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Financial Statement Fraud Assessment Answer

Financial Statement Fraud

Summary:

With the ramified changes in business, many organizations are using the falsified financial data to mislead the investors and attract them to invest their capital in their business. Ideally, financial frauds and falsification of financial data are made by overstating the financial assets and understating the liabilities and other outstanding. Nonetheless, the company uses this sort of action to make less transparent and strengthen its brand image in the market. The major objective of misleading this information or manipulating imperative data is to attract the potential investors so that they could somehow invest their capital in their business or creating the market mapping to strengthen the share price of the company. This manipulation in the financial records and falsified data mislead the financial decisions of the investors and stakeholders. Ideally, the falsification of the data is made in the cash flow statement, balance sheet, income statement, and other financial data which are used by investors to make their financial decisions.  

It is evaluated that top management sometimes generates misleading information in their business so that it could give a push to the organization for better business outcomes. In addition to this, when the company wants to raise more capital in the market from the investors, these misleading information to influence the investors and their financial decisions in the company. The self-interest theory depicts that management of the organization misleads the financial data to strengthen the business values in the market. It is analyzed that if the company faces poor business conditions then upper business management manipulates the financial statements to showcase that the company is doing well. Ideally, this destructs the transparency of the business and create a falsified shield to mislead the investors.  This manipulation in the financial data is made by applying the wrong accounting in recording and classifying the financial data.  However, this financial fraud is made by manipulating the sales book, changing the financial expenses, falsified assets valuation, and non-suitable disclosure. There are several financial scams which we could find to illustrate the example of the misleading output of manipulation in the financial data. For instance, in the case of Worldcom financial statements fraud where there was found the accounting anomalies by the former CEO of the company to gain the personal profit from the business. This was the scam in which the internal control department and auditors were also questioned for the issue for their corporate governance.  


Common & Different themes:

Common themes:

After assessing the secondary data available in the market, it is found that in the back time, two biggest scams were identified. These two accounting scandals were accompanied with the shift in economic turmoil. These two top accounting scandals were Worldcom and Enron. These two scams destruct the financial-economic and resulted in high business losses due to the non-effective accounting framework.  To the earlier of the 2000 year, financial crises revealed that all the public company were having the poor accounting system and needs to make the changes in their financial recording system to strengthen the transparency in the books of accounts. All the frauds and scams found helped financial authority and government to come with the new different strong financial accounting framework which could mitigate the financial issues and frauds in the public listed companies. After evaluating the scandals and scams, the government issued the SOX act 2002 to helps auditors to strengthen their audit work and identify the financial issues in the books of accounts of the company. It is analyzed that SOX legislation aimed to increase the transparency in the recorded financial statements and help the company to maintain the accuracy in the recorded items. In addition to this, it also asks for the disclosure of the activities made by the CEO of the company to maintain the transparency of any strategic plans with the stakeholders (Rezae, & Kedia, 2012).

After assessing the case, it is found that historical details of the case Worldcom suggests that it was incorporated in 1983 and offered effective long-distance domestic customer base service. After that, it was merged with other organization and merging benefit and creation of synergy in the business uplift the business growth of Worldcom. It changed its name to LDDDS Worldcom after the merger.  This merger helped the company to write off its most of the large expenses from the balance sheet and the company could easily evade all the pending debts and liabilities. In 2002, the company revised the financial statement to tune its assets to 3.85 million. However, CEO Ebber was responsible for $ 400 million amount to restrict the assets in the company. Nonetheless, due to the devaluation of the stock in the business, the protective steps of CEO went in vain. After that, the CEO position of the company was changed and new CEO Sidhmore was appointed to make the situation of business better. However, the situation was nowhere better due to the high financial turmoil in business. The bankruptcy agreement made Worldcom pay $ 750 million and resets the FS to the investors.  

The fraud scheme article could be used in this case to depict the classical fraud theory. This theory has three main cognitions which accompanied with the person involved in the financial scandals. These three cognitions are pressure, rationalization, and opportunity. First element pressure stats that individual in the pressure of internal and external forces takes decisions. For instance, the CEO of Worldcom Company was having the objective to gain personal gain which resulted in the fraudulent scam (Ashraf, 2011). Another cognition is an opportunity where an actor must have enough space to conduct the fraud and scam in the business system. The reasonable opportunity shows the ways which could be used by an actor to save him from the fraud and error cases.  The third cognition covers the ethical perspective of the company and this cognitive dissonance is compensated by the core values of the actor. This collusion theory points out where the CG participant's article is imperative. This case revealed that the scams and frauds happened in this company was based on the weakness of the control system in the organization. As given in the COSO report, it was found that if there was effective corporate governance then it could easily detect the scandals in the company. It was issue arise due to the lack of control by the corporate governance actors in the complaint.  If there was proper voting for directors, BOD disclosure and strong access of directive SEC then it could have saved this fraud happened in the company (Rezaee, & Kedia, 2012). 


Different themes:

The experimental testing article, there is details of the SOX act, SEC and audit which are more likely to details given in corporate governance article. Nonetheless, CG article revealed the gender biases and opportunity and work activity both are found as the major theme behind the frauds and scams. Nonetheless, none off the article gives the solution of Frauds and scam of Worldcom example except Worldcom Article. In this article, it was given that companies facing the same issue need to strengthen the control environment, internal control system and strong accounting frameworks to prevent this issue. The auditors also need to use proper backups such as invoices, management representation letter while auditing the financial of the company.  

The below-given image reveals the solution structure to prevent the given issues.  

 solution structure

Source: (Ashraf, 2011)


Managerial Implication:

This stats the steps taken by managers. All the four articles accompanied with the SOX, SEC, internal control system, auditing, and control system which need to be included in the corporate governance of the company. Nonetheless, Worldcom article evaluated the issue and points to consider for the FSF solutions. In addition to this, the other three articles, general information is given. Nonetheless, fraud scheme article has revealed the control gaps which could be helpful to similar future fraud cases detention (Albrecht, et al. 2015) In case of corporate governance article, collusion is added to evaluate the relation between the decision making and conspirators. In case of Experimental testing article, it is found that there are more hypothetical data and supporting theory which is based on the real-life issue.  

Limitations:

In the Worldcom article, it was found that it is more descriptive and focused on informing more about the scandals, blaming points, new acts and lesson learned from the issues. This article does not cover the general point of view of fraud and errors. There is no estimation of future issues and frauds is being identified in the article. In the case of Fraud article scheme, more focus has been made to express the organizational theories and key terms. It avoided the imperativeness of internal control and audit procedure in fraud cases. In case of Experimental testing article, vague examples and assumptions are used which cannot be used in the real issues. However, CG article is limited only to its external environmental factors and set the hierarchical process.

Interrelationships:

All these three articles are showing the key aspects of the financial statement frauds. Nonetheless, following terms such as CG, financial-economic crises and internal control system been used to showcase that Worldcom has a less effective internal control system which resulted in the financial scandal in its business. In addition to this, the control gap and failure to maintain transparency in the recording and reporting framework was also considered the main issue of scam in this company (Woolley, 2016).  As per the self-interest theory, the personal gain of the CEO was another reason for the financial fraud in this company.

Answer

Financial Statement Fraud



Summary:

With the ramified changes in business, many organizations are using the falsified financial data to mislead the investors and attract them to invest their capital in their business. Ideally, financial frauds and falsification of financial data are made by overstating the financial assets and understating the liabilities and other outstanding. Nonetheless, the company uses this sort of action to make less transparent and strengthen its brand image in the market. The major objective of misleading this information or manipulating imperative data is to attract the potential investors so that they could somehow invest their capital in their business or creating the market mapping to strengthen the share price of the company. This manipulation in the financial records and falsified data mislead the financial decisions of the investors and stakeholders. Ideally, the falsification of the data is made in the cash flow statement, balance sheet, income statement, and other financial data which are used by investors to make their financial decisions.  

It is evaluated that top management sometimes generates misleading information in their business so that it could give a push to the organization for better business outcomes. In addition to this, when the company wants to raise more capital in the market from the investors, these misleading information to influence the investors and their financial decisions in the company. The self-interest theory depicts that management of the organization misleads the financial data to strengthen the business values in the market. It is analyzed that if the company faces poor business conditions then upper business management manipulates the financial statements to showcase that the company is doing well. Ideally, this destructs the transparency of the business and create a falsified shield to mislead the investors.  This manipulation in the financial data is made by applying the wrong accounting in recording and classifying the financial data.  However, this financial fraud is made by manipulating the sales book, changing the financial expenses, falsified assets valuation, and non-suitable disclosure. There are several financial scams which we could find to illustrate the example of the misleading output of manipulation in the financial data. For instance, in the case of Worldcom financial statements fraud where there was found the accounting anomalies by the former CEO of the company to gain the personal profit from the business. This was the scam in which the internal control department and auditors were also questioned for the issue for their corporate governance.  


Common & Different themes:

Common themes:

After assessing the secondary data available in the market, it is found that in the back time, two biggest scams were identified. These two accounting scandals were accompanied with the shift in economic turmoil. These two top accounting scandals were Worldcom and Enron. These two scams destruct the financial-economic and resulted in high business losses due to the non-effective accounting framework.  To the earlier of the 2000 year, financial crises revealed that all the public company were having the poor accounting system and needs to make the changes in their financial recording system to strengthen the transparency in the books of accounts. All the frauds and scams found helped financial authority and government to come with the new different strong financial accounting framework which could mitigate the financial issues and frauds in the public listed companies. After evaluating the scandals and scams, the government issued the SOX act 2002 to helps auditors to strengthen their audit work and identify the financial issues in the books of accounts of the company. It is analyzed that SOX legislation aimed to increase the transparency in the recorded financial statements and help the company to maintain the accuracy in the recorded items. In addition to this, it also asks for the disclosure of the activities made by the CEO of the company to maintain the transparency of any strategic plans with the stakeholders (Rezae, & Kedia, 2012).

After assessing the case, it is found that historical details of the case Worldcom suggests that it was incorporated in 1983 and offered effective long-distance domestic customer base service. After that, it was merged with other organization and merging benefit and creation of synergy in the business uplift the business growth of Worldcom. It changed its name to LDDDS Worldcom after the merger.  This merger helped the company to write off its most of the large expenses from the balance sheet and the company could easily evade all the pending debts and liabilities. In 2002, the company revised the financial statement to tune its assets to 3.85 million. However, CEO Ebber was responsible for $ 400 million amount to restrict the assets in the company. Nonetheless, due to the devaluation of the stock in the business, the protective steps of CEO went in vain. After that, the CEO position of the company was changed and new CEO Sidhmore was appointed to make the situation of business better. However, the situation was nowhere better due to the high financial turmoil in business. The bankruptcy agreement made Worldcom pay $ 750 million and resets the FS to the investors.  

The fraud scheme article could be used in this case to depict the classical fraud theory. This theory has three main cognitions which accompanied with the person involved in the financial scandals. These three cognitions are pressure, rationalization, and opportunity. First element pressure stats that individual in the pressure of internal and external forces takes decisions. For instance, the CEO of Worldcom Company was having the objective to gain personal gain which resulted in the fraudulent scam (Ashraf, 2011). Another cognition is an opportunity where an actor must have enough space to conduct the fraud and scam in the business system. The reasonable opportunity shows the ways which could be used by an actor to save him from the fraud and error cases.  The third cognition covers the ethical perspective of the company and this cognitive dissonance is compensated by the core values of the actor. This collusion theory points out where the CG participant's article is imperative. This case revealed that the scams and frauds happened in this company was based on the weakness of the control system in the organization. As given in the COSO report, it was found that if there was effective corporate governance then it could easily detect the scandals in the company. It was issue arise due to the lack of control by the corporate governance actors in the complaint.  If there was proper voting for directors, BOD disclosure and strong access of directive SEC then it could have saved this fraud happened in the company (Rezaee, & Kedia, 2012). 


Different themes:

The experimental testing article, there is details of the SOX act, SEC and audit which are more likely to details given in corporate governance article. Nonetheless, CG article revealed the gender biases and opportunity and work activity both are found as the major theme behind the frauds and scams. Nonetheless, none off the article gives the solution of Frauds and scam of Worldcom example except Worldcom Article. In this article, it was given that companies facing the same issue need to strengthen the control environment, internal control system and strong accounting frameworks to prevent this issue. The auditors also need to use proper backups such as invoices, management representation letter while auditing the financial of the company.  

The below-given image reveals the solution structure to prevent the given issues.  

solution structure to prevent fraud

Source: (Ashraf, 2011)


Managerial Implication:

This stats the steps taken by managers. All the four articles accompanied with the SOX, SEC, internal control system, auditing, and control system which need to be included in the corporate governance of the company. Nonetheless, Worldcom article evaluated the issue and points to consider for the FSF solutions. In addition to this, the other three articles, general information is given. Nonetheless, fraud scheme article has revealed the control gaps which could be helpful to similar future fraud cases detention (Albrecht, et al. 2015) In case of corporate governance article, collusion is added to evaluate the relation between the decision making and conspirators. In case of Experimental testing article, it is found that there are more hypothetical data and supporting theory which is based on the real-life issue.  

Limitations:

In the Worldcom article, it was found that it is more descriptive and focused on informing more about the scandals, blaming points, new acts and lesson learned from the issues. This article does not cover the general point of view of fraud and errors. There is no estimation of future issues and frauds is being identified in the article. In the case of Fraud article scheme, more focus has been made to express the organizational theories and key terms. It avoided the imperativeness of internal control and audit procedure in fraud cases. In case of Experimental testing article, vague examples and assumptions are used which cannot be used in the real issues. However, CG article is limited only to its external environmental factors and set the hierarchical process.

Interrelationships:

All these three articles are showing the key aspects of the financial statement frauds. Nonetheless, following terms such as CG, financial-economic crises and internal control system been used to showcase that Worldcom has a less effective internal control system which resulted in the financial scandal in its business. In addition to this, the control gap and failure to maintain transparency in the recording and reporting framework was also considered the main issue of scam in this company (Woolley, 2016).  As per the self-interest theory, the personal gain of the CEO was another reason for the financial fraud in this company. 

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