MIlestone 3

Worldcom

Fraud refers to a false or wrong representation of a person or information with an intention to deceive another while aiming to get unjustifiable financial gains or advantage. Fraud may take several forms for example, identity fraud or identity theft (Elliott, R. K. 1980). Identity theft happens when someone’s personal information are stolen while identity fraud is when such stolen details are now used to commit the actual fraud. It is of great necessity for an organization to incorporate into their code of conduct very strong policy with regards to fraud so as to give a better opportunity to communicate the company’s corporate ethic, stop persons who may be tempted to involve in fraudulent activities and moreover, act as a general guidance to the employees on the best methods of dealing with fraud while shielding the company from counter litigations as a result of mishandling various fraud cases (Bylinski, J. H. 1981). There are various elements that must be proved to constitute a fraudulent behavior and include; a representation of a fact: there must exist a certain verifiable fact that is represented leading to the fraudulent happening, the represented detail or fact has to be material in nature. For instance, it has to influence in a significant manner the figures represented in the accounting statements for example (Elliott, R. K. 1980). Another key element is that, the fact that was represented and is material in nature was actually false and that the individual making the false representation of the facts actually knew that it was a false fact. It also has to be determined that the above falsified representation of the fact was for the sole benefit of the author of the fact or a small group of individuals working closely with this individual to design the above falsified fact. Incorporation of fraud as a topic of study particularly with the accounting students is of a very great importance taking into account the developments in the corporate business environment and the dynamics of the accounting practice (Bylinski, J. H. 1981). For instance, there is increasing use of technology in the accounting field including wide use of various accounting programs by different companies. Also, the increasing number of startups every year widely depending on partial online practices and accounting majorly increases the risk of fraudulent behaviors developing hence, need to create an awareness of such factors and the possible litigation liability in case one while in practice involve in such activities. Knowledge of fraud is of great benefit to all other stakeholders in the company other than in the accounting department in various aspects. For instance, shareholders are able to understand the specific fraud on the financial reports and gauge their impact on their wealth invested in the company while taking necessary actions to sue the involved parties in misappropriation of their wealth. Suppliers and creditors on the other hand are able to reconcile the amount credited to their accounts in relation to the value they actually lent or supplied to the company in question. Other employees are able to determine their fair pay in relation to what is actually expensed as their pay in the company’s statements while managers are able to understand whether the accounting reports company are actually complying with the various laws of the land and industry to avoid any unnecessary litigation that may in turn be costly and impact negatively on the company’s expenses, also to safeguard the shareholders wealth.

There are three major crime causation and includes strain, social learning and control theories. All the above theories describe crime in relation to the social environment for example workplace, community, church or peer groups. However, they are of different points of view from each other in several aspects (Elliott, R. K. 1980). For instance, they provide varying accounts on why the social environment leads to crime while some majoring on describing the isolated differences in crime as others try to describe cluster differences in crime for example the reason why certain communities or clans are experiencing higher crime rates compared to others. According to the strain theory, people involve in fraudulent activities due to certain stress they are experiencing and so they become upset leading to occurrence of crimes on many occasions. An example to this is an involvement in crime as a way of ending intimidation or harassment from certain people or involve in physical stealing in an attempt to eliminate financial distress (Bylinski, J. H. 1981). Social learning theory on the other hand explains that people involve in crime essentially through association with some other people where after they are consolidated into the criminal beliefs that side with criminal tendencies. After this occurrence, these individuals start viewing crime as very absolutely necessary in certain situations. Social leaning theory also explains that young people learn to involve in criminal tendencies just in the same way as they do learn to involve in the acceptable good behaviors. Control theory primarily exploits the question of why people conform to certain behavior. While not necessarily taking crime for granted, the control theorists are of the view that every individual has got different needs that are very simple to satisfy through criminal activities than through approved legal ways. It is very important for an investigating officer to first understand the cause of a certain fraudulent activity so as to easily trace down the perpetrators of the same (Elliott, R. K. 1980). Based on the theories above and particularly the control theory, by understanding the main intention to of the fraud, the investigating officer is able to narrow down the from a large group of employees or interest groups in the organization to a certain small cluster of individuals who may have perpetrated the fraud. For example, where the cash balances shows a red flag in the financial statements, and then the investigator has to determine the cause maybe as uncaptured payments in the accounting system thus the emerging gap. Thereafter, the investigator will be able to know his specific target employees with this kind of activity- the accounts receivable clerks. Knowing the cause of the fraud eliminates time wastage into unnecessary investigations on wrong groups of employees in the organization. Another example as of the Enron fraud where the principle cause was the loopholes in the financial reporting and accounting system and so were able to hide huge sums of money in debt from failed projects.

The fraud triangle attempts to describe the reasoning behind an employee’s decision to engage in fraud in the organization. It has got three stages which includes pressure, opportunity and rationalization. Firstly, pressure on a person is usually the motivation to commitment of a crime and may include financial or workplace debt pressure. In a broader view of this taking into account the case study of Enron’s scandal, the directors faced a lot of pressure to report more impressive financial figures and reports to the shareholders and this primarily formed the basis of the occurrence of what became the largest corporate fraud in America at the time. Second in the fraud triangle is the chance to commit the crime. It is basically the means through which a person or group of people will defraud the company. A clear path of opportunity is seen by the involved workers where they can actively exploit, misuse their positions to perform the fraud. Directors of Enron, the renowned company in the United States energy industry in an attempt to give false impressive financial reports saw an opportunity in the weak accounting systems and so colluded with an audit firm to further authenticate their reports that would be relied on by various stakeholders. Lastly is the ability to rationalize the crime. It involves attempts by the associated person(s) in fraud to justify the fraud in a manner that is allowable to their internal morality. This is further associated with the fact that a large number of the fraudsters happen to involve in such acts for the first time hence after such an occurrence, they attempt to convince themselves in their minds that it was actually necessary and justified to have performed the fraud that they did in the concerned organization.

The corporate scandal at Enron saw the raising of the bar by the regulatory authorities in an attempt to prevent or in any case determine the occurrence of fraudulent activities in various corporate and is as follows; the Sarbanes-Oxley Act created a public Company Accounting oversight board (PCAOB) with the mandate of registering and inspecting various public accounting firms and too enhancing the adoption and modification of audit standards (Elliott, R. K. 1980). Before, registration of accounting companies was done in the various states and so the new regulation greatly impacted on this feature as no more registration could be done at the state level. The public Companies Accounting Oversight Board also assumed the authority to bring enforcement actions consistent with the Security Exchange Commission’s enforcement authority. This means that it has the authority to pass regulations and as consistent with the Security Exchange Commission ensure that the passed regulations are enforced. Secondly, the requirement of the establishment of independent audit committees by various companies has become a mandatory requirement as a measure of preventing attempts of fraud (Bylinski, J. H. 1981). Public companies are now required to rotate their audit firms after every five years, this tries to limit the attempt by the firm to collude with its auditing firm to validate erroneous accounting figures useful to various stakeholders in the company. For instance, Enron colluded with its auditor Arthur Anderson because of the many years they had worked together, Arthur Anderson offering various consultancy services to Enron thus doing everything within its means to sustain business with Enron to an extent of validating what was an open fraudulent activity perpetrated by the directors of Enron . Another regulation that has been embraced is the change of a chief executive officer for the company after every five years as a way too of limiting possible collusion and undue influence leading to various fraud cases in the companies.

The recent developments in regulation environment have greatly impacted the accounting industry in relation to fraud mitigation and investigation. For instance, a requirement of submission of returns on a yearly basis to the registrar of companies has enhanced availability of various important accounting reports to aid in the accurate investigation. Further to this, the rotation of audit firm as a key requirement has impacted positively in mitigating the possibility of collusion hence making it easy for the investigating persons to adequately track their areas of concerns.

The energy industry is faced with a number of challenges ranging from technology changes, regulation and the supply-demand inadequacy (Elliott, R. K. 1980). While these happens, cyber security has continued to be an immense threat to the accounting system of firms in the energy industry .In the case of Enron, most of its top leadership personalities did come from relatively not rich families and so had a sense of motivation to make up for their past bad experiences by working so hard to make better life. Enron had the most intelligent team ranging from the management to the employees who were also very ambitious spending most of their time at work. The management team was mostly made up of young professionals of ages ranging below forty years who in many instances did not have the potential and interest to manage the other equally younger group of employee of ages ranging between twenty’s. For instance, the chief financial officer was talented in number crunching and believed that their business was totally just about the figures. This however, compromised his people management skills. Most of the staff were seldom seen in the office and exhibited playful tendencies in the office while compromising their needed guidance to the other employees. Precisely, close to all the managers focused less on enhancing good internal control mechanisms while exhibiting external networking in many cases involving in deal making. Because they were predominantly absent in the office, the managers here relied on others to handle the internal operation activities while putting little control and safeguard on the internal workers. For example, manager Lou Pai was so reluctant that was rarely found in the office, had little attention towards employee management and put more favor on the role of dealer, practitioner or entrepreneur within the organization (Elliott, R. K. 1980). Had the management of Enron been firm in their management practice and faithful in adequately guiding the other junior employees, they could have not created the environment that favored the fraudulent action that eventually led to the closure of the firm. The organizations internal control system were thus very weak and porous to the extent that it provided a great opportunity for ease of manipulation by the employees, while unfortunately the manipulation was perpetrated by the managers who could have taken the lead in ensuring that no such unhealthy practice occurred in the company at least under their watch. These weaknesses could have only been addressed by a strong internal control system with defined separation of duties leading to a clear accountability structure. With a clear path of accountability flow, every employee would definitely safeguard their roles while on duty to avoid any sort of litigation. The management could have also made clear the organizations code of ethics so that all employees would know the level of ethical standards they were expected of. Among the anomalies that existed in the Enron’s financial statements were the overstatement of revenue and the understatement of expenses where a lot of money was hidden into fraudulent projects that never even existed.

Even after the Enron massive scandal, the energy industry still faces a number of challenges and potential threats of fraudulent occurrences. For instance, bribery in an attempt to secure foreign contracts is a major looming fraud. Developing countries such as Nigeria have started developing their various energy related natural resources. However, like Nigeria most of these countries do not have adequate resources and the right technology including capital and enough knowledge to potentially handle their nation’s natural resources and so most often, these nations do contract other multinational companies in the energy industry to assist in the management of this procedure (Elliott, R. K. 1980). This feature has potentially led to increased cases of bribery witnessed where most of the multinational companies hoping to be contracted for these projects lure officials from these developing countries with huge chunk of money so as to be awarded such lucrative contracts. Another potential fraud in this energy industry is the tendency of publically overstating of reserves. It is a requirement that public companies involved in doing energy related natural resources such as oil to estimate their reserves. For instance, in the oil industry, the amount of oil reserves refer to the amount of crude oil that can be recovered from a given development project. Various categories of oil reserves have been developed by the security exchange commission. The accounting employees have the greatest chance of engaging in fraudulent activities if the system is porous, this is because they have the capacity to manipulate the figures. In particular, the chief financial officer should be greatly put on the spotlight with regards to potential threats of fraudulent activities.

In investigating a fraudulent activity, the following steps are key to be followed; firstly, it is important to do an initial analysis of the cause of the fraudulent occurrence in question. After the investigation analysis and determining the cause of the fraud, it is necessary to take immediate steps to select an investigating team. Planning and leading is the next step in fraud investigation where appropriate communication is key and designing of an appropriate timetable and too leading and advising (Elliott, R. K. 1980). Fact finding and interviewing takes the next step and involves planning, arranging, administering questionnaire. Thereafter, it is important to analyze the available evidence from the investigation whereby each piece of fact or evidence is examined; thorough determination is made on what may have been missing and determination of the possible conflict of the evidence. The collected facts are then reported and follow ups made including regulatory measures.

References

Elliott, R. K. (1980). Management fraud: Detection and deterrence. New York: Petrocelli Books.

Bylinski, J. H. (1981). Cost effective auditing for management fraud: A decision theoretic approach.