Running head: FRAUD AND ETHICS IN MANAGERIAL ACCOUNTING 1
Fraud and Ethics in Managerial Accounting
Deborah Smith, Shanelle Wright, and James
Zeris Liberty University
FRAUD & ETHICS IN MANAGERIAL
ACCOUNTING
2
Introduction – Shanelle Wright
A page on accounting-degree.org gives ten of the most noteworthy scandals of all time,
listing fraud committed by companies like Enron, Freddie Mac, and WorldCom to name a few .
Over the last two decades, there have been many cases of fraud like these that have been brought
to the light in some way or another. A few were brought down by whistle-blowers, some caught
by the Securities and Exchange Commission (SEC), and some even by family members. The
most pertinent one (turned in by his own sons) is the fraud perpetrated by Bernard Madoff,
which is the largest Ponzi scheme in history recorded to date. By paying returns to his investors
out of their own money or from money of other investors, he was able to cheat them out of
around 64 billion dollars.
Many people wonder how this went on for over 20 years. An article in the Journal of
Wealth Management states there were many red flags that the SEC was made aware of, with the
most notable effort by Harry Markopolis (Gregoriou & Lhabitant, 2009). He tried for 6 years to
get them to investigate Madoff, many times succeeding, but the SEC “found no evidence of front
running or of a Ponzi scheme” (Gregoriou & Lhabitant, 2009). It’s a wonder if standards setters
and external auditors are doing enough. The SEC particularly seems questionable because they
are the ones who are appointed to expose the wrongdoings, and they failed with Madoff. Each
of the frauds that have occurred represents an ethical compromise and the number of them in the
past few decades is quite astounding. This raises the question: Where are the morals in today’s
business and accounting practices and why is there a decline in ethics?
Cause and Effect of Fraud and Ethics Role – James Zeris
There are many reasons why people commit fraud. In fact, every incident of fraud usually
has its own situation or reasoning behind it. The fraud triangle sheds a lot of light of the causes
FRAUD & ETHICS IN MANAGERIAL
ACCOUNTING
3
of fraud. Opportunity, reasoning, and financial pressure are the real culprits behind fraud. The
causes of fraud are in many cases the fault of managers for poor internal control procedures. If
internal controls are applied appropriately there should be virtually zero fraud without detection.
Fraud can be devastating to a company in more ways than one. Fraud can drastically affect the
books that a company shows and could not only cost the company the goods or inventory or
equipment stolen but it can also cause the internal accountants to overstate the year’s inventory
or equipment which will ultimately be more costly on their tax return. In consequence of fraud,
companies in the U.S. lose billions of dollars per year that is generally unrecoverable. Proper
internal controls can save the company a lot of money every year, just by applying simple rules
and procedures (ex: don’t let the same person who opens the mail deposit the checks).
Ethics play a huge role when it comes to fraud. Ethics is not something you necessarily
learn in college but more so at home growing up. Basic rules apply (don’t steal, don’t cheat, etc.)
when someone isn’t raised around good ethics, that person is more likely to commit fraud in their
adult life. In a perfect world where anti-fraud tactics such as internal control methods aren’t
needed we would imagine people would do the right thing by not taking what isn’t theirs.
However, there aren’t enough of those people in this world to have that level of trust for people.
Ethics is best defined or simplified by “doing the right thing”.
Ethics Effect on Fraud – Deborah Smith
But since not everyone was taught integrity or has a natural bent towards honesty, there
are ways businesses can protect themselves against fraud. An article from the Houston Chronicle
states,
At the core of accounting ethics is the strict adherence -- as much as is possible --
to generally accepted accounting principles (GAAP). These are the basic rules of
FRAUD & ETHICS IN MANAGERIAL
ACCOUNTING
4
accounting laid out by the Financial Accounting Standards Board, and their use
ensures the reliability, comparability and integrity of financial statements. In
some rare cases, business circumstances may require diversions from GAAP. In
these situations, accounting ethics require that any departures are fully
documented and clearly justified for investors or others reading the resulting
financial statements (Petryni).
Professional organizations like the Institute of Management Accountants have a
code of ethics to help accountants solve ethical dilemmas when there must be a diversion
from GAAP (Wild, Shaw, & Chiappetta, 2013, p. 738). A business should not rely on
hoping employees are ethical, they should establish and enforce principles and policies
like a code of ethics that must be followed by all employees from the top down.
Personal ethics plays a huge role on battling fraud in the workplace. If an
employee believes that stealing from others is wrong, they will be in a much better place
to resist the urge to commit fraud when faced with the opportunity or to report it when
they discover it being committed by others.
Conclusion – Deborah Smith
Bernard Madoff may or may not have been taught integrity and honesty by his parents or
other caregivers while growing up. His actions would show that if he was taught ethical
behavior, he soundly rejected it due to greed. Scripture from The Message translation says it
best in 1 Timothy 6:10, “But if it’s only money these leaders are after, they’ll self-destruct in no
time. Lust for money brings trouble and nothing but trouble. Going down that path, some lose
their footing in the faith completely and live to regret it bitterly ever after.” Madoff may have
decades
FRAUD & ETHICS IN MANAGERIAL
ACCOUNTING
5
of wealth but he now has 150 years of trouble while he sits in prison unable to enjoy the wealth
he craved.
The fraud triangle – opportunity, reasoning and financial pressure are a part of every
financial decision made by people in the business world. Internal controls, accounting ethics and
basic rules of accounting counteract the human weakness of the love of money. Money itself is
not the problem, it is the love of it that creates the temptation to commit fraud.
FRAUD & ETHICS IN MANAGERIAL
ACCOUNTING
6
References
Gregoriou, G. N., & Lhabitant, F.-S. (2009, Summer). Madoff: a flock of red flags. Journal of
Wealth Management, 12(1), 89+. Retrieved from http://go.galegroup.com/ps/i.do?
id=GALE
%7CA200251612&v=2.1&u=vic_liberty&it=r&p=ITOF&sw=w&asid=8e6cc7065768d2
3d603820881df4e600
Petryni, M. (n.d.). Houston Chronicle. Retrieved July 26, 2014 from Chron.com:
http://smallbusiness.chron.com/accounting-ethics-integrity-standards-24246.html
The 10 Worst Corporate Accounting Scandals of All Time. (n.d.). Retrieved July 25, 2014,
from accounting-degree.org: http://www.accounting-degree.org/scandals/
Wild, J. J., Shaw, K. W., & Chiappetta, B. (2013). Fundamental Accounting Principles, Vol. 2,
21st Ed. McGraw-Hill Education.
