The 1920s was known as the Roaring Twenties in the American history because of changes in the social norms, and the country experienced a strong economic boom (Kennedy: 2). During the time of widespread economic gain, the application of fair value in accounting and lack of regulation in security markets left the investors at great risk. That is the reported figures of stock prices had no information justifying their values. Similarly, financial institutions such as banks were lending recklessly with no guarantees to their clients. Consequently, the gap between the rich and the poor in America increased steadily (pbs.org). Several Americans invested in the life-saving stock market without knowing the consequences of doing so. Consequently, the above activities resulted in the financial crisis that lasted until 1933.
Previous Cases of Fraud
In the last ten years, there have been several instances of accounting fraud. The most notable one was the Enron and Bernie Madoff scandals. Alongside these were WorldCom, Tyco International Ltd., and Adelphia Communications Corp. Each of these fraud cases led to massive losses because several individuals that were part of the top management team in the companies practiced mischievous activities in the financial reports. In preventing future fraud scandals in accounting, it is essential to understand the execution of the past frauds. In some cases, fraud may lead to the bankruptcy, loss of pensions among the employees, legal prosecution and staggering lawsuits for the major perpetrators in the company. Many of the above consequences happened in the case of WorldCom where the officials were part of the fraudulent financial reporting.
The fraudulent acts at WorldCom were facilitated by motivation since the top managers at the company had personal financial incentives and fraudulently report the financial statements to misappropriate the funds of the company. Similarly, they were motivated to make the company appear successful through income statements that would not have occurred if there was a true record for the losses of the company.
Tyco International Ltd.
The company was founded by Arthur Rosenburg in 1960 as an investing and holding company that specializes in government and military research. However, the focus of the Tyco's products shifted to the commercial sector, and it started to trade publicly in 1964 (tycofis.co.uk). In the 2000s, Tyco International Ltd. was complicated in a fraudulent financial reporting. The company misappropriated the assets through the top executives.
The fraud scandal in Tyco was facilitated by the opportunity and strong greed at the hands of Mark Swartz, and Mark Belnick (Kennedy: 15). These people had a chance to rip-off millions of cash from the company. Moreover, these managers took advantage of the many years before detection. Moreover, the internal controls that were in place were not able to stop the fraudulent activities of the top executives. However, the scandal did not have devastating influences on Tyco. But the share prices drop significantly at some points, and there was never any sign of bankruptcy at Tyco.
Adelphia Communications Corporation
It was founded in 1952 by John Rigas where it remained in the entire hands of Rigas family until 1986 when the company went public. Even after going public, John and his sons were still holding the top executive positions in the Adelphia Corporation. In 2002, the fraud case of Adelphia involved fraudulent financial reporting and misappropriation of the company's assets, and the case involved the founding family of the firm perpetrating the fraud (Kennedy: 17).
In 2002, the SEC news revealed that between 1991 and 2001, the executive deliberately excluded about $2.3 billion in the bank debt from the financial statements (Kennedy: 18). Furthermore, it was discovered that the corporation did not have the highest operating cash margins in the cable industry. Similarly, the debt did not appear as a liability on the financial position of the company because it was hidden in the bookkeeping records of off-balance sheet affiliates. It was also noticed that Adelphia funded $ 150 million of Rigas for the purchase of Buffalo Sabres, and about 17 company vehicles for personal use. Additionally, the company inflated its earnings to meet the expectations of the Wall Street. It also falsified the statistics of the operations and concealed the self-dealings by the founding family.
In this scandal, the Rigas family were motivated to hide the debt to report earnings and keep the company running. For instance, they wanted to meet the expectations of the Wall Street. Therefore, the wanted to make Adelphia appear as the strongest cable corporation in the country. Regarding the personal gifts and cash that were allotted by the Rigas family, this act was motivated by greed. Since the company was founded by Rigas family, they feel justified for what they took because they worked hard for the company. The executives of the company enjoyed the existence of the opportunity to commit fraud by considering the top executive that happened to be the Rigas family. The officials also enjoyed from the existence of the weak internal control systems. To control this fraud, other employees should have been checking the validity of the personal purchases to the Rigas family.
Waste Management Incorporation
The continuous accounting scandals in many companies in America such as Waste Management made the Security Exchange Commission (SEC) to bring a lawsuit against the founders and the executives of such companies. Consequently, the officials were charged with the illegal transaction of massive assets for more than five years. For instance, in WMI, the perpetrators were the chairperson, company's president, vice president, chief accounting officer, and other top management teams that were alleged to be engaged in a systematic order of falsifying and misrepresenting the financial figures of Waste Management Company.
Later, it was clear that the accused officials manipulated the financial results of the incorporation to meet the predetermined targets of earnings. On the same note, they dishonored the anti-fraud and the provisions of reporting for record keeping for the federal securities. Moreover, the defendants inflated the proceeds of the WMI by over $1 billion. This value represented about $ 29 million of the fraudulent gains from the annual bonuses, and other inside trading. Therefore, the investors were swindled over $ 5 billion.
The fraud case in Waste Management has been the most severe accounting scandal that has ever been witnessed. The perpetrators made a misrepresentation on the financial records for the purpose of enriching themselves. Additionally, they preserved their employment while dumping the unsuspected investors of the company. However, the fraudulent activities of the executives at WMI were facilitated by the long- serving auditor, Arthur Anderson LLP. This auditing firm issued unqualified reports of auditing regarding the materiality of the incorporation. The act misled the yearly financial statements. But in 2001, SEC fine the auditor for the inappropriate duties against the executives at WMI. Moreover, the fraudsters were to pay over $ 30 million as a prejudgment, and civil penalties.
Sarbanes-Oxley Act of 2002
Enron is the first company that was noted during the emergence of the accounting fraud. However, the above cases prove that it was not Enron alone that was involved in the malicious activities. Besides, there were HealthSouth, Global Crossing, and Xerox. In light of the fraudulent cases in these corporations, the SOX Act was signed in 2002 into law as the most reaching reforms of the business practices in America. The main objective of the SOX is to enhance the corporate responsibility, financial disclosures, and combat corporate and accounting frauds. Therefore, in the act that intends to protect investors through accuracy and reliability of corporate disclosures should be made in pursuant to the security laws, and for other purposes
The difference between interview and conversation
The interview is a popular technique that is used to investigate and resolve fraud. It is a period of questions and answers that are designed to produce information. Therefore, an interview is different from a conversation in the sense that it is in a structured form with a purpose (Albrecht, et al.: 282). Interviews factor in all suspects and produce admissions from the guilty parties. Additionally, it assists in obtaining relevant information that is establishing the significant elements of a crime. Lastly, interviews may be conducted by anyone who is helpful in the investigation.
Types of fraud questions
Denial question
It acts as a buffer after receiving the unexpected news. Therefore, it allows the affected managers to mobilize less extreme defenses. For instance, why did the executive members decided to conduct parallel investigations yet some managers were still on vacation?
Anger question
This type of question indicates that time to resolve the fraudulent issue is poor. Consequently, it may allow overreacting criminals to get legal settlements. For instance, why did all managers admitted that there were some elements of fraud yet the internal audit team had not released their report?
Rationalization question
This type of question is meant to minimize the crime. Therefore, the managers believe that they understood why they committed the crime. For instance, what type of explanation do you have for having committed the fraud?
Depression question
It is meant to diminish hope in that the executives are faced with emotional burden concerning truth. Similarly, it is a normal question that is intended to cope with the necessary process of psychological readjustment. Moreover, it replaces the anger of the managers with the sense of loss and disappointments. For instance, what was your action since the occurrence of the fraud incidence?
Acceptance question
It allows the managers to face the reality of what took place. Therefore, it is an acknowledgment of what happened. For instance, did you just get greedy or you just wanted additional money?
ASSIGNMENT 2 – Arthur Anderson
Conflict of interest
Previously, Anderson had had two major audit failures before Enron filed bankruptcy. For instance, in 1996, the audit reports of WMI from Anderson were false and misleading, and this headed to the inflation of income by over $ 1 billion. The information arises after SEC investigations, and this made Waste Management (WM) sell out to another company. Similarly, in 1997, SEC found that Sunbeam was using accounting tricks to create false profits, and it was Anderson who signed-off the financial statements even after being advised by the partner. Later, Sunbeam filed for the bankruptcy.
The two most important audit failures could have put Anderson on guard against another failure. As per the internal memos from Anderson, he indicated that there some conflicts between the auditors, and the audit committee at Enron. Arthur Anderson and its client Enron did not set out to have the positive influence in the industry of accounting. However, they configured the money for personal gains as quickly as possible. They were also willing to do anything to make money. Consequently, these acts of greed led Arthur Anderson and Enron to eventual bankruptcy. On the other hand, the accounting industry introduced some changes that were meant to improve itself and the economy in which it operates in the long run.
Conclusion
Before the fall of Enron and its accountant, Arthur Anderson, there were several types of safety measures in place to protect the investors and the members of the public. Therefore, Arthur Anderson could have survived Enron by adhering to the following safety standards of the GAAP, GAAS, SAS, and other professional ethics. The application of Generally Accepted Accounting Principle (GAAP) is the standard procedure. Arthur Anderson could have followed the accounting principles as a matter of everyday routine. Moreover, GAAP has been identified as the most dynamic set of broad and specific guidelines that companies should follow when making reports to their financial statements. Similarly, the external auditors could have indicated whether the company followed the GAAP rules consistently. If not, they could have demonstrated that Enron was not ethical in reporting its financial statements in specific situations.
Bibliography
"Fire Detection & Protection - Tyco Fire and Integrated Solutions". Tycofis.co.uk. N.p., 2016. Web. 12 May 2016.
Albrecht, Steve et al. Fraud Examination. 5th ed. Cengage Learning, 2015. Print.
Kennedy, Kristin. "An Analysis of Fraud". Cases, Prevention, and Notable Cases (2012): 1-45. Print.
"PBS: Public Broadcasting Service". PBS. N.p., 2016. Web. 12 May 2016.
