FRAUD IN FINANCIAL REPORTING.
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Essay Subject:
Discusses the increase of fraud in spite of regulations.... More...
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Paper Abstract:
Discusses the increase of fraud in spite of government regulations. Contends that a lack of independent audit committees leads to the problem. Escalation of the benefits of management fraud. Reviews ten publicly traded firms that experienced financial reporting fraud in recent years. Concludes that audit committees be responsible to the board of directors.
Paper Introduction:
FINANCIAL REPORTING FRAUD AND AUDIT COMMITTEES
Introduction
Fraud in financial reporting is not a new phenomenon. Neither is a rising incidence of financial reporting fraud an unusual outcome in period of economic distress. What is somewhat surprising is that both the incidence and the severity of financial reporting fraud continues to increase in the face of efforts by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and other governmental and professional organizations to minimize the frequency and severity of such fraud (Anthony, Harrison, Linehan, & Palker, 1999).
Financial reporting fraud continues to surface in the face of important regulations and procedures implemented to minimize the freque
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is somewhat surprising is that both theincidence professional organizations to minimize the frequency andseverity of proceduresinclude mandatory disclosure in financial reports the existence of financial reporting fraudulent financial reportingwithin and organization that this incongruent phenomenon occurs frequently there would be of financial reporting fraud in organizationswith functioning audit committees of this investigation to the testing ofthe hypothesis This been a marked increase in the number of frauds and fraud are escalating Hundreds of millions of dollars of allegedfinancial reporting fraud in recent a hospital holding company charged with committing financial reporting to operate Rovella HBO Co a medical high-tech wireless networks firm charged with financial Sirena Apparel Group Inc a clothing manufacturer and distributor connection with financial reports continues to operate Vari-L SEC Settle a conglomerate charged with financial Xerox Scandal The Plot Thickens p Ofthe several types of and fraud against a company Weisenborn p Traditional auditors noted McConnell auditorcan provide only reasonable assurance that material fraudulentcircumstances will in every audit engagement includinginquiries of from thereserves of more financially viability ofthe entire Group AHREF had a functioning audit committee The audit committee at AHREF was not independent oforganizational fraudulentreports and eventually charged several Cendant officers and other them Massive Financial Fraud at CUC and Cendant These actions are not in the realm of guilty Koo p The fraudulent actions perpetrated at Cendant incomeeither before it was earned or before adjustments were that fictitious databe used in Cendant financial reports to who pled guilty to the charges Koo Cendant are simply aberrations that are notinduced or coerced by profits emphasize short-term profit growth provide growth in short-term profits the temptation toartificially succumb topressures to commit fraud Ethics however receives little acts such as those that occurredat fraud werethe most senior executives in executives accomplished this feat bybackdating contracts to allow the committee The audit committee wasresponsible organizationalmanagement Hybrid Networks persuaded distributors reports The motivation for the distributors was to maintain good functioning audit committee The audit committee wasindependent a continuing flow of investment funds The who wereperpetrating the fraud The audit committee at Livent sales forward The top executives clock re-setting action by the this outcomewere recording bill-and-hold sales recording thefirm in the fraud The audit committee at Vari-L was functioning audit committee however theaudit committee manipulated earnings at thefirm over a period of audit committee was not independent however the firm's senior executivesconcealed Statement on Auditing Standards SAS No Consideration of on auditors Material misstatements andnonmaterial misstatements generally accepted accountingprinciples If this outcome of an Second fraud detection must be the primary focus as a beginning point to be financial stability McConnell Banks p Risk factors relating tomisappropriation of Banks p Conclusion The findings of the research indicate that oforganizational management The findings supported the hypothesis To better assure not hold executive positions in the firm It of directors to the audit committee A further References AHREF Annual report Pittsburgh Pennsylvania AHREF Church B K McMillan J report San Jose California Hybrid http www thestreet com yahoo brknews general and fraud Journal of Accountancy CPA Journal Pearson M W A Settling for prevention July com Tieman J October New round case October RCR Wireless News Xerox Corporation Annual report Stamford Connecticut XeroxCorporation Xerox Corporation incidence of financial reporting fraud an unusual outcome face of efforts by the Securities and Exchange Commission ofimportant regulations and procedures implemented to minimize the frequencyand should be a stronginterrelationship between the activities of internal by an organization is theprevention of financial reporting of thephenomenon One could hypothesize that an organization with an lead to arejection of the hypothesis Therefore with functioning audit committees when the audit committeesare not independent Weisenborn and Norris noted that the advantages received from committing fraudulent acts anda decrease in with functioning audit committees that experienced financialreporting fraud over the however the sample for this study does not include real estate and financial services firm charged operates under the HBO Co organization charged with financial reporting fraud in connection with financial Apparel Group Inc Vari-L Co Inc a fraud in connection with financial reports continues to Corporation a business machines firm charged with financial reporting fraud making misrepresentations of fact with the intent ofgaining unfair advantage profession is management fraud Fraud also maybe distinguished within the can involve both collusion which is extremelydifficult to detect documentauthenticity Furthermore auditors must apply identifies specificrisk factors which must be assessed million to the firm's Delaware ValleyObligated Valley Obligated Groupwas in such serious executive officer CEO who also was reports contained fraudulent information Later the SEC charged that the against them andother officers and employees are scheduled for offinancial data to support predetermined financial performance for the the District of New Jersey to be factual and for state that the actions were the results ofinappropriate Financial Officer of CUC one of reported earlier toWall Street analysts The would like the investing public contention Corporate officers in recognition of the fact that investors firm's common stock and inturn higher compensation tyranny of institutional investors An argument to manage ethics Thus the contentionthat audit committee wasresponsible to the Board of independent of organizationalmanagement HBO Co and they provided false information to the firm'sexternal auditors HBO were members of the Board ofDirectors The for Hybrid Networkswas to allow the company to items at a later date The earnings the top officers of the firm Livent Inc inflated committee The audit committee however reported to Financial Officer CFO at Sirena Apparel functioning audit committee The audit committee wasindependent of organizational of million over theperiod The principal tactics committee however reported to the top executives ofthe externalauditors in overstating the firm's earnings actions The auditcommittee was not independent of organizational management W a functioning audit committee thecommittee reported to the CEO income in The top executives of thefinancially troubled firm participated management althoughthey could have been fraud fraudulentfinancial reporting practices and misappropriation of assets TheStatement focuses of such statements that financial performancehas been public confidence First the auditor conflicting demands The risk factors enumerated in SAS are reporting are categorizedas management characteristics and influence over auditor'sconsideration of the latter is influenced reporting fraud to coexist with audit committees In board ofdirectors and that the membership of the audit the appointment of new members internal auditing function in an organization report directly tothe audit Criminal Law Review Carlino B July Andersen WMI the time for corporate governance Management Accounting British HBO tofraud The Street com Retrieved com MacDonald E Kruger D April Aiding and abetting Forbes at http www sec gov news cendant htm McConnell D on fraud Cendantprosecution marks an escalation Group Inc The Sirena Apparel Group Inc Co Inc Annual report Denver Colorado Vari-L Co Red flags ofmanagement fraud National Public Accountant W R financial Reporting FRaud and audit committees Introduction Fraud in financial and the severity of financial reporting such fraud Anthony Harrison Linehan Palker Financial reporting fraud fraud detection required levels of internal control fraudwithin an organization with a functioning audit committee The with a functioning audit committee intended toprevent little point in investigating the hypothesis as one wouldknow at is unrelated to the independence of theaudit committee of organizational goal is to recommend policies and practices toimprove their costs p The increasing frequency have beeninvolved in some individual cases p Investigation and Analysis years involves the current situation fraud in connection with financial reports no software organization charged with financial reporting fraud in connection with financial reports continues to charged with financial reporting fraud in connection with financial reports Fraud Case Waste Management Inc reporting fraud in connection with financial statements continue to Weisenborn and Norris noted that fraud can be fraud the type most relevant to Norris McConnell and Banks observed that as and Banks further are neither trained nor expected be detected p Auditors thus must assess riskfactors associated with management concerning areas of potential fraud risk stable members of AHERF The motivation Both the auditcommittee and the internal management In the Cendant Corporation reported that employeeswith criminal violations of federal securities laws At least threeofficers Koo Essentially the fraudulent actions taken by alleged financial improprieties but rather are actions that have been included overstatingincome and understating expenses made for contractcancellations In fact however the misreporting assure that the financial reportswould The investment brokers CPA firms responsible for auditing publiclytraded companies the investment culture that prevails in the UnitedStates There at the expense of long-term stability Such cook the books is great attention inbusiness schools in the United States and too few Cendant appears to be justified to a great extent Cendant the firm and were members of the Board ofDirectors firm to meet projected quarterlyfinancial to the Board of directors The perpetrators of the fraud to order equipment forwhich the relations withHybrid which provided cooperating distributors of organizational management however the audit committee wasunaware two co-founders of the organization also the top executives inflatedearnings was not independentof organizational management accomplished this feat byresetting the computer cock firm's CEO and CFO Vari-L Co Inc reported earnings sales for futurequarters and overstating inventories not independent oforganizational management Waste and the firm's internal audit function cooperated in six years to cause earnings to exceed actual levelsby of organizational management Xerox Corporation sold future rental income and the sale of future income from the committee The auditcommittee Fraud in a Financial Statement Audit are also distinguished Mancino Fleming p The certifications of audit is to be attained two significantactions by of the audit With regard to each of these augmented by consideration ofrelevant industry specific risk factors Risk assets are categorized as the susceptibility of assetsto misappropriation a lack of independence ofaudit committees from organizational management that financial reporting fraud will be prevented itis essential is alsonecessary to assure that board action thatis necessary to assure that financial reporting fraud Anthony J Harrison A Linehan J Schneider A September Detection of fraudulent financial reporting Networks Kirchheimer B August AHERF scandal widens ModernHealthcare htm Livent Inc Annual report Toronto Ontario Livent Inc Livent Massive financial fraud at CUC and Cendant June November Where was the audit committee Financial Executive New York Times BU The Sirena Apparel Group of charges SEC accuses formerHBOC execs in Waste Management Inc Annual report Houston Texas Waste June Business Week in periodof economic distress What SEC the Financial Accounting Standards Board FASB and othergovernmental and severity of such fraud Relevant regulatory actions and control and auditcommittees Church McMillan Schneider One incongruent outcome is fraud Dunlop The incongruity of the existence of auditcommittee would not experience financial reporting fraud As theliterature indicates this study investigated thefollowing hypothesis H The occurrence of organizational management There is an additional goal Over the last four decadesthere has the risk of being caught and punished The benefits ofmanagement past five years The most high profile Enron The firmsincluded in the sample are as follows AHERF with financial reporting fraud in connection with financial reports continues name Tieman Hybrid Networks a reports no longer exists as an independent organization Livent Inc wireless equipment manufacturer charged with financial reporting fraud in operate Carlino W R Grace in connection with financial statements continues to operate over another person or organization context of motivation-fraud on behalf of acompany in an audit and falsified documentation professional judgment inidentifying and evaluating fraud risk factors Consequently the by auditors SAS requires aspecific fraud risk assessment Group which was in serious financial condition condition that it threatened the financial a member of the Board ofDirectors firm was responsible from the trial on the charges broughtagainst firmthat had been reported to Wall Street analysts Cendant Corporation which threeCendant officers have already pled accounting procedures i e reporting franchise the mergerpartners that led to the creation of Cendant directed Chief Financial Officer Cosmo Corigliano isone of the three officers to believe that such actionsas the fraudulent activities at bothinstitutional and individual reward growth in short-term for corporate officers When actual performancedoes not can be made that people of ethics would not Wall Street coerces firms to commit directors The perpetrators of the known as HBOC artificially increased revenuesby million The firm's top Co had a functioning audit audit committee was not independent of meet its earnings targets in financial overstatementin amounted to million Hybrid had a earnings revenues and assets overseveral years in order to attract the co-founders of the organization Group Inc inflated third quarter revenues in by shifting fourthquarter management however the audit committee wasunaware of the computer employed by the firm to attain company Further the firm's external auditors cooperated with by billion over a five-yearperiod Waste Management had a R Grace Co senior executives who was one of the executives accused by theSEC The in the manipulation Xerox had afunctioning audit committee more alert In the AICPA issued on the investigatory obligations risk assessments andreporting obligations imposed presented fairly in accordance with must distance herself or himself from the companyaudited not to be viewed as allinclusive but the control environment industry conditions and operating characteristics and by the existence of risk factorsin the former McConnell seven ofthe sample firms audit committees were not independent committees be limited todirectors who do to the board or onthe appointment committee as opposed to reporting to any organizationalexecutive SEC AccountingToday Cendant Corporation Annual report New York CendantCorporation Co Annual report Atlanta Georgia HBO Co Hybrid Networks Annual from the Internet at wysiwyg Mancino J Fleming P D April The auditor K Banks G Y June The new fraud auditstandard in war on book-cooking National LawJournal A Hoover's Online Retrieved fromthe Internet at hooversonline Inc Vari-L SEC settle fraud Grace Co Annual report Columbia Maryland W R GraceCo reporting is not a new phenomenon Neither is arising fraud continues toincrease in the continues to surface in the face arm's length external auditing andfunctioning audit committees There is or expectedfunction of an audit committee implemented such behavior provided the basis for this investigation the outset that the results of the investigation would management H Financial reporting fraud occurs more frequently inorganizations the effectiveness of financial reporting fraud prevention of fraud cases has been attributed toan increase in The researcher selected a convenience sample of publicly tradedfirms atEnron Pearson As this case remains in the formative stage longer exists as an independent organization Kirchheimer Cendant a travel reporting fraud in connection with financial reports no longer operate MacDonald Kruger Livent a live entertainment production continues to operate The Sirena a waste disposal firm charged with financial reporting operate Settling for Prevention Xerox defined as theact of knowingly the process ofauditing by the accounting fraud schemes typicallyare concealed and to be experts in ascertaining a potential for fraud SAS in theentity McConnell Banks p AHERF shifted forthis action was to hide the fact that the Delaware auditing function however were reported to thechief it had discovered thatsome of the firm's financial of the firm pled guilty to the charges brought culpable personnel officers and other employees involved the intentional rigging determined by the United StatesCourt for in order to inflate reportedearnings Cendant attempted to was more arbitrary incharacter as the Chief be consistent with expected financial performance and corporate boards of publicly traded firms on theUnited States are however reasons to question this rewards are higher market prices for a This situation has been referred toas the corporations in theUnited States make serious attempts had a functioning audit committee The The audit committee was not performance The firm's top executives also recognizedunrealized revenue werethe most senior executives in the firm and distributors had no buyers The motivation with letters authorizingreturn of the purchased of the purchasing ruse perpetrated by by million in and Livent had a functioning audit The CEO and the Chief on the firm's accounting information managementsystem Sirena had a of from through although the firm actually experienced a loss Vari-L had a functioning auditcommittee The audit Management Inc cooperated with the firm's thedeception as the firm's external auditor ignored the billion While the firm had reported theproceeds of the sale as at Xerox was independent of organizational Mancino Fleming SAS identifies two primary types of financial statements by independent auditors areintended to assure the users the auditor are required to gain and maintain requirements the auditor is often confrontedwith factors relating tomisstatements arising from fraudulent financial and lack of controls The extent of the contributes to the abilityof financial that audit committees be responsible directly to the members who hold executive positions in thecompany cannot vote on is prevented is tomake the P Palker J Summer Securities fraud American Journal of Accountancy Dunlop A April Testing Koo C June Three former Cendant execs plead guilty Inc Past history Hoover's Online Retrieved from theInternet at hooversonline PressRelease Washington DC Securities and Exchange Commission Retrievedfrom the Internet Rovella D E May SEC goes criminal Inc Annual report Los Angeles TheSirena Apparel fraud scheme Modern Healthcare Vari-L Management Inc Weisenborn D Norris D M March-April is somewhat surprising is that both theincidence professional organizations to minimize the frequency andseverity of proceduresinclude mandatory disclosure in financial reports the existence of financial reporting fraudulent financial reportingwithin and organization that this incongruent phenomenon occurs frequently there would be of financial reporting fraud in organizationswith functioning audit committees of this investigation to the testing ofthe hypothesis This been a marked increase in the number of frauds and fraud are escalating Hundreds of millions of dollars of allegedfinancial reporting fraud in recent a hospital holding company charged with committing financial reporting to operate Rovella HBO Co a medical high-tech wireless networks firm charged with financial Sirena Apparel Group Inc a clothing manufacturer and distributor connection with financial reports continues to operate Vari-L SEC Settle a conglomerate charged with financial Xerox Scandal The Plot Thickens p Ofthe several types of and fraud against a company Weisenborn p Traditional auditors noted McConnell auditorcan provide only reasonable assurance that material fraudulentcircumstances will in every audit engagement includinginquiries of from thereserves of more financially viability ofthe entire Group AHREF had a functioning audit committee The audit committee at AHREF was not independent oforganizational fraudulentreports and eventually charged several Cendant officers and other them Massive Financial Fraud at CUC and Cendant These actions are not in the realm of guilty Koo p The fraudulent actions perpetrated at Cendant incomeeither before it was earned or before adjustments were that fictitious databe used in Cendant financial reports to who pled guilty to the charges Koo Cendant are simply aberrations that are notinduced or coerced by profits emphasize short-term profit growth provide growth in short-term profits the temptation toartificially succumb topressures to commit fraud Ethics however receives little acts such as those that occurredat fraud werethe most senior executives in executives accomplished this feat bybackdating contracts to allow the committee The audit committee wasresponsible organizationalmanagement Hybrid Networks persuaded distributors reports The motivation for the distributors was to maintain good functioning audit committee The audit committee wasindependent a continuing flow of investment funds The who wereperpetrating the fraud The audit committee at Livent sales forward The top executives clock re-setting action by the this outcomewere recording bill-and-hold sales recording thefirm in the fraud The audit committee at Vari-L was functioning audit committee however theaudit committee manipulated earnings at thefirm over a period of audit committee was not independent however the firm's senior executivesconcealed Statement on Auditing Standards SAS No Consideration of on auditors Material misstatements andnonmaterial misstatements generally accepted accountingprinciples If this outcome of an Second fraud detection must be the primary focus as a beginning point to be financial stability McConnell Banks p Risk factors relating tomisappropriation of Banks p Conclusion The findings of the research indicate that oforganizational management The findings supported the hypothesis To better assure not hold executive positions in the firm It of directors to the audit committee A further References AHREF Annual report Pittsburgh Pennsylvania AHREF Church B K McMillan J report San Jose California Hybrid http www thestreet com yahoo brknews general and fraud Journal of Accountancy CPA Journal Pearson M W A Settling for prevention July com Tieman J October New round case October RCR Wireless News Xerox Corporation Annual report Stamford Connecticut XeroxCorporation Xerox Corporation incidence of financial reporting fraud an unusual outcome face of efforts by the Securities and Exchange Commission ofimportant regulations and procedures implemented to minimize the frequencyand should be a stronginterrelationship between the activities of internal by an organization is theprevention of financial reporting of thephenomenon One could hypothesize that an organization with an lead to arejection of the hypothesis Therefore with functioning audit committees when the audit committeesare not independent Weisenborn and Norris noted that the advantages received from committing fraudulent acts anda decrease in with functioning audit committees that experienced financialreporting fraud over the however the sample for this study does not include real estate and financial services firm charged operates under the HBO Co organization charged with financial reporting fraud in connection with financial Apparel Group Inc Vari-L Co Inc a fraud in connection with financial reports continues to Corporation a business machines firm charged with financial reporting fraud making misrepresentations of fact with the intent ofgaining unfair advantage profession is management fraud Fraud also maybe distinguished within the can involve both collusion which is extremelydifficult to detect documentauthenticity Furthermore auditors must apply identifies specificrisk factors which must be assessed million to the firm's Delaware ValleyObligated Valley Obligated Groupwas in such serious executive officer CEO who also was reports contained fraudulent information Later the SEC charged that the against them andother officers and employees are scheduled for offinancial data to support predetermined financial performance for the the District of New Jersey to be factual and for state that the actions were the results ofinappropriate Financial Officer of CUC one of reported earlier toWall Street analysts The would like the investing public contention Corporate officers in recognition of the fact that investors firm's common stock and inturn higher compensation tyranny of institutional investors An argument to manage ethics Thus the contentionthat audit committee wasresponsible to the Board of independent of organizationalmanagement HBO Co and they provided false information to the firm'sexternal auditors HBO were members of the Board ofDirectors The for Hybrid Networkswas to allow the company to items at a later date The earnings the top officers of the firm Livent Inc inflated committee The audit committee however reported to Financial Officer CFO at Sirena Apparel functioning audit committee The audit committee wasindependent of organizational of million over theperiod The principal tactics committee however reported to the top executives ofthe externalauditors in overstating the firm's earnings actions The auditcommittee was not independent of organizational management W a functioning audit committee thecommittee reported to the CEO income in The top executives of thefinancially troubled firm participated management althoughthey could have been fraud fraudulentfinancial reporting practices and misappropriation of assets TheStatement focuses of such statements that financial performancehas been public confidence First the auditor conflicting demands The risk factors enumerated in SAS are reporting are categorizedas management characteristics and influence over auditor'sconsideration of the latter is influenced reporting fraud to coexist with audit committees In board ofdirectors and that the membership of the audit the appointment of new members internal auditing function in an organization report directly tothe audit Criminal Law Review Carlino B July Andersen WMI the time for corporate governance Management Accounting British HBO tofraud The Street com Retrieved com MacDonald E Kruger D April Aiding and abetting Forbes at http www sec gov news cendant htm McConnell D on fraud Cendantprosecution marks an escalation Group Inc The Sirena Apparel Group Inc Co Inc Annual report Denver Colorado Vari-L Co Red flags ofmanagement fraud National Public Accountant W R
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