An organization can work to revert, deter and detect fraud by utilizing a fraud risk assessment and creating an anti-fraud program. Ethics and integrity of management and employees are the foundation of a control system, and major frauds occur due to managers that lack ethics and integrity. To manage the cost of fraud, a proper implementation of an effective and visible anti-fraud program that identifies the fraud risk and is balanced out with the internal controls to manage this cost.
An effective organizational architecture seeks intended results in education, detection and deterrence, through interlaced corporate ultra, organizational structure and compliance system. Organizational architecture should be tailored to fit an organization’s specific needs and circumstances, which improve firm performance. Corporate culture sets the moral tone for an organization and can be defined as the statements, visions, customs, values, and role models. The visions and commitments from leadership can play a significant role in reducing corruption.
A control framework, such as COOS, should then be implemented that includes policies and procedures, which provide the definition of the scope and activities of organizational functions, and include the communication and relationships internally and externally throughout the organization. Introduction The first section of this briefing report high lights organizational fraud and corruption risks resulting from unethical practices by executives or employees, with the use of the World debacle as a relevant example. The following section centers on red flags and some questions that may arise indicating red flags that corruption is occurring.
Once again, the World incident was used to provide a real life example of red flags that occurred during the case. To conclude that section the lessons learned were directed towards the auditing standards and the implications of failures of this preventive measure. The risk analysis, best practices and corruption prevention section will help One to understand the elements Of the COOS framework and how effective it can be, by providing the effectiveness of this model when all of its elements and factors are used efficiently.
Lastly, with the supplemental information from the previous sections, the active plan highlights some key mechanisms that should be in implemented to reduce fraud and corruption. This briefing report should provide a better understanding of the measures and mechanisms, with the utilization of multiple factors, to decrease the risks of corruption and uncertainty within the organization, and ultimately the industry. Identified Fraud and Corruption Risks According to the Rafters and Holder (2014), many experts believe that the majority of frauds within an organization involve employees, and are the main threat to any business.
Key vulnerabilities to fraud in telecommunications, with reference to the World debacle, were questionable accounting practices by officers or directors that fraudulently letter financial reports (CIA, 2015). More specifically, the driving force behind the fraud was orchestrated by World CEO, Ernie Beers. His perpetration of the fraud has been considered one of the largest accounting frauds and bankruptcy in US history, and was convicted as the mastermind behind the $11 billion fraud, which resulted in a sentence of 25 years in prison on July 13, 2005 (Stefan, 2005).
According to Jovanovich (2007), there has been a rise in frauds perpetrated by corporate executives in the LIST and other “modern” nations. He further states that a combination of selfish greed, guests for power and disregard for the impact Of their fraudulent decisions on shareholders and employees, which become the ultimate losers in these cases. Other factors making frauds possibly in an organization are not only related to collusion but ambiguous and complicated regulations making frauds by management harder to deter and detect (Jovanovich, 2007).
Mackey (2008) discusses the purpose of corporate governance as a method to persuade, induce, and motivate corporate managers to keep the promise they make to investors by reducing any actions by management or directors hat go against the investment-backed expectations of investors. The World case can be a leading example of how there was a gigantic failure in corporate governance. To begin, Beers business strategy clearly focused on achieving growth of the company through acquisitions, and sought to pay for these acquisitions through World stocks, which had to continually increase in value (Stefan, 2005).
According to Sandburg, Solomon, and Blustering (2002), in the early sass’s the market was being flooded by telecommunication companies and the telecommunications market was lowing down by 2001, as there was an excess of supply and decrease in demand. Workroom’s multi-billion dollar acquisition contracts with third party telecommunication companies were costing more in expenses than what the company was receiving in revenue (Sandburg, Solomon, and Blustering, 2002).
To address this problem, Beers initiated the practice by reclassifying operating expenses as a capital expenditure to make the company appear to be in good health and match the stock prices (Stefan, 2005). To support the case stated by Stefan (2005), Goldman and Kaufman (2009 ) explains that he common motives for dishonest behavior of executives when falsifying financial records and statements is to boost share price and maintain investor confidence. More specifically, the manipulation of liabilities is the act of concealing or classifying expenses as capital expenditures to convert these liabilities to assets.
World used this bookkeeping trick on a grand scale, which they improperly reported $3. 8 billion in expenses as capital expenditures (Goldman and Kaufman, 2009). Raze (2005), states that the reliability, transparency and uniformity of financial reporting should reflect an ones picture of the organization’s performance, allowing investors to make intelligent decision based on the truth, and not on inflated and fraudulent data that effects the decision of capital market participants (e. G. Investors, creditors, analysts etc. ).
Financial statement fraud is an intentional attempt by a corporation or an individual to mislead users with the use of publicly disclosed statements by falsification, altering, or manipulation of records or supporting documents (Raze, 2005). Chou and Kapok (201 0), similarly state Resale’s outlook on financial statement fraud by highlighting the impact not only on individual investors, but the overall stability of global economies. According to Chou and Kapok (2010), financial statement fraud is the intentional, deliberate, misstatement or omission of material facts that would cause a reader to change or alter their judgment or decision.
Sandburg Solomon, and Blustering (2002) discuss that with the downturn of the telecommunications market, Wall Street had high expectations of double digit growth for World, and Beers desired a need for a continuing increase in revenue and income of World. Stefan (2005) states that in order for Beers to meet Wall Street’s expectations and to achieve his desired goal, Beers had to doctor the company books to meet the company’s financial targets.
As well, another factor for his actions was to maintain and protect his personal financial condition in the case he would have to meet a margin call if the stock price of World declined. Jovanovich (2007) adds that the motivation for an individual to act in a fraudulent manner can be influenced from the perspective of personal gain and the desire to maintain power. Furthermore, fear of the public perception can amplify and influence the individual to act in an unethical manner (Jovanovich, 2007).
In all, Wells (2013) highlights the detrimental effects that financial statement fraud has on companies, investors, the markets, and the economies, which are presented in the following list: It undermines the reliability, quality, transparency, ad integrity of the financial reporting process The integrity and objectivity of auditors and auditing firms Decreases the confidence of the capital markets, its participants, and the reliability of financial information Capital markets become less efficient Results in large litigation costs
Enables the destruction of careers of those involved in the fraud Can result in bankruptcy or economic loss to the company engaged in the fraud Deterioration of normal operations and performance Raises doubt about the reliability of financial statement audits Decreases public confidence and trust in the accounting and auditing profession Red Flags and Lessons Learned For sample purposes, the following section is an assessment of the red flags and symptoms that were present in the World case that can provide an idea of indicators to the Wet’s concerns of fraudulent activity.
Direct orders from World to make requests for documents, information and access to personnel through gatekeepers, which allowed them to know ahead of time which records the auditor is seeking Outperforming the competition despite a business sector downturn.
Aggressive growth strategies (that led to fraudulent accounting practices) Management loans (to cover margin calls on World stock losses) Management heavily invested in the stock (The last two points are major conflicts of interest, and likely contributed to the first three scenarios happening) Boogieman and Barrow (2012) present mom general questions that may raise concern of possible fraud: Does management display significant disregard for regulations or controls? Has management restricted the auditors access to documents or personnel?
Has management set unrealistic financial goals? Does on person or small group dominate management? Are their frequent changes in account policies? Is there management compensation out of line with company performance? Are there aggressive revenue recognition policies? According to Hancock (2006), auditing standards in place provide a firm a foundation for carrying out a quality audit, but there have been failures in executing the audit and in the critical thinking necessary to draw proper conclusions.
He further states that this is partly caused by the conflict currently in the system used to hire auditors. External auditor fees are received from the organizations that hire them, which create an immanent conflict when difficult decisions must be made by the auditor (Hancock, 2006). For example, a question to be asked could be if the auditor would be willing to question the ethics and integrity of management and its employees when they want to get the contract for the audit next year?
Furthermore, Boogieman ND Barrow (2012) discusses if the auditor does not have the ability to ask questions consistently and to challenge and verify the answers provided, the ability to carry out the audit successfully is reduced. Professional skepticism can be considered the core of the auditing profession and is fundamental to discovering frauds, and should be the focus of every audit (Hancock, 2006).
Lastly, Hancock (2006) concludes that in order for auditors to gain the public trusts in their level of competence and credibility, they must be consistently diligent in satisfying the standards of their profession. They must learn from their past mistakes, such as those made by the World auditors, and continue to challenge themselves to do better Risk Analysis According to CIA (201 5), an organization can work to prevent, deter and detect fraud by utilizing a fraud risk assessment and creating an anti-fraud program.
Scarring (2012) states that COOS defines internal controls broadly, and overall, that the three main business objectives of a business includes; (1 ) the desire for efficient operations, including obtaining performance goals and safeguarding assets from loss, (2) to have reliable financial and operational ATA and reports, and (3) the compliance with laws and regulations. To achieve the previously mentioned objectives, COOS consists of five components that would facilitate management to achieve these objectives: 1 . A sound control environment.
This is the foundation for all other components of internal control and sets the “tone at the top” of an organization, which can influence people (CIA, 2015). The environment requires a level of attention and direction from senior management, and there attitudes toward and awareness for fraud can influence the employees around them (Scarring, 2012). Scarring (2012) states that the factors to be considered when reviewing the control environment include the hiring of managers and employees who possess integrity, ethical values and competence of the organization’s people.
According to CIA (201 5), the environment is a function Of management’s philosophy and operating style, therefore, it requires the proper assignment of authority and responsibility by management. Scarring (201 2), states that management must ensure that the employees are trained and developed to an appropriate standard to ensure that they can successfully exercise control. 2. A sound risk assessment process. This will allow management to become aware of the risks and barriers that are in the way of achieving the previously mentioned business objectives, and involves identifying, analyzing and managing the risks (Scarring, 2012).
According to the CIA (201 5), management’s assessment of risk is ongoing, and they must take necessary actions to manage risks and the impact it may have. 3. Sound operational and control activities. To help ensure the implementation of actions identified by management, the control activities must establish, execute and monitor sound policies and procedures that are n place, and to make sure they are effective in identifying risk (Scarring, 2012). CIA (2015) states that activities can include authorization (preventive controls), reviews of operating performance, and security of assets and segregation of duties. . Sound information and communication systems. Information systems support the running and control of a business by capturing, processing and reporting transactions or events that contain financial, operational and compliance-related information (Scarring, 2012). The systems use both internally generated data and information on external activities, conditions, ND events that management need to be aware of when making decisions or communication outside of the company (CIA, 2015).
For information and communication to flow effectively, it must flow up, down, across the organization or outside of the organization, and the personnel must understand their roles and their activities that relate to the work of others in the internal control system (Scarring, 2012). Scarring (2012) states that this can be done by top management sending a clear message that control responsibilities must be taken seriously. 5. Effective monitoring. Effective monitoring ensures the effectiveness of the intro process and can be done through ongoing monitoring or separate evaluations (CIA, 2015).
The entire control system has to be monitored by management in order to assess the quality of the system’s performance on an ongoing basis and any deficiencies or serious matter should be reported directly to senior management (Scarring, 2012). In addition, the scope and frequency of separate evaluations depends on how effective the ongoing monitoring process is, as well, the degree of competence of those enacting the controls. Therefore, the more effective the ongoing monitoring process, he less need for separate evaluations (CIA, 2015).
Fraud Theories All or some of the following aspects of the presented fraud theories can supplement the reasoning for the underlying fraudulent actions of worlds CEO Ernie Beers, Fraud Diamond The Fraud Triangle has long been used as a tool for Caps seeking to manage and understand fraud risks, but according to Wolfe and Hermann (2004), the fraud triangle should be strengthened by considering an individual’s capability as a fourth element, to improve both fraud prevention and detection, thus creating the Fraud Diamond.
The fraud triangle describes the opportunity that opens the doorway to fraud, and the incentive/pressures and rationalization can draw an individual toward the fraud, but with the addition of the capability of an individual allows them to realize the open doorway and to take advantage of this opportunity over and over (Wolfe & Hermann, 2004).
Wolfe and Hermann (2004) state the following six components of a person with capability: 1) The person’s position or function within the organization allows the ability to create or exploit an opportunity of fraud not available to others 2) The right person for a fraud has the intelligence to understand and exploit internal control weaknesses, and to use position, function or authorized access to leverage the greatest advantage. 3) The right person has a great confidence that he will not be detected, or believes they can talk themselves out of trouble when questioned. ) A successful fraudster can coerce others to commit or conceal fraud. 5) A successful fraudster lies effectively and consistently to avoid detection from auditors, investors and others. They also have the skill to keep track of the lies, so that the story remains consistent. 6) A successful fraudster can deal well with stress. Although Paterson concealed the fraud for quite some time and managed the stress of possibly being detected.
Rational Choice Theory White-collar and corporate crime can be analyzed through rational choice theory because they involve decisions made within business environments where rationality is presumably valued (Culled & Wilcox, 2010). Therefore, the central element of calculation involves a cost benefit analysis (ACH, 2013). According to Culled and Wilcox (201 0), rational choice theory explains that individual’s consciously and deliberately choose criminal behavior of their win free will, and the components of criminal behavior forming rational choice considerations can relate to the setting to justify criminal action.
Brown and Expenses (2010) identify white-collar violations as: Violations of law in which penalties are attached that involve the use Of a violator’s position of economic power, influence, or trust in the legitimate economic or political institutional order for the purpose of illegal gain, or to commit an illegal act for person or organizational gain (p. 459). Culled and Wilcox (2010) also state that certain white-collar crimes can occur room individuals higher in the managerial ranks of the corporation, which lead to engagement of corruptive practices, “because they can”.
White-collar crime as a rational choice potentially flourishes in an atmosphere of lax regulation, where regulatory bodies fail to follow through, and the confidence and skills of an individual provides the ability to offend. Brown and Expenses (2010) describe an underlying reason for white-collar crimes are pressures to meet self-defined or standards imposed externally on successful performance, therefore, offenders find soothing explanations for their crimes.
According to Culled and Wilcox (2010), corporate crimes are illegal offenses that an employee commits with the company they work for, and included in the theory is three types of perceived costs to weigh between engaging in the corporate crime or not. They state the perceived costs as the possibility of being prosecuted for their actions, damaging the company’s reputation, or being criticized by friends and family, and there is a possibility of losing self- respect from feeling shame or guilty (Culled & Wilcox, 2010).
Lastly, Culled and Wilcox (2010) argue there may be pressure from the company to make refits or be successful in some matter that may present opportunities to commit an offence, as well, they caution that past behavior also matters because employees who have broken the law in the past are likely to do it again. Best Practices in Fraud Corruption Prevention According to Lou (2004), the ethics and integrity of management and employees are the foundation of a control system.
He further states that major frauds occur due to managers that lack ethics and integrity, and employees who fear losing their jobs if they did not comply with mangers’ requests. Avon (2008) states that to manage the cost of fraud requires the roper implementation of an effective and visible anti-fraud program, which identifies the fraud risk. This must be balanced out with the internal controls to manage this cost.
As outlined in the previous section by the CIA (2015) and Scarring (201 2), the COOS frameworks components present an effective model to limit fraudulent activity. This framework focuses on the principles of creating a culture of honesty and high ethics, and evaluating antiradar processes and controls with the appropriate oversight process (Avon, 2008) Fraudulent activities can be caused by two mechanisms: First, is he corporate structure in regards to tasks, responsibilities, rules, and producers.
Secondly, the corporate culture which relates to ideas, expectations, values, visions and customs (Lou, 2004). Lou (2004) further States that the organization provides some rationalizations that lead to fraudulent activities because there is a belief that the activity is in range of ethical and legal limits, it is in the best interest of the corporation and it will not be discovered. Hansen (2010) discusses anti-corruption at the organizational level is institutionalized through an organizational architecture, which is composed of culture, structure, and system.
An effective organizational architecture seeks intended results in education, detection and deterrence, through interlaced corporate culture, organizational structure and compliance system. According to Avon (2008), organizational architecture should be tailored to fit an organization’s specific needs and circumstances that improve firm performance. This can result in bringing an organization’s decisions and actions together with societal expectations, sharpens the organization’s governance, transparency and accountability, while boosting employee morale, business confidence and the overall reputation of the corporation (Avon, 2008). Ultimately, this can help guide managers to make day to day decisions (Lou, 2004) Lou (2004) states that corporate culture sets the moral tone for an organization, and can be defined as the statements, visions, customs, values, and role models. He further states that the visions and commitments from leadership can play a significant role in reducing corruption. Leadership that performs ethically sets the moral standards for an organization by focusing on integrity, and can be considered role models hat lead the anti-corruption efforts (Lou, 2004).
Hansen (2010) states that apart from structural formalization to educate, detect and deter, an organization may also establish an anti-corruption committee and select a corporate compliance officer within an existing structure to better deter corruption. The committee or officer can play key roles in drafting codes of conduct, and educating and training employees on compliance procedures. Furthermore, transparency throughout the entire organizational structure is a condition to reduce the potential for illicit dealings.
Record-keeping and porting are procedures that the organization can use to document key aspects of its compliance effort and to monitor its program for effectiveness (Hansen, 2010). According to Avon (2008), a good communications effort can build employee confidence, and the organization will not retaliate against whistle-blowers. As well, an organization should ensure that all employees understand that failure to adhere with its anti-corruption policy and procedures will result in disciplinary action (Hansen, 2010).
Lastly, Mackey (2008) discusses the purpose of corporate governance as a method to persuade, induce, and motivate corporate managers to keep the remises they make to investors by reducing any actions by management or directors that go against the investment-backed expectations of investors. Therefore, good corporate governance is about keeping promises and bad corporate governance is corporate deviance that exhibits promise-breaking behavior (Mackey, 2008). Action Plan The CIA (2015) provides a great framework that should be followed in order to initiate and monitor an anti-fraud program.
These basic elements can be found under the aforementioned “Risk Analysis” section previously. In general, the organizational infrastructure must be assessed, as it defines the susceptibilities of managers and employees, setting limits of authority and proper segregation of duties, such as detailed job descriptions (Avon, 2008). A control framework should then be implemented that includes policies and procedures that provide the definition of the scope and activities of organizational functions, which include the communication and relationships internally and externally throughout the organization (Avon, 2008).
As stated in the previous section, a key to integrity and ethical behavior in the company starts from the top down, and leadership that acts as role models an significantly reduce corruption (Lou, 2004). Due diligence is essential to ensure that anti-corruption processes are efficient and effective to prevent potential harm to the organization’s reputation, and additional ethical practices should include formal procedures for evaluating ethical and legal performance, while rewarding Or punishing certain behavior (Hansen, 2010).