company growth project targets. Ardana (2018) suggests that some of the rationalization component elements include individual thinking that there is no other solution than to use fraud as the show cat or risk losing their job for failing to meet the target. This reveals that rationalization is one of the components that contributed to this fraud. Moreover, there is also a possibility of fraud committed due to the opportunity component. Ardana (2018) suggests that fraud committed due to the opportunity component can result from inadequate accounting policies that influence the accountant to manipulate numbers in the financial statement.

Sheel suggests that she has been working under huge pressure over a long time trying to investigator multiple cases all on her own. Therefore, it is likely that she took a long time before addressing and communicating the issue because she has multiple responsibilities to carry out with any assistance.

The internal control did not identify the bribery payment because it was designed to appear as a legitimate payment while, in the real sense, it is for illegitimate activities (Schillermann, 2018). This is a fictitious based type of fraud, and LDC can implement abnormal invoice volume activity monitoring and assessment to ensure that any rapid invoice volume increases are legitimate ad not fraudulent.

After Sheel conducted her investigation for a while, she identified that there was no proven legitimate reason why the company would need the services of a consulting firm, and this information is a red flag for possible fraud and manipulation of the financial statement account. Other than the inherent limitation of an audit that subjective financial statement to some degree of uncertainty, there are no other aspects that should limit an auditor from carrying out their investigation. With this in mind, internal audit has the mandate to investigate any information contained in the financial statement, and if not, the objective of the investigation process would be compromised of any information that is withdrawn from the investigation.

Scene 5

This conversation is between Filippe Arizmendi and Ross Trela. Arizmendi states that he identifies that his team is under high pressure, and so is the other department. On the same note, he adds that must worker was feeling overworked. Despite every individual being focused on doing the right thing, there is a possibility of excessive pressure based on the company-based target. Through an analysis of this kind of an environment and the fraud triangle, the effect of this push for meeting the growth target may, if exceeded, lead to employees committing fraud due to rationalization component such as thinking that there is no other way to meet the expectation (Ardana, 2018). This reveals that with the current company pressure for meeting growth targets, the company may have a high risk of fraud cases.

As the sales department enacts higher and aggressive targets, the need for more accounting services and legal services means what the sales department has a significant influence operation carried out by the accounting and legal department. The threat is that excessive aggressiveness in the expected target can force employees to take desperate measures that would compromise the company's legitimacy. In the general perspective, a goalie makes every effort to ensure that the ball does not get past them during football matches. Based on the perspective, the CFO-Arizmendi refers to his team as playing goalie to indicate their individual commitment in ensuring that they are only the entire organization only engage legitimate business process and activities. This is also why more and aggressive increasing sales growth targets also increase the pressure in the accounting function as the department tries to match its tasks with the increase in sales activities.

Scene 6

This scene involves a conversation between Ross Trela, Latham Asper, and Lester Darnal; the team wishes to have enough information to establish a consensus in the board meeting about the next steps in addressing the fraud cases identify whether the company will file a restatement. From the conservation between the three staff, Trela does not have a clear decision whether the suspected email is connecting to fraudulent activities or not, but he is also concern that a decision must be made because, in a short while, the company has to prepare its quarterly financial report. On the other hand, both Asper and Darnal feel that this can be a potential red flag for fraudulent activities. As such, the team needs to first clarify where the case stands. Based on the multiple red flag and explanation from Asper as the external audit expert, the best decision is to investigate the case that decides to prepare for a restatement. According to “The Institution of Internal Auditors” (2020), governance refers to a combination of process and procedure applied board to inform, manage, monitor, and direct each organization's activity to ensure effectiveness and efficiency in achieving set goals and objectives. Through this concept, governance refers to an organization's process or procedure to determine which business process is ethical/legal or unethical/illegal. When it is to prevent an organization, the term governance refers to the procedure used to ensure effective organizational performance through responsible management and accountability. In terms of the investigation, governance refers to the coordination of business activities and communicating the information found to the concerned stakeholders such as management, auditors, and the board.

Due to the current issue in the case, the company may prefer to delay the financial report filing to determine the materiality of the questionable accounting estimation, but it is also paramount to note that there is a limit to the time available for this. Bartov, DeFond & Konchitchki (2013) suggest that when organizations miss their filing date for the financial statement, there is a particular regulatory concern that comes into effect. There is a grace period of five calendar days, which may give the company some time to address its concern. Unfortunately, other concerns make it more challenging to miss/delay filing of a quarterly financial report because the company may be led to delisting and suspension from the common financial market. These consequences outweigh the benefit that an organization expects from the delay, and hence the best approach is not to delay the quarterly financial report.

Conclusion

This case study's analysis process helps an individual familiarize themselves with different fraud triangle components such as opportunity and rationalization and their elements such as weak internal control and belief that there is no other solution, respectively. LDC's organizational structure includes both internal and external audit departments, which work in collaboration with the executive team to ensure the legal and successful performance of employees. When the internal audit team detects or identify red flags, it ensures the issue is communicated to the executive and engages employees to account for their perspective. The same applies to the external audit team, such as Sheel. The internal audit team is good but has poor fraud detection approaches. The executive team pressures their employees to be more productive and committed. They also set a tone of the top that no individual should engage in any unethical or illegal activities to meet their executives' expectations. The company's objective is to ensure that it can effectively match the rapid growth and change in technology but without adding more employees. This creates high pressure and distress among employees, which increases the possibility of employees committing fraud. The low capacity of the internal audit is also a contributing factor to the company's exposure to fraud. The executive team continuously pressure employees to meet their target through the management team, but they do not wish to expand the workforce. This forces each employee to work in distress, and finally, when part of the organization realizes that they could not meet the target rationalization fraud as the only solution. The case also reveals that during financial reporting, the accountant, auditing team, management, and the executive should work together as a team—the term work through a system characterized by trust, mutual understanding, responsibility, accountability, and teamwork.

References

Ardana, R. A. J. (2018). FRAUD INVESTIGATION ON FINANCIAL STATEMENT FRAUD FACTORS AND COMPARISON OF FRAUD TRIANGLE AND FRAUD ELEMENTS TRIANGLE ANALYSIS.

Bartov, E., DeFond, M. L., & Konchitchki, Y. (2013). The consequences of untimely quarterly and annual financial reporting. SSRN, HTTP:[zpapers. in. com [sol3lpapers. com. Medcraft, G. (2016). The tone from the top: influencing conduct and culture. Law and Financial Markets Review, 10(3), 156-158.

Khemakhem, H., & Fontaine, R. (2019). The audit committee chair's abilities: Beyond financial expertise. International Journal of Auditing, 23(3), 457-471.

Medcraft, G. (2016). The tone from the top: influencing conduct and culture. Law and Financial Markets Review, 10(3), 156-158.

M Šestović, M. (2015). The challenges of internal audit in contemporary financial management. FINIZ 2015-Contemporary Financial Management, 73-77.

Pew Research Center. (2017, May). Understanding a financial statement audit. PwC: Audit and assurance, consulting, and tax services. https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf

Schillermann, M. K. (2018). Early Detection and Prevention of Corporate Financial Fraud (Doctoral dissertation, Walden University).

The Institution of Internal Auditors (2020). Governance, risk, and control. The Institute of Internal Auditors. https://na.theiia.org/standards-guidance/topics/Pages/Governance-Risk-and-Control.aspx