Brennan, Niamh M. and McGrath, Mary [2007] Financial Statement Fraud: Incidents, Methods and Motives, Australian Accounting Review, 17 (2) (42) (July): 49-61.
This document summarizes a research paper that studied 14 cases of financial statement fraud from the US and Europe. It found that senior management was usually responsible, and the most common method of fraud was recording false sales to meet external earnings forecasts. Fraud was typically discovered by management, either existing or new management taking over.
This literature review is organized in five sections. Firstly, we begin with general ideas and continue with the origin of the fraudulent. Secondly, we discuss the struggle of the phenomena, insisting on the available mechanisms. Finally, we’ll discuss the link between audit and fraud.
Fraud: Understanding Fraud and Our ResponsibilitiesJason Lundell
This document discusses various types of fraud, famous fraudsters, how fraud is detected, and ways to prevent fraud. It provides details on common fraud schemes like asset misappropriation, corruption, and financial statement fraud. The largest fraudsters discussed are Bernie Madoff, whose Ponzi scheme resulted in $65 billion in losses, and Ken Lay of Enron, which led to a $100 billion loss for investors. Fraud is most often detected through tips, internal controls, and audits. Strong internal controls like surprise audits and job rotation were found to significantly reduce median fraud losses.
The document discusses fraud awareness for managers. It defines fraud and provides examples of regulatory definitions. It outlines factors that can contribute to fraud such as lack of controls and management oversight. The document emphasizes the importance of prevention through controls and establishes tone at the top. It lists behavioral and other red flags that could indicate fraud.
The document discusses the fraud triangle theory developed by Cressey which describes three factors that can lead to fraud - perceived pressure, perceived opportunity, and rationalization. It also discusses the legal elements of fraud, common fraud schemes such as asset misappropriation and corruption, the role of fraud examination in corporate governance, occupational fraud, how an employee's position relates to theft levels, and challenges of collusion. Different types of banks are also identified such as commercial banks, savings banks, offshore banks, and central banks.
This document discusses computer fraud and the fraud process. It begins by introducing the chapter topics which include what fraud is, who commits fraud and why, what is computer fraud and its forms, approaches to committing computer fraud, and ways to deter and detect it. It then discusses the fraud process and types of fraud perpetrators, known as white-collar criminals. Researchers have found few psychological differences between white-collar criminals and the general public. The document also introduces the fraud triangle of pressure, opportunity, and rationalization to explain why people commit fraud. Common pressures include financial problems and fear of status loss.
This document discusses different types of employee and management fraud and internal controls to prevent fraud. It defines employee fraud as theft of company assets by non-management employees who bypass internal controls. Management fraud is more dangerous as it often involves falsifying financial statements and can damage a company before being detected. The document also outlines guidelines for strong internal controls, including clear responsibilities, routine procedures, separating duties, and numbered documents. It describes the relationship between accounting systems and internal controls, with each relying on the other to ensure reliable accounting data and compliance.
Presentation Fraud Prevention and Financial ControlsSarai Johnson
This document discusses fraud prevention and financial controls for nonprofits. It outlines common types of fraud like skimming, purchasing fraud, and financial reporting fraud. It also identifies issues that make nonprofits susceptible to fraud, such as informality, lack of awareness, and unwillingness to discuss risks. The document then explains the five components of internal controls according to COSO: control environment, risk assessment, control activities, information/communication, and monitoring. It provides examples of control policies and procedures within each component. Finally, it discusses the role of an assessor in evaluating a nonprofit's awareness of fraud risks and internal controls. The assessor should ask about audits, policies, procedures, and symptoms to assess fraud potential.
This literature review is organized in five sections. Firstly, we begin with general ideas and continue with the origin of the fraudulent. Secondly, we discuss the struggle of the phenomena, insisting on the available mechanisms. Finally, we’ll discuss the link between audit and fraud.
Fraud: Understanding Fraud and Our ResponsibilitiesJason Lundell
This document discusses various types of fraud, famous fraudsters, how fraud is detected, and ways to prevent fraud. It provides details on common fraud schemes like asset misappropriation, corruption, and financial statement fraud. The largest fraudsters discussed are Bernie Madoff, whose Ponzi scheme resulted in $65 billion in losses, and Ken Lay of Enron, which led to a $100 billion loss for investors. Fraud is most often detected through tips, internal controls, and audits. Strong internal controls like surprise audits and job rotation were found to significantly reduce median fraud losses.
The document discusses fraud awareness for managers. It defines fraud and provides examples of regulatory definitions. It outlines factors that can contribute to fraud such as lack of controls and management oversight. The document emphasizes the importance of prevention through controls and establishes tone at the top. It lists behavioral and other red flags that could indicate fraud.
The document discusses the fraud triangle theory developed by Cressey which describes three factors that can lead to fraud - perceived pressure, perceived opportunity, and rationalization. It also discusses the legal elements of fraud, common fraud schemes such as asset misappropriation and corruption, the role of fraud examination in corporate governance, occupational fraud, how an employee's position relates to theft levels, and challenges of collusion. Different types of banks are also identified such as commercial banks, savings banks, offshore banks, and central banks.
This document discusses computer fraud and the fraud process. It begins by introducing the chapter topics which include what fraud is, who commits fraud and why, what is computer fraud and its forms, approaches to committing computer fraud, and ways to deter and detect it. It then discusses the fraud process and types of fraud perpetrators, known as white-collar criminals. Researchers have found few psychological differences between white-collar criminals and the general public. The document also introduces the fraud triangle of pressure, opportunity, and rationalization to explain why people commit fraud. Common pressures include financial problems and fear of status loss.
This document discusses different types of employee and management fraud and internal controls to prevent fraud. It defines employee fraud as theft of company assets by non-management employees who bypass internal controls. Management fraud is more dangerous as it often involves falsifying financial statements and can damage a company before being detected. The document also outlines guidelines for strong internal controls, including clear responsibilities, routine procedures, separating duties, and numbered documents. It describes the relationship between accounting systems and internal controls, with each relying on the other to ensure reliable accounting data and compliance.
Presentation Fraud Prevention and Financial ControlsSarai Johnson
This document discusses fraud prevention and financial controls for nonprofits. It outlines common types of fraud like skimming, purchasing fraud, and financial reporting fraud. It also identifies issues that make nonprofits susceptible to fraud, such as informality, lack of awareness, and unwillingness to discuss risks. The document then explains the five components of internal controls according to COSO: control environment, risk assessment, control activities, information/communication, and monitoring. It provides examples of control policies and procedures within each component. Finally, it discusses the role of an assessor in evaluating a nonprofit's awareness of fraud risks and internal controls. The assessor should ask about audits, policies, procedures, and symptoms to assess fraud potential.
It is all about social and professional issues in computing.In today's era its really important to understand how a fraud happens.The presentations also helps to differentiate between fraud and embezzlement.Categories of frauds are also available in this section.
White paper on fraud detection with acl (send afterwards)~9sumitrarrc
This document discusses fraud detection and prevention through transactional analysis. It outlines the challenges of fraud management, including large data volumes, complex systems, and evolving fraud schemes. Traditional fraud detection methods like internal controls and audits are reactive and often detect fraud long after the fact. The document advocates for continuous transaction monitoring using data analytics software. This allows comparing data across systems, testing transactions against fraud indicators, and detecting fraud earlier to prevent greater losses. While powerful, challenges include the effort to extract and compare data from multiple systems and developing flexible analytics.
This document proposes a new framework called the "fraud evasion triangle" to explain why fraud is difficult to detect in today's business environment. It identifies three key factors that obstruct fraud detection: 1) Crafty perpetrators who are knowledgeable about the business and take steps to commit fraud without getting caught; 2) Dependent internal auditors who lack independence, proper training, and experience to detect complex fraud schemes; and 3) Limitations in external audits which are not specifically designed to detect fraud and rely on management assertions. The document argues that understanding these obstructing factors is important to developing new approaches to combat fraud. It proposes solutions like limiting senior executive tenure, encouraging whistleblowing, improving corporate culture, and increasing fraud
Financial scams are caused by corruption, lack of employment opportunities, electing dishonest leaders, and lack of oversight to prevent bribery. They negatively impact the Indian economy by potentially putting employees out of work, raising inflation, and causing shareholders to overpay for investments. To minimize scams, people should seek honest professionals, raise awareness, elect ethical leaders, and create independent oversight organizations.
company names mentioned herein are for identification and educational purposes only and are the property of, and may be trademarks of, their respective owners.
Most companies have ethics and compliance policies in place and those policies usually include training for employees. That training typically includes material about policies prohibiting discrimination and harassment, bribery and excessive gift-giving. But it usually does not teach employees how to recognize signs of fraud and how to report them.
Employee fraud awareness training is one of the most important ways your company can protect itself from fraud which, according to the Association of Certified Fraud Examiners, costs the average company five per cent of its revenues every year.
Fraud Risk Management | Fraud Risk Assessment - EY IndiaErnst & Young
Check out the edition of fraud risk management & fraud risk assessment understanding the client's organizational structure & business environment. For more details, visit http://bit.ly/1RtohKr.
1) The document discusses fraud deterrence, which aims to proactively identify and remove factors that enable fraud through improving organizational procedures and culture.
2) It defines fraud deterrence as preventing fraud by analyzing conditions and procedures that could enable fraud in the future and reducing related risks.
3) The document outlines the five components of the COSO internal control model that provide a foundation for fraud deterrence by limiting fraud opportunity factors - control environment, risk assessment, control activities, information and communication, and monitoring.
This document provides biographies of the authors of a book on internal audit and fraud prevention. It introduces John Milner, Martin Ghirardotti, Enrique Pastor, and Miguel del Olmo, who have extensive experience in fields including internal audit, risk evaluation, fraud prevention and detection, and corporate governance. They have worked with companies and organizations in countries like Ireland, Argentina, Mexico, the United States, South Africa, and throughout Latin America. The document establishes the authors' expertise on the topic which will be covered in the book.
This document summarizes a study that aimed to develop a model for detecting false financial statements using published data from Greece. The study analyzed 76 firms, including 38 with false financial statements and 38 without, looking at 10 financial ratios as potential predictors. Using logistic regression, the study developed a model based on five variables - inventory to sales ratio, total debt to total assets ratio, working capital to total assets ratio, net profit to total assets ratio, and a financial distress score - that could accurately classify firms as having false financial statements or not with over 84% accuracy. The model provides a method for auditors, tax authorities, and others to detect potential false financial statements.
The document defines fraud and discusses its different types. It describes fraud as theft by deception or trickery to obtain an unjust advantage. The main types are occupational fraud committed by employees against an organization, and fraud committed for an organization like financial statement fraud. Employee embezzlement, vendor fraud, and customer fraud are provided as examples of fraud against an organization. Management fraud committed through misleading financial statements can harm shareholders and investors. Criminal prosecution through law and civil lawsuits aim to punish fraudsters and compensate victims.
The document discusses red flags that can indicate the presence of fraud. It defines fraud and explains the fraud triangle of opportunity, pressure, and rationalization. It provides examples of general red flags related to employees and management. Specific red flags are given for cash/accounts receivable, payroll, and purchasing/inventory. Common types of fraud like lifestyle fraud and financial statement fraud are also summarized. The document stresses the importance of recognizing and investigating red flags instead of ignoring them.
Fraud and Internal Controls: A Forensic Accountant's Perspective - Bill AcuffDecosimoCPAs
The document discusses fraud risks and provides examples of fraud cases. It discusses key steps to manage fraud risks including governance, risk assessment, prevention, detection, deterrence and response. It then summarizes several high-profile fraud cases including Rita Crundwell who embezzled $53 million from her small town as controller over 20 years through lack of segregation of duties and extravagant lifestyle. The document outlines common fraud schemes and techniques based on research from COSO and the ACFE. It discusses Donald Cressy's fraud triangle of perceived opportunity, incentive/pressure, and rationalization driving fraud. Finally, it provides charts on common financial statement fraud techniques and the distribution of fraud by category and median losses.
Fraud management in ten minutes presentationWarren Park
This document provides guidance on countering fraud by understanding the fraud triangle of motive, opportunity, and rationalization. It discusses relevant UK laws, common fraud terms, and strategies for reducing fraud risk such as implementing controls, promoting the right culture and attitudes, and addressing employee motives and pressures through open communication and support. The overall approach is to disrupt the conditions within the fraud triangle.
This document outlines 6 main indicators of fraud: accounting anomalies, internal control symptoms, analytical symptoms, lifestyle symptoms, behavioural symptoms, and tips/complaints. It provides examples for each indicator and explains that combining information from all categories enhances fraud detection capabilities. Vigilance is needed as fraud symptoms often go unnoticed or unpursued.
The document discusses fraud symptoms and red flags that may indicate fraud. It notes that fraud can involve irregularities in source documents, faulty journal entries, or inaccuracies in ledgers. Internal control weaknesses like a lack of segregation of duties or physical safeguards are also red flags. Some common fraud schemes discussed include fraudulent financial reporting through falsifying accounting records or misstating financial statements. The document also outlines protections for whistleblowers and the importance of internal controls for fraud prevention and detection.
This document examines fraud prevention and internal controls in the Nigerian banking system. It uses both primary and secondary data to analyze the effectiveness of internal controls and identify factors that influence fraud. The primary data uses questionnaires from four banks to test how separation of duties, monitoring, and staff qualifications impact internal controls. The secondary data uses bank profit, regulation, technology, and M2 levels to further explore their impact on actual losses, weighted losses, and percentage increases in losses. Regression analysis is used to analyze the relationships between these factors. The results show that internal controls are effective against fraud but not all staff commit to them fully. The secondary data supports and expands on this by showing M2 levels, staff qualifications and technology have significant impacts across
This document analyzes different fraud theories - the fraud triangle, fraud diamond, and fraud pentagon - and their ability to detect corporate fraud in Indonesia. It reviews the literature on each theory and their components (pressure, opportunity, rationalization, capability, arrogance). The study uses secondary data from 310 publicly listed Indonesian companies from 2012-2017 to empirically test if the theories significantly affect corporate fraud. The results of statistical tests show the data supports all the hypotheses, indicating all three fraud theories can be used to investigate corporate fraud based only on publicly available secondary data.
Running head AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFO.docxjoellemurphey
Running head: AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFORCEMENT RELEASES CASES
An Empirical Study on Accounting and Auditing Enforcement Releases Cases
Xin Tan
Southeast Missouri State University
Author Note
This paper was submitted in partial fulfillment of the requirements of the degree of Masters in Business Administration
AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFORCEMENT RELEASES CASES
31
Abstract
The objective of the paper is to provide an empirical study about the characteristics of accounting fraud and fraudulent financial reporting occurrences, including violation length, industry, audit tenure and violation types. To do so, I collected Accounting and Auditing Enforcement Releases (AAERs) issued by the Securities and Exchange Commission (SEC) for accounting fraud committed by companies during 2009-2011, which provides a fraud sample consisting of 66 companies. I analyzed each incident and explore key company characteristics in instances of fraudulent reporting in AAERs.
APPLIED RESEARCH ACCEPTANCE SHEET
An Empirical Study on Accounting and Auditing Enforcement Releases Cases
Submitted by Xin Tan in partial fulfillment of the requirements for the degree of Masters in Business Administration.
Accepted on behalf of the Faculty of the School of Graduate Studies and Research by the Applied Research Project Committee.
(Date)
Advisor/Chair (Name,Ph.D.)
______________________________ (Date)
MBA Coordinator (Name, Ph.D.)
CONTENTS
ABSTRACT.............................................................. .............................. ……………. i
ACCEPTANCE PAGE.............................................. ………………… ii
CONTENTS....................................... …………....................................... …………iii
INTRODUCTION…………………………………………………….…...1
LITERATURE REVIEW……………………………………………….....3
METHOD…………………………………………………….……………… 4
RESEARCH DESIGN AND RESULT………………………………...… 5
CONCLUSION………………………………………………………….....15
LIMITATION…………………………………………………..... .... …...... 16
REFERENCES…………………………………………………………. …18
APPENDIX …………………………………………………………. ……. 20
I. Introduction
While the United States experienced an unprecedented storm of accounting fraud, like Enron and WorldCom, around the beginning of twenty-first century, it is still unclear to what extent the typical fraud profile has changed in recent years. In the last decade, the accounting industry has made a variety of legislative and regulatory changes because of accounting fraud, such as the Sarbanes-Oxley Act of 2002. This act was enacted as a reaction to major accounting scandals and it enhanced standards for all U.S. public companies boards, management and public accounting firms. Fraudulent financial reporting can have significant consequences for companies, stockholde ...
It is all about social and professional issues in computing.In today's era its really important to understand how a fraud happens.The presentations also helps to differentiate between fraud and embezzlement.Categories of frauds are also available in this section.
White paper on fraud detection with acl (send afterwards)~9sumitrarrc
This document discusses fraud detection and prevention through transactional analysis. It outlines the challenges of fraud management, including large data volumes, complex systems, and evolving fraud schemes. Traditional fraud detection methods like internal controls and audits are reactive and often detect fraud long after the fact. The document advocates for continuous transaction monitoring using data analytics software. This allows comparing data across systems, testing transactions against fraud indicators, and detecting fraud earlier to prevent greater losses. While powerful, challenges include the effort to extract and compare data from multiple systems and developing flexible analytics.
This document proposes a new framework called the "fraud evasion triangle" to explain why fraud is difficult to detect in today's business environment. It identifies three key factors that obstruct fraud detection: 1) Crafty perpetrators who are knowledgeable about the business and take steps to commit fraud without getting caught; 2) Dependent internal auditors who lack independence, proper training, and experience to detect complex fraud schemes; and 3) Limitations in external audits which are not specifically designed to detect fraud and rely on management assertions. The document argues that understanding these obstructing factors is important to developing new approaches to combat fraud. It proposes solutions like limiting senior executive tenure, encouraging whistleblowing, improving corporate culture, and increasing fraud
Financial scams are caused by corruption, lack of employment opportunities, electing dishonest leaders, and lack of oversight to prevent bribery. They negatively impact the Indian economy by potentially putting employees out of work, raising inflation, and causing shareholders to overpay for investments. To minimize scams, people should seek honest professionals, raise awareness, elect ethical leaders, and create independent oversight organizations.
company names mentioned herein are for identification and educational purposes only and are the property of, and may be trademarks of, their respective owners.
Most companies have ethics and compliance policies in place and those policies usually include training for employees. That training typically includes material about policies prohibiting discrimination and harassment, bribery and excessive gift-giving. But it usually does not teach employees how to recognize signs of fraud and how to report them.
Employee fraud awareness training is one of the most important ways your company can protect itself from fraud which, according to the Association of Certified Fraud Examiners, costs the average company five per cent of its revenues every year.
Fraud Risk Management | Fraud Risk Assessment - EY IndiaErnst & Young
Check out the edition of fraud risk management & fraud risk assessment understanding the client's organizational structure & business environment. For more details, visit http://bit.ly/1RtohKr.
1) The document discusses fraud deterrence, which aims to proactively identify and remove factors that enable fraud through improving organizational procedures and culture.
2) It defines fraud deterrence as preventing fraud by analyzing conditions and procedures that could enable fraud in the future and reducing related risks.
3) The document outlines the five components of the COSO internal control model that provide a foundation for fraud deterrence by limiting fraud opportunity factors - control environment, risk assessment, control activities, information and communication, and monitoring.
This document provides biographies of the authors of a book on internal audit and fraud prevention. It introduces John Milner, Martin Ghirardotti, Enrique Pastor, and Miguel del Olmo, who have extensive experience in fields including internal audit, risk evaluation, fraud prevention and detection, and corporate governance. They have worked with companies and organizations in countries like Ireland, Argentina, Mexico, the United States, South Africa, and throughout Latin America. The document establishes the authors' expertise on the topic which will be covered in the book.
This document summarizes a study that aimed to develop a model for detecting false financial statements using published data from Greece. The study analyzed 76 firms, including 38 with false financial statements and 38 without, looking at 10 financial ratios as potential predictors. Using logistic regression, the study developed a model based on five variables - inventory to sales ratio, total debt to total assets ratio, working capital to total assets ratio, net profit to total assets ratio, and a financial distress score - that could accurately classify firms as having false financial statements or not with over 84% accuracy. The model provides a method for auditors, tax authorities, and others to detect potential false financial statements.
The document defines fraud and discusses its different types. It describes fraud as theft by deception or trickery to obtain an unjust advantage. The main types are occupational fraud committed by employees against an organization, and fraud committed for an organization like financial statement fraud. Employee embezzlement, vendor fraud, and customer fraud are provided as examples of fraud against an organization. Management fraud committed through misleading financial statements can harm shareholders and investors. Criminal prosecution through law and civil lawsuits aim to punish fraudsters and compensate victims.
The document discusses red flags that can indicate the presence of fraud. It defines fraud and explains the fraud triangle of opportunity, pressure, and rationalization. It provides examples of general red flags related to employees and management. Specific red flags are given for cash/accounts receivable, payroll, and purchasing/inventory. Common types of fraud like lifestyle fraud and financial statement fraud are also summarized. The document stresses the importance of recognizing and investigating red flags instead of ignoring them.
Fraud and Internal Controls: A Forensic Accountant's Perspective - Bill AcuffDecosimoCPAs
The document discusses fraud risks and provides examples of fraud cases. It discusses key steps to manage fraud risks including governance, risk assessment, prevention, detection, deterrence and response. It then summarizes several high-profile fraud cases including Rita Crundwell who embezzled $53 million from her small town as controller over 20 years through lack of segregation of duties and extravagant lifestyle. The document outlines common fraud schemes and techniques based on research from COSO and the ACFE. It discusses Donald Cressy's fraud triangle of perceived opportunity, incentive/pressure, and rationalization driving fraud. Finally, it provides charts on common financial statement fraud techniques and the distribution of fraud by category and median losses.
Fraud management in ten minutes presentationWarren Park
This document provides guidance on countering fraud by understanding the fraud triangle of motive, opportunity, and rationalization. It discusses relevant UK laws, common fraud terms, and strategies for reducing fraud risk such as implementing controls, promoting the right culture and attitudes, and addressing employee motives and pressures through open communication and support. The overall approach is to disrupt the conditions within the fraud triangle.
This document outlines 6 main indicators of fraud: accounting anomalies, internal control symptoms, analytical symptoms, lifestyle symptoms, behavioural symptoms, and tips/complaints. It provides examples for each indicator and explains that combining information from all categories enhances fraud detection capabilities. Vigilance is needed as fraud symptoms often go unnoticed or unpursued.
The document discusses fraud symptoms and red flags that may indicate fraud. It notes that fraud can involve irregularities in source documents, faulty journal entries, or inaccuracies in ledgers. Internal control weaknesses like a lack of segregation of duties or physical safeguards are also red flags. Some common fraud schemes discussed include fraudulent financial reporting through falsifying accounting records or misstating financial statements. The document also outlines protections for whistleblowers and the importance of internal controls for fraud prevention and detection.
This document examines fraud prevention and internal controls in the Nigerian banking system. It uses both primary and secondary data to analyze the effectiveness of internal controls and identify factors that influence fraud. The primary data uses questionnaires from four banks to test how separation of duties, monitoring, and staff qualifications impact internal controls. The secondary data uses bank profit, regulation, technology, and M2 levels to further explore their impact on actual losses, weighted losses, and percentage increases in losses. Regression analysis is used to analyze the relationships between these factors. The results show that internal controls are effective against fraud but not all staff commit to them fully. The secondary data supports and expands on this by showing M2 levels, staff qualifications and technology have significant impacts across
Similar to Brennan, Niamh M. and McGrath, Mary [2007] Financial Statement Fraud: Incidents, Methods and Motives, Australian Accounting Review, 17 (2) (42) (July): 49-61.
This document analyzes different fraud theories - the fraud triangle, fraud diamond, and fraud pentagon - and their ability to detect corporate fraud in Indonesia. It reviews the literature on each theory and their components (pressure, opportunity, rationalization, capability, arrogance). The study uses secondary data from 310 publicly listed Indonesian companies from 2012-2017 to empirically test if the theories significantly affect corporate fraud. The results of statistical tests show the data supports all the hypotheses, indicating all three fraud theories can be used to investigate corporate fraud based only on publicly available secondary data.
Running head AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFO.docxjoellemurphey
Running head: AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFORCEMENT RELEASES CASES
An Empirical Study on Accounting and Auditing Enforcement Releases Cases
Xin Tan
Southeast Missouri State University
Author Note
This paper was submitted in partial fulfillment of the requirements of the degree of Masters in Business Administration
AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFORCEMENT RELEASES CASES
31
Abstract
The objective of the paper is to provide an empirical study about the characteristics of accounting fraud and fraudulent financial reporting occurrences, including violation length, industry, audit tenure and violation types. To do so, I collected Accounting and Auditing Enforcement Releases (AAERs) issued by the Securities and Exchange Commission (SEC) for accounting fraud committed by companies during 2009-2011, which provides a fraud sample consisting of 66 companies. I analyzed each incident and explore key company characteristics in instances of fraudulent reporting in AAERs.
APPLIED RESEARCH ACCEPTANCE SHEET
An Empirical Study on Accounting and Auditing Enforcement Releases Cases
Submitted by Xin Tan in partial fulfillment of the requirements for the degree of Masters in Business Administration.
Accepted on behalf of the Faculty of the School of Graduate Studies and Research by the Applied Research Project Committee.
(Date)
Advisor/Chair (Name,Ph.D.)
______________________________ (Date)
MBA Coordinator (Name, Ph.D.)
CONTENTS
ABSTRACT.............................................................. .............................. ……………. i
ACCEPTANCE PAGE.............................................. ………………… ii
CONTENTS....................................... …………....................................... …………iii
INTRODUCTION…………………………………………………….…...1
LITERATURE REVIEW……………………………………………….....3
METHOD…………………………………………………….……………… 4
RESEARCH DESIGN AND RESULT………………………………...… 5
CONCLUSION………………………………………………………….....15
LIMITATION…………………………………………………..... .... …...... 16
REFERENCES…………………………………………………………. …18
APPENDIX …………………………………………………………. ……. 20
I. Introduction
While the United States experienced an unprecedented storm of accounting fraud, like Enron and WorldCom, around the beginning of twenty-first century, it is still unclear to what extent the typical fraud profile has changed in recent years. In the last decade, the accounting industry has made a variety of legislative and regulatory changes because of accounting fraud, such as the Sarbanes-Oxley Act of 2002. This act was enacted as a reaction to major accounting scandals and it enhanced standards for all U.S. public companies boards, management and public accounting firms. Fraudulent financial reporting can have significant consequences for companies, stockholde ...
Problem & Prospects of Forensic Accounting in IndiaCA. Sanjay Ruia
This document discusses the problems and prospects of forensic accounting as a profession in India. It begins with defining forensic accounting as the combination of accounting, auditing, and investigation skills used to deter, detect, and investigate financial reporting frauds. It then discusses how forensic accounting has gained prominence in India after major corporate scandals like Satyam. While the demand for forensic accountants is rising, it remains an emerging profession with problems like a lack of expertise in law enforcement. The document explores the scope and techniques of forensic accounting and analyzes the challenges and opportunities for its growth in India.
The impact of forensic accounting on fraud detectionAlexander Decker
This document summarizes a research study that examined the impact of forensic accounting on fraud detection in Nigerian firms. The study aimed to determine the relationship between fraud detection and forensic accounting. It reviewed definitions and types of forensic accounting and fraud. Data was collected through questionnaires administered to 15 firms and analyzed using descriptive statistics and regression analysis. The study revealed that the application of forensic accounting services affects the level of fraudulent activities in firms. It concluded that forensic accounting can help curb fraud in companies.
This review present some evidence on fraud, forensic accounting, the skills and education of the forensic investigator. Also, some explanation for the diverging views among academics and regulators in relation to detecting fraud are provided. To regulators, I address the question on why academic research in forensic accounting have little significance to inform policy. Further, I present some rich set of questions and identify a number of important directions for future research in forensic accounting. This paper is intended to stimulate debates and future research on the issues identified.
This document is a project report on forensic accounting in India written by Sridevi H.V. It discusses the evolution and increasing importance of forensic accounting due to rising financial frauds. It outlines the objectives and methodology of the study. Forensic accounting involves detecting fraud and investigating accounting irregularities by looking beyond raw numbers and applying skills from accounting, auditing and law. It is useful for fraud examinations, dispute resolution, and other legal proceedings. However, forensic accountants in India face difficulties due to a lack of organized databases and sometimes unreasonable client expectations. The report examines the nature, role and techniques of forensic accounting as well as common types of financial frauds.
Computer aided audit techniques and fraud detectionAlexander Decker
This research study examined the use of computer aided audit techniques (CAATs) to detect fraud. The study found that 72.8% of respondents agreed that CAATs play a major role in fraud detection. It was also found that CAATs help improve auditor performance and provide transparency in financial reporting. However, costs associated with implementation and skills required present challenges to adoption of CAATs. The study concluded that CAATs can effectively detect fraudulent and misappropriated practices in organizations.
The following article is related to deterring employee fraud within .docxssuser454af01
The document summarizes key findings from a report on occupational fraud. It finds that while asset misappropriation is most common, fraudulent financial statements cause the highest losses. Small businesses are most vulnerable due to lack of audits and controls. Establishing anonymous hotlines is the most effective way to reduce fraud losses, more so than audits. Fraud by executives results in highest losses and is best detected through tips rather than controls.
Application of forensic audit and investigation in resolving tax related frau...Newman Enyioko
The incessant tax related fraud and malfeasance resulting to corporate collapse and the failure of the statutory audit to detect and prevent fraudulent activities which had led to the impoverishment of investors had given rise to the need for forensic audit and investigations. In view of the above, this paper considers the application of forensic audit and investigation in resolving tax related fraud and malfeasance. The study is a theoretical research which considers the roles of forensic auditors in combating fraudulent activities, distinction of forensic auditor and statutory auditor, and impact of forensic auditor on corporate governance. Based on the findings; this paper concludes that forensic auditing has improved management accountability, strengthened external auditor’s independence and assisting audit committee members in carrying out their oversight function by providing them assurance on internal audit report have impacted positively to corporate governance, thereby reducing tax related fraud and malfeasance. Therefore the study recommends that; the service of forensic auditors should be employed in Nigerian organisations.
Application of forensic audit and investigation in resolving tax related frau...Newman Enyioko
The incessant tax related fraud and malfeasance resulting to corporate collapse and the failure of the statutory audit to detect and prevent fraudulent activities which had led to the impoverishment of investors had given rise to the need for forensic audit and investigations. In view of the above, this paper considers the application of forensic audit and investigation in resolving tax related fraud and malfeasance. The study is a theoretical research which considers the roles of forensic auditors in combating fraudulent activities, distinction of forensic auditor and statutory auditor, and impact of forensic auditor on corporate governance. Based on the findings; this paper concludes that forensic auditing has improved management accountability, strengthened external auditor’s independence and assisting audit committee members in carrying out their oversight function by providing them assurance on internal audit report have impacted positively to corporate governance, thereby reducing tax related fraud and malfeasance. Therefore the study recommends that; the service of forensic auditors should be employed in Nigerian organisations.
Fraud Investigation, Prevention and DetectionTareq Obaid
The document summarizes key findings from a study of 2,690 occupational fraud cases reported between 2016-2017. Some key findings include:
- Asset misappropriation was the most common fraud (89% of cases), but financial statement fraud caused the highest median loss ($800,000).
- Over 23% of cases involved more than one fraud type. Corruption often occurred with asset misappropriation.
- Frauds lasted an average of 16 months but duration varied by type, from 6 months for non-cash schemes to 5 years for payroll schemes.
- Tips were the leading detection method (40% of cases), and active detection methods like internal audits found frauds with lower losses.
Accounting Frauds A Review Of LiteratureTony Lisko
This document provides a literature review on accounting frauds. It begins by defining accounting fraud and distinguishing it from earnings management. Accounting fraud involves intentional material misstatements in financial statements to mislead stakeholders, while earnings management uses judgment within accounting standards to influence reported numbers. The fraud triangle is discussed as identifying pressures, opportunities, and rationalization as factors enabling fraud. Common fraud schemes aim to inflate or mask financial performance. Motivations for fraud include meeting targets and personal gain. Predictors of fraud and its consequences are also reviewed to improve fraud detection.
This document provides a literature review on accounting frauds. It begins by defining accounting fraud and distinguishing it from earnings management. It discusses the "fraud triangle" model which identifies opportunity, motivation, and rationalization as key drivers of fraud. Common actors involved in accounting fraud are CEOs and CFOs who are able to override internal controls. Various fraud schemes used to misstate financials are described, as well as incentives and consequences of fraud. The literature review aims to improve understanding of fraud anatomy to enhance detection and prevention.
This report summarizes findings from 2,690 cases of occupational fraud investigated between 2016-2017 in 125 countries. Key findings include:
- Total losses exceeded $7 billion, with a median loss of $130,000 per case. 22% of cases caused losses over $1 million.
- Asset misappropriation was the most common fraud, while financial statement fraud had the highest median loss of $800,000.
- Tips from employees and management review were the most common detection methods, detecting over half of cases. Organizations with hotlines detected more fraud from tips.
- Small businesses with fewer than 100 employees lost almost twice as much per scheme as larger companies.
- Internal control weaknesses were a
Overcoming compliance fatigue - Reinforcing the commitment to ethical growth ...EY
This presentation is based on EY FIDS' 13th Global Fraud Survey. It highlights the state of fraud, bribery and corruption, comprising global as well as India findings.
For further information, please visit: http://www.ey.com/FIDS
An examination of actual fraud cases with a focus on the auditor’s responsibi...Jesper Seehausen
This working paper examines actual fraud cases involving auditors in Denmark from 1909-2006 to understand the evolution of auditors' responsibilities related to fraud. The paper analyzes how court rulings and professional organizations in Denmark have established auditors' duties to detect potential fraud situations and respond appropriately. The analysis finds that auditors have never been criticized solely for failing to detect fraud, but rather for deficiencies in their audit work or failures to communicate issues. Over time, courts now consider fraud a normal business risk for which auditors must be proactively responsible in planning and conducting audits.
11.isea vol 0004www.iiste.org call for paper no 1 pp. 65-73Alexander Decker
1) The article discusses fraudulent financial reporting (FFR) and how audits aim to prevent and detect it.
2) It conducted interviews at two Atlantic Canadian companies to understand motivational factors for FFR and the role of audits.
3) The findings suggest audits alone are not enough to prevent FFR, and companies need strong internal controls and to educate employees on their role in preventing FFR.
Application of forensic accounting a tool for confidence in auditors’ reportsAlexander Decker
The document discusses the application of forensic accounting as a tool to build confidence in auditors' reports. It examines how forensic accounting can help detect issues like fraud, theft, bribery, and intentional misstatements. The study administered questionnaires to auditing firms, legal experts, and computer specialists. The results found that forensic accounting can significantly aid in litigation, quantifying losses from theft, detecting bribery and misstatements, and finding intentional misrepresentations to auditors. The document recommends mandatory forensic accounting training for accountants to produce more reliable audit reports.
Ais Romney 2006 Slides 05 Computer Fraud And Abusesharing notes123
This chapter discusses computer fraud, including:
1) It addresses what fraud is, who commits it, and what forms computer fraud takes.
2) Companies face threats from natural disasters, software/equipment errors, unintentional acts, and intentional acts like fraud.
3) There are three main types of occupational fraud - asset misappropriation, corruption, and fraudulent financial statements. Fraud usually starts small and escalates over time.
Similar to Brennan, Niamh M. and McGrath, Mary [2007] Financial Statement Fraud: Incidents, Methods and Motives, Australian Accounting Review, 17 (2) (42) (July): 49-61. (20)
Brennan, Niamh and Clarke, Peter [1985] Objective Tests in Financial Accounti...Prof Niamh M. Brennan
A multiple choice questionnaire (MCQ) style examination typically consists of 20/30 short statements, each of which is followed by a number of alternative answers. Only one answer is strictly correct. This allows the examiner to mark candidates' responses in an objective rather than subjective fashion. This style of examination question has recently been adopted by the Institute of Chartered Accountants in Ireland and is also used in third level institutions.
MCQs have a number of advantages over traditional examination formats. First, they allow the examiner to ask questions on every topic on the syllabus and thus test the candidates range of knowledge. Perhaps more importantly, correction of answers is entirely objective and comparatively easy. Large numbers of scripts can be objectively tested in a short space of time.
Objective tests can also be an effective teaching tool. The topics covered in each chapter are logically sequenced so that as the student progresses through the chapter they build up their know¬ledge and skills in relation to that topic. In addition, the book emphasises problem areas and attempts to help students avoid common mistakes in financial accounting. Thus the tutor can indicate the correct solution and also explain or seek responses as to why other plausible answers are incorrect to the given statement. Such a process should ensure greater understanding of the topic under discussion.
This book is suitable for students taking introductory financial accounting examinations of the professional accountancy bodies, third level accounting students or other students studying introductory financial accounting courses. The three revision examinations at the end of this book are reproduced with the kind permission of the Institute of Chartered Accountants in Ireland.
03 14 brennan merkl davies accounting narratives and impression managementProf Niamh M. Brennan
This chapter examines impression management in accounting communication through four theoretical perspectives: economic, psychological, sociological, and critical. Impression management refers to organizations constructing impressions to appeal to audiences like shareholders and stakeholders. Discretionary accounting narratives in corporate reports are analyzed for seven communication choices that could constitute impression management. The chapter concludes by discussing implications for corporate reporting practice and suggestions for future research on how impression management may undermine reporting quality and influence stakeholder perceptions.
Brennan, Niamh M., Merkl-Davies, Doris M., and Beelitz, Annika [2013] Dialogi...Prof Niamh M. Brennan
We conceptualise CSR communication as a process of reciprocal influence between organisations and their audiences. We use an illustrative case study in the form of a conflict between firms and a powerful stakeholder which is played out in a series of 20 press releases over a two-month period to develop a framework of analysis based on insights from linguistics. It focuses on three aspects of dialogism, namely (i) turn-taking (co-operating in a conversation by responding to the other party), (ii) inter-party moves (the nature and type of interaction action characterising a turn i.e., denial, apology, excuse), and (iii) intertextuality (the intensity and quality of verbal interaction between the parties). We address the question: What is the nature and type of verbal interactions between the parties? First we examine (a) whether the parties verbally interact and then (b) whether the parties listen to each other.
We find evidence of dialogism suggesting that CSR communication is an interactive process which has to be understood as a function of the power relations between a firm and a specific stakeholder. Also, we find evidence of intertextuality in the press releases by the six firms which engage in verbal interaction with the stakeholder. We interpret this as linguistic evidence of isomorphic processes relating to CSR practices resulting from the pressure exerted by a powerful stakeholder. The lack of response by ten firms that fail to issue press releases suggests a strategy of ‘watch-and-wait’ with respect to the outcome of the conflict.
Brennan, Niamh M. and Flynn, Maureen A. [2013] Differentiating Clinical Gover...Prof Niamh M. Brennan
This document proposes new definitions to distinguish between clinical governance, clinical management, and clinical practice. It analyzes 29 existing definitions of "clinical governance" and finds they confuse governance, management, and practice roles. The document suggests 3 new separate definitions: clinical governance focuses on accountability, oversight, and setting standards; clinical management focuses on efficient service delivery through processes and resources; and clinical practice focuses on delivering high-quality care. Clearer distinctions between these roles could help implement clinical governance more effectively.
Brennan, Niamh M. and Conroy, John P. [2013] Executive Hubris: The Case of a ...Prof Niamh M. Brennan
Purpose – Can personality traits of Chief Executive Officers (CEOs) be detected at-a-distance? Following newspaper speculation that the banking crisis of 2008 was partly caused by CEO hubris, this paper analyses the CEO letters to shareholders of a single bank over ten years for evidence of CEO personality traits, including: (i) narcissism (a contributor to hubris), (ii) hubris, (iii) overconfidence and (iv) CEO-attribution. Following predictions that hubris increases the longer individuals occupy positions of power, the research examines whether hubristic characteristics intensify over time.
Design/methodology/approach – This paper takes concepts of hubris from the clinical psychology literature and applies them to discourses in CEO letters to shareholders in annual reports. The research comprises a longitudinal study of the discretionary narrative disclosures in the CEO letters to shareholders in eight annual reports, benchmarked against disclosures in the CEO letters to shareholders of the previous and subsequent CEOs of the same organisation.
Findings – Results point to evidence of narcissism and hubris in the personality of the Bank CEO. Over half the sentences analysed were found to contain narcissistic-speak. In 45% of narcissistic-speak sentences, there were three of more symptoms of hubris – what Owen and Davison (2009) describe as extreme hubristic behavior. In relation to CEO overconfidence, only seven (2%) sentences contained bad news. More than half of the good news was attributed to the CEO and all the bad news was attributed externally. The research thus finds evidence of hubris in the CEO letters to shareholders, which became more pronounced the longer the CEO served.
Research limitations/implications – The analysis of CEO discourse is highly subjective, and difficult to replicate.
Originality/value – The primary contribution of this research is the adaptation of the 14 clinical symptoms of hubris from clinical psychology to the analysis of narratives in CEO letters to shareholders in annual reports to reveal signs of CEO hubris.
Craig, Russell J. and Brennan, Niamh M. [2012] An Exploration of the Relation...Prof Niamh M. Brennan
This paper proposes a taxonomy to assist in more clearly locating research on aspects of the association between corporate reputation and corporate accountability reporting. We illustrate how our proposed taxonomy can be applied by using it to frame our exploration of the relationship between measures of reputation and characteristics of the language choices made in CEO letters to shareholders. Using DICTION 5.0 software we analyse the content of the CEO letters of 23 high reputation US firms and 23 low reputation US firms. Our results suggest that company size and visibility each have a positive influence on the extent to which corporate reputation is associated with the language choices made in CEO letters. These results, which are anomalous when compared with those of Geppert and Lawrence (2008), highlight the need for caution when assessing claims about the effects on corporate reputation arising from the language choice in narratives in corporate annual reports.
Merkl-Davies and Brennan A Conceptual Framework of Impression Management: New...Prof Niamh M. Brennan
In this paper we develop a conceptual framework, based on the concepts of rationality and motivation, which uses theories and empirical research from psychology/behavioural finance, sociology and critical accounting to systematise, advance and challenge research on impression management. The paper focuses on research which departs from economic concepts of impression management as opportunistic managerial discretionary disclosure behaviour resulting in reporting bias or as ‘cheap talk’. Using alternative rationality assumptions, such as bounded rationality, irrationality, substantive rationality and the notion of rationality as a social construct, we conceptualise impression management in alternative ways as (i) self-serving bias, (ii) symbolic management and (iii) accounting rhetoric. This contributes to an enhanced understanding of impression management in a corporate reporting context.
Brennan, Niamh [1996] Disclosure of Profit Forecasts during Takeover Bids. Do...Prof Niamh M. Brennan
This thesis examines disclosure of 250 profit forecasts in 701 UK takeover bids in the period 1988 to 1992 against five research issues:
• Factors influencing disclosure of forecasts
• Influence of prevailing market expectations
• Effect of disclosure of forecasts on the outcome of bids
• Factors influencing disclosure content in forecasts
• Whether forecasts disclosed convey good news
Logit analysis and negative binomial regression are the two primary statistical techniques used to analyse the results.
Results show the domination of the takeover-context of the research. Two variables accounted for almost all the influence on disclosure of forecasts for both bidders and targets: bid horizon and type of bid. Probability of disclosure of a forecast is greater the shorter the bid horizon and during contested bids.
In addition to bid horizon and type of bid, for bidders, year, value of bid and purchase consideration were significant, and for targets value of bid and industry were significant in one of the two models estimated.
Evidence supporting the hypothesis that forecast disclosure is more likely when market expectations are out of line with actual results is provided.
There is some evidence that forecasts by targets affect the outcome of bids, but there is no such evidence for bidders.
Takeover-context variables and forecast-related variables were most relevant in determining disclosures in forecasts. Disclosure content in forecasts was significantly greater during contested bids, in voluntary forecasts and in longer period forecasts. Significantly more assumptions were disclosed by target forecasters and in longer horizon forecasts.
Evidence shows a tendency to disclose good news, with some disclosure of bad news. Good news forecasts are more likely during contested bids. Targets are more likely to disclose bad news forecasts, but when bidders disclose bad news it tends to be worse on average than targets’ bad news.
Merkl-Davies, Doris M., Brennan, Niamh M. and McLeay, Stuart J. [2011] Impres...Prof Niamh M. Brennan
Purpose – Prior accounting research views impression management predominantly though the lens of economics. Drawing on social psychology research, we provide a complementary perspective on corporate annual narrative reporting as characterised by conditions of ‘ex post accountability’ (Aerts, 2005, p. 497). These give rise to (i) impression management resulting from the managerial anticipation of the feedback effects of information and/or to (ii) managerial sense-making by means of the retrospective framing of organisational outcomes.
Design/methodology/approach – We use a content analysis approach pioneered by psychology research (Newman et al., 2003) which is based on the psychological dimension of word use to investigate the chairmen’s statements of 93 UK listed companies.
Findings – Results suggest that firms do not use chairmen’s statements to create an impression at variance with an overall reading of the annual report. We find that negative organisational outcomes prompt managers to engage in retrospective sense-making, rather than to present a public image of organisational performance inconsistent with the view internally held by management (self-presentational dissimulation). Further, managers of large firms use chairmen’s statements to portray an accurate (i.e., consistent with an overall reading of the annual report), albeit favourable, image of the firm and of organisational outcomes (i.e., impression management by means of enhancement).
Research limitations – The content analysis approach adopted in the study analyses words out of context.
Practical implications – Corporate annual reporting may not only be understood from a behavioural perspective involving managers responding to objectively determined stimuli inherent in the accountability framework, but also from a symbolic interaction perspective which involves managers retrospectively making sense of organisational outcomes and events.
Originality/value – Our approach allows us to investigate three complementary scenarios of managerial corporate annual reporting behaviour: (i) self-presentational dissimulation, (ii) impression management by means of enhancement, and (iii) retrospective sense-making.
Brennan, Niamh M., Daly, Caroline A. and Harrington, Claire S. [2010] Rhetori...Prof Niamh M. Brennan
This exploratory study extends the analysis of narrative disclosures from routine reporting contexts such as annual reports and press releases to non-routine takeover documents where the financial consequences of narrative disclosures can be substantial. Rhetoric and argument in the form of impression management techniques in narrative disclosures are examined. Prior thematic content analysis methods for analysing good and bad news disclosures are adapted to the attacking and defensive themes in the defence documents of target companies subject to hostile takeover bids. The paper examines the incidence, extent and implications of impression management in ten hostile takeover defence documents issued by target companies listed on the London Stock Exchange between 1 January 2006 and 30 June 2008. Three impression management strategies – thematic, visual and rhetorical manipulation – are investigated using content analysis methodologies. The findings of the research indicate that thematic, visual and rhetorical manipulation is evident in hostile takeover defence documents. Attacking and defensive sentences were found to comprise the majority of the defence documents analysed. Such sentences exhibited varying degrees of visual and rhetorical emphasis, which served to award greater or lesser degrees of prominence to the information conveyed by target company management.
While exploratory in nature, this paper concludes with suggestions for future more systematic research allowing for greater generalisations from the findings.
Brennan, Niamh M., Guillamon-Saorin, Encarna and Pierce, Aileen [2009] Impres...Prof Niamh M. Brennan
Purpose – This paper develops a holistic measure for analysing impression management and for detecting bias introduced into corporate narratives as a result of impression management.
Design/methodology/approach – Prior research on the seven impression management methods in the literature is summarised. Four of the less-researched methods are described in detail, and are illustrated with examples from UK Annual Results’ Press Releases (ARPRs). A method of computing a holistic composite impression management score based on these four impression management methods is developed, based on both quantitative and qualitative data in corporate narrative disclosures. An impression management bias score is devised to capture the extent to which impression management introduces bias into corporate narratives. An example of the application of the composite impression management score and impression management bias score methodology is provided.
Findings – While not amounting to systematic evidence, the 21 illustrative examples suggest that impression management is pervasive in corporate financial communications using multiple impression management methods, such that positive information is exaggerated, while negative information is either ignored or is underplayed.
Originality/value – Four impression management methods are described in detail, illustrated by 21 examples. These four methods are examined together. New impression management methods are studied in this paper for the first time. This paper extends prior impression management measures in two ways. First, a composite impression management score based on four impression management techniques is articulated. Second, the composite impression management score methodology is extended to capture a measure for bias, in the form of an impression management bias score. This is the first time outside the US that narrative disclosures in press releases have been studied.
Brennan, Niamh M. and Solomon, Jill [2008] Corporate Governance, Accountabili...Prof Niamh M. Brennan
Purpose – This paper reviews traditional corporate governance and accountability research, to suggest opportunities for future research in this field. The first part adopts an analytical frame of reference based on theory, accountability mechanisms, methodology, business sector/context, globalisation and time horizon. The second part of the paper locates the seven papers in the special issue in a framework of analysis showing how each one contributes to the field. The paper presents a frame of reference which may be used as a 'roadmap' for researchers to navigate their way through the prior literature and to position their work on the frontiers of corporate governance research.
Design/methodology/approach – The paper employs an analytical framework, and is primarily discursive and conceptual.
Findings – The paper encourages broader approaches to corporate governance and accountability research beyond the traditional and primarily quantitative approaches of prior research. Broader theoretical perspectives, methodological approaches, accountability mechanism, sectors/contexts, globalisation and time horizons are identified.
Research limitations/implications – Greater use of qualitative research methods are suggested, which present challenges particularly of access to the “black box” of corporate boardrooms.
Originality/value – Drawing on the analytical framework, and the papers in the special issue, the paper identifies opportunities for further research of accountability and corporate governance.
Merkl-Davies, Doris M. and Brennan, Niamh M. [2007] Discretionary Disclosure ...Prof Niamh M. Brennan
This paper reviews and synthesizes the literature on discretionary narrative disclosures. We explore why, how, and whether preparers of corporate narrative reports use discretionary disclosures in corporate narrative documents and why, how, and whether users react thereto. To facilitate the review, we provide three taxonomies based on: the motivation for discretionary narrative disclosures (opportunistic behavior, i.e. impression management, versus provision of useful incremental information); the research perspective (preparer versus user); and seven discretionary disclosure strategies.
Brennan, Niamh and Kelly, John [2007] A Study of Whistleblowing Among Trainee...Prof Niamh M. Brennan
Over the last number of years whistleblowers have been gaining prominence. This paper investigates some of the factors that influence the propensity or willingness to blow the whistle among trainee auditors. Three categories of factors are examined: audit firm organisational structures, personal characteristics of whistleblowers and situational variables.
A survey of 240 final year students of the Institute of Chartered Accountants in Ireland was undertaken. Trainee auditors (just about to sit their finals) were asked about their confidence in internal and external reporting structures in their firms. Using four scenarios, audit trainees were questioned on their willingness to challenge an audit partner’s inappropriate response to concerns raised during the audit. Finally, audit trainees were asked about the influence of legal protection on their likelihood of whistleblowing.
Results indicate that where firms have adequate formal structures for reporting wrongdoing, trainee auditors are more likely to report wrongdoing and have greater confidence that this will not adversely affect their careers. Training increases this confidence. Trainee auditors also express a willingness to challenge an audit partner’s unsatisfactory response to wrongdoing. Significant differences were found in attitudes depending on whether the reports of wrongdoing were internal or external. The willingness to report wrongdoing externally reduces for older (aged over 25) trainees.
Brennan, Niamh [2006] Boards of Directors and Firm Performance: Is there an E...Prof Niamh M. Brennan
Reflecting investor expectations, most prior corporate governance research attempts to find a relationship between boards of directors and firm performance. This paper critically examines the premise on which this research is based. An expectations gap approach is applied for the first time to implicit expectations which assume a relationship between firm performance and company boards. An expectations gap has two elements: A reasonableness gap and a performance gap. Seven aspects of boards are identified as leading to a reasonableness gap. Five aspects of boards are identified as leading to a performance gap. The paper concludes by suggesting avenues for empirically testing some of the concepts discussed in this paper.
Brennan, Niamh and Gray, Sidney J. [2005] The Impact of Materiality: Accounti...Prof Niamh M. Brennan
This paper comprises a review of the literature on materiality in accounting. The paper starts by examining the context in which materiality is relevant, and the problems arising from applying the concept in practice. Definitions of materiality from legal, accounting and stock exchange sources are compared. The relevance of materiality to various accounting situations is discussed. Methods of calculating quantitative thresholds are described and illustrated. Prior research is reviewed, focussing on materiality thresholds, and on the materiality judgments of auditors, preparers and financial statement users. The paper concludes with some suggestions for future research and for policy makers concerning this best kept accounting secret.
Brennan, Niamh [2005] Accounting Expertise in Litigation and Dispute Resoluti...Prof Niamh M. Brennan
This document summarizes the role of expert witnesses in litigation, with a focus on accounting experts. It discusses how expert witnesses are used to assist courts in resolving complex issues outside the knowledge of judges and juries. The expert's primary duty is to the court, not to the hiring party. The summary also outlines important qualities of expert testimony like being unbiased, relevant, reliable, and cost-effective. It notes that experts can face civil liability for negligence if these qualities are lacking. Finally, it provides an overview of the process for selecting and engaging expert witnesses.
Brennan, Niamh and McDermott, Michael [2004] Alternative Perspectives on Inde...Prof Niamh M. Brennan
This paper examines the issue of independence of boards of directors and non-executive direc¬tors of companies listed on the Irish Stock Exchange. Based on information published in annual reports, the study found that most Irish listed companies were complying with the Combined Code’s recommendations for a balanced board structure, albeit with only 60 per cent having majority-independent boards. The study found a lack of consistency in inter-preting the definition of “independence”, a lack of disclosure of information and, by apply¬ing criteria generally regarded as prerequisite to independence of non-executive directors, certain situations which imposed upon their independence.
Brennan, Niamh [2003] Accounting in crisis: A story of auditing, accounting, ...Prof Niamh M. Brennan
Recent accounting scandals are the product of multiple failings of auditing, accounting, corporate governance and of the market. In discussing the many factors that led to failure, this paper attempts to provide insights on regulatory inadequacies that contributed to these problems. At the centre is human failure – in particular greed and weakness. Reforms in progress are briefly examined, with the caveat that no reforms will ever fully cater for human weakness.
Brennan, Niamh [2001] Reporting Intellectual Capital in Annual Reports: Evide...Prof Niamh M. Brennan
This paper examines the extent to which a sample of 11 knowledge-based Irish listed companies is adopting methodologies for reporting of intellectual capital in their annual reports. Their market and book values were compared and a content analysis of the annual reports of the 11 listed companies was conducted. With the exception of two of the 11 listed companies, significant differences in market and book values were found suggesting that knowledge-based Irish listed companies have a substantial level of non-physical, intangible, intellectual capital assets. The level of disclosure of intellectual capital attributes by the 11 listed companies studied was low.
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Brennan, Niamh M. and McGrath, Mary [2007] Financial Statement Fraud: Incidents, Methods and Motives, Australian Accounting Review, 17 (2) (42) (July): 49-61.
1. Financial Statement Fraud: Some Lessons from US and European Case Studies
Niamh M. Brennan and Mary McGrath
(Published in Australian Accounting Review, 17 (2) (42) (July 2007): 49-61)
2. Abstract
This paper studies 14 companies which were subject to an official investigation
arising from the publication of fraudulent financial statements. The research found
senior management to be responsible for most fraud. Recording false sales was the
most common method of financial statement fraud. Meeting external forecasts
emerged as the primary motivation. Management discovered most fraud, although the
discovery was split between incumbent and new management.
3. “An ounce of prevention is worth a pound of cure. In few other business contexts is
that as true as with financial statement fraud” (Young 2000, p. 211).
INTRODUCTION
The term “red flags of fraud” is frequently found in books and articles on fraud (see,
for example, Brennan and Hennessy 2001, ch. 3). Fraud is generally a hidden activity
and fraudulent financial statements do not always come to light. This type of fraud
can have very serious consequences for organisations: although the Association of
Certified Fraud Examiners has found fraudulent financial statements to be the least
commonly reported fraud, it had the highest median loss at $US1 million (ACFE
2004). Financial statement fraud can be difficult to detect, is motivated by many
different factors and is achieved in many ways. This paper attempts to identify “red
flags” associated with reported cases of financial statement fraud. The research
focuses on 14 case studies from the US and Europe.
Australia has not been free from financial statement fraud. In the case of HIH, one of
the biggest business failures in Australian history, material misstatements of assets
were not included by Arthur Andersen in the year-end proposed adjusting entries, and
therefore were not included in their assessment of the truth and fairness of the
financial statements. In National Australia Bank, staff concealed foreign-exchange
trading losses through false transactions and systems’ manipulations which were not
picked up by external auditors, resulting in misleading financial statements. KPMG’s
2004 survey of fraud in Australia found seven instances of financial statement fraud
out of 206 usable responses (KPMG 2004a). KPMG was unable to quantify the losses
from these frauds.
While Australian cases are not included in this paper, insights from the US and
Europe may add knowledge in an Australia context. Sharma (2004), for example,
found results for the relationship between fraud and governance variables in
Australian companies similar to studies in the US, and that US research evidence was
generalisable to an Australian environment.
Financial statement fraud
Most jurisdictions do not have a specific crime of financial statement fraud.
Perpetrators are charged with theft or the improper keeping of books and
records depending on the nature of the fraud. Guy and Pany (1997) state that
financial statement fraud differs from other frauds in that “fraudulent
financial reporting is committed, usually by management, to deceive
financial statement users while misappropriation of assets is committed
against an entity, most often by employees” (p. 4).
This research uses the Treadway Commission’s definition of financial statement fraud
(AICPA 1987): “Financial statement fraud is any intentional act or omission that
results in materially misleading financial statements” (p. 8). While it could be argued
that this definition is out of date, more recent definitions are not much different. For
example, the definition of fraudulent financial reporting in paragraph 08 of Australian
auditing standard (AUS) 210 is “ . . . intentional misstatements including omissions of
amounts or disclosures in the financial report to deceive financial statement users”
(AARF 2004a).
1
4. It is often difficult to classify an act or omission as fraud, as the motivation behind the
action must be considered. Brennan and Hennessy (2001, p. 61) point out: “The
classification of an action as being fraudulent may depend on the motivation behind it
(eg, was it deliberate or accidental?)” Similar to Beasley (1996) and Persons (2005),
this research assumes that US firms subject to Securities and Exchange Commission
(SEC) enforcement actions under Rule 10(b) have been involved in financial
statement fraud in which the acts or omissions resulting in the fraud were intentional.
While this is a simplification it is necessary, as intent is difficult to prove. This
assumption is also applied to the European cases in this paper.
Young (2000) suggests that fraudulent financial reporting does not start with
dishonesty; rather, it may begin with pressure to meet financial targets and a fear that
failure to meet these targets will be viewed as unforgivable. Alternatively, the
perpetrator of fraud may be driven by dishonesty and personal gain (for example, to
protect bonuses) rather than by pressure from the organisation. This resonates with
Cressey’s (1953) fraud triangle, which identifies three factors: private non-sharable
incentives or pressures, contextual opportunities to commit fraud and ability to
rationalise fraud. Cressey’s research was based on interviews with embezzlers, and
without further research cannot be extrapolated to financial statement fraud.
Financial statement fraud tends to start small (KPMG 2004b). It begins in areas of
generally accepted accounting practices (GAAP) which contain ambiguities (except
for jurisdictions with very prescriptive accounting standards). Managers may exploit
the ambiguities and available choices to present the financial picture that meets their
financial targets. The dividing line between “earnings management” and “earnings
manipulation” is narrow. Paragraph 10 of AUS 210 specifically comments on this
pattern of starting out small, with pressures and incentives heightening the activity.
Burns (1998) asked: “At what point does sharp practice become fraud?” (p. 38).
Once financial statement fraud has been committed it is difficult to stop, as most fraud
techniques involve “borrowing” from one period and “loaning” to another period.
With the passage of time, the amounts and number of people involved grow and the
perpetrators can only continue to try to hide the fraud.
Justification for the research
Research into fraud, and financial statement fraud in particular, is difficult as fraud is
usually a hidden activity. Higson (1999) found management reluctant to report
suspected fraud because of its imprecise definition, vagueness over directors’
responsibilities and confusion about the reason for reporting fraud. The Committee of
Sponsoring Organisations of the Treadway Commission report found that most audit
reports issued in the year prior to the fraud coming to light were unqualified (COSO
1999); therefore, qualified audit reports do not adequately quantify the impact of
financial statement fraud. Fraud Advisory Panel (1999) figures suggest that UK fraud
involving false accounting peaked in the early 1990s, falling until 1996 when reported
cases of false accounting rose again, though not to the same level. Similar data
available for Australia suggest that financial statement fraud peaks in times of
recession (Fraud Advisory Panel 1999, p.18).
Despite the lack of quantitative evidence, consideration of the qualitative aspects of
financial statement fraud can enhance our insights. This research will be useful to
practitioners by highlighting management and organisational characteristics
2
5. associated with financial statement fraud and may help in early detection and
prevention of fraud. Cases are evaluated by reference to the number of fraud factors
present in official reports of the financial statement fraud and interrelationships of
fraud factors for each case studied are analysed. Most previous case studies are based
only on US cases. This paper contributes to the literature by including a sample of
European as well as US cases. Clarke et al (2003) include case studies of Australian
accounting scandals.
LITERATURE REVIEW
Perpetrators of financial statement fraud
A survey by the Association of Certified Fraud Examiners (ACFE 1997) found that
83% of the fraud losses studied involved owners or executive directors. Using the
phrase “watch the insider”, Ernst & Young (2003) found that more than half of the
perpetrators were from management.
While many individuals within companies have committed financial reporting fraud,
most of the cases studied involved the CEO, president or chief financial officer (CFO)
as the principal perpetrators (AICPA 1987). The COSO (1999) investigation of 200
companies in which financial statement fraud had been found showed that 72% of
occurrences involved CEOs and 42% involved CFOs. The Auditing Practices Board
(1998) also points to senior management involvement and states (p. 9) that most
material fraud involves management.
Methods of financial statement fraud
ACFE (2004, p. 10) has developed an occupational fraud classification system, shown
in Figure 1.
Spathis (2002) identifies three methods of committing financial statement fraud:
• changing accounting methods;
• altering managerial estimates; and
• improper recognition of revenue and expenses.
Beasley et al (2000) investigated fraudulent financial reporting in the technology,
healthcare and financial services sectors. The study found the most common types of
fraud to be:
• improper revenue recognition; and
• asset overstatement.
3
6. FIGURE 1: FINANCIAL STATEMENT FRAUD CLASSIFICATION
SYSTEM
Fraudulent
statements
Financial Non-
financial
Asset/revenue Asset/revenue Employment
overstatements understatements credentials
Timing Internal
differences documents
Fictitious External
revenues documents
Concealed
liabilities
Improper asset
valuations
Source: ACFE (2004: 10)
Motivations for financial statement fraud
Motivating factors cited for the involvement of management in fraudulent financial
reporting include:
• compensation packages based on reported earnings. There is support in the
literature for management compensation as a significant motivator of fraudulent
financial reporting (eg, Watts and Zimmerman 1990, AICPA 1987), although
there have also been contrary findings (Dechow et al 1996);
• desire to maintain or increase share prices;
• need to meet internal and external forecasts. When a firm is failing to achieve
targets, there is incentive for management to falsify financial reports to meet them
and protect share prices (Feroz et al 1991, Dechow et al 1996);
• desire to minimise tax liabilities (Spathis 2002);
• need to avoid violations of debt covenants. Dechow et al (1996) found that firms
committing financial statement fraud had higher leverage than control firms.
Spathis (2002) mentions the need to meet unrealistic commitments made to
creditors as a motivation to commit fraud. The Treadway Report (AICPA 1987)
found that the desire to postpone dealing with financial problems (and thus
violating debt covenants) was a frequent incentive for fraudulent financial
reporting; and
• desire to raise external capital cheaply.
Albrecht et al (2004) examine financial statement fraud from the perspective of four
prevailing theories of management. They identify nine factors which together create
the “perfect fraud storm”: a booming economy (which hid the fraud), moral decay,
4
7. misplaced executive incentives, unachievable expectations of the market, pressure of
large borrowings, US rules-based accounting, opportunistic behaviour of audit firms,
greed on the part of a wide variety of groups of people and educator failures. These
nine factors are analysed by reference to the fraud triangle of pressure to commit
fraud, opportunity to commit fraud, and inclination to rationalise fraud. They are also
examined against agency and stewardship theories. Albrecht et al conclude from their
analysis that managers who identify with a stakeholder perspective rather than with an
agency theory perspective are less likely to commit fraud.
Organisational factors related to financial statement fraud
Loebbecke et al (1989) designed a fraud prediction model based on conditions in the
entity, manager motivation and manager attitude. Bell and Carcello (2000) used the
same fraud sample as Loebbecke et al and contrasted it with a non-fraud sample in
order to consider the presence or absence of “red flags” as assessed by auditors. Some
organisational factors identified as likely contributors to fraudulent financial reporting
include:
• weak control environment;
• rapid growth;
• inadequate or inconsistent profitability;
• management placing undue emphasis on meeting earnings forecasts; and
• ownership status (public or private companies).
Fama and Jensen (1983) hypothesise that the internal control function of the board of
directors is increased by the inclusion of outside directors, who have an incentive to
develop reputations as experts in decision control. Jensen (1993) argues that outside
directors have a greater incentive to monitor top management when they hold
substantial amounts of shares. Beasley (1996) found that certain characteristics of
outside directors, such as the percentage of equity held, help reduce the incidence of
financial statement fraud.
Audit committees form an important part of the internal control environment. Young
(2000) describes the audit committee as the vanguard in the prevention and detection
of financial statement fraud. However, Beasley (1996) found that the existence of
audit committees does not significantly affect the likelihood of the occurrence of
financial statement fraud. This may be attributed in part to the number of times the
audit committee meets. Beasley found that in 35% of fraud firms and 11% of non-
fraud firms in the research an audit committee had not met during the year. Dechow et
al (1996) found that firms subject to fraud are less likely to have an audit committee.
Beasley et al (2000b) investigated corporate governance differences in a sample of
fraud and non-fraud firms. They found that fraud firms were less likely to have an
audit committee. Where one existed in a fraud firm, it tended to be less diligent and
less independent; non-fraud firms had more outside directors on the audit committee
than fraud firms. They also found that internal audit departments were less common in
fraud firms.
Detection of financial statement fraud
APB (1998) concedes that management fraud is difficult to detect during a financial
audit because of management’s unique ability to conceal the fraud. Auditors
discovered 84% of the fraud cases examined by Loebbecke et al (1989). Financial
statement fraud may be discovered when the auditor becomes suspicious about false
5
8. accounting or a lack of management explanation regarding transactions and balances.
However, it is often discovered because of the company’s difficult financial
circumstances, which may ultimately bring about the firm’s failure. Johnson et al
(1993) examine what kinds of knowledge help the successful detection of financial
statement fraud. Summers and Sweeney (1998) found auditors could increase the
likelihood of detecting fraudulent financial reporting by including insider trading in
their detection model. Also taking an auditor perspective, Chen and Sennetti (2005)
try to develop a model to predict fraudulent financial reporting. They identify
common fraud characteristics in a group of 52 computer companies accused of
financial statement fraud. They find fraud firms have larger stock-option tax benefits
and, compared with sales, lower research and development expenditures, lower
marketing expenditures and smaller changes in free cashflow.
Time to discovery
The average length of time taken to discover financial statement fraud varies among
studies. Summers and Sweeney (1998) found the average period from fraudulent
actions to discovery was three years. Table 1 shows that the time taken to discover
fraudulent financial statements varies with each individual case.
TABLE 1: TIME TO DISCOVERY OF FINANCIAL
STATEMENT FRAUD
Number of firms Time to discovery
19 3 months
50 1 year
10 2 years
Adapted from Dechow et al (1996)
Management and the reporting of financial statement fraud
Higson (1999) found that there was a distinct reluctance to report fraud and that few
companies had policies for dealing with discovered fraud. The main motivation for
reporting financial statement fraud was to deter others. Disciplinary action was found
to be the most popular deterrent, as prosecution or loss recovery was expensive and
troublesome.
Outcomes arising from fraud
Outcomes arising from fraud or its discovery are considered from the perspectives of
the victim firm, the perpetrator, actions of official investigators and of the external
auditor.
Effect of fraud on the firm
The immediate result for the company is a serious drop in share price once the
financial statement fraud becomes public. Dechow et al (1996) found an average
share-price drop of about 9% when allegations of financial statement fraud were first
announced. Not all firms can survive once the financial statement fraud is discovered.
The COSO report (1999) found that consequences for the company included
bankruptcy, significant changes in ownership, financial penalties and delisting by
stock exchanges. More than 50% of the sample firms went bankrupt or experienced
6
9. significant changes in ownership. Twenty-one percent of the firms were delisted by a
national stock exchange.
Effect of fraud on the perpetrator
Consequences for the individuals involved in the fraud are also severe. When
accounting irregularities come to light in the US, class-action suits and investigation
by the SEC may follow. COSO (1999) reports that individual senior executives of the
sample firms were subject to class-action legal suits and SEC actions resulting in
personal financial penalties. A large number were sacked or forced to resign. Few,
however, admitted guilt or were jailed.
Official investigations into fraudulent financial reporting
In the US, allegations of fraud can be investigated by the SEC where the companies
involved come under the Commission’s supervision. Feroz et al (1991) point out that
the SEC has more targets than it can cope with and, because investigations are costly
and highly visible, undertakes investigations only where there is a high probability of
success.
In contrast to the US, class-action suits are not common in the UK, where financial
statement fraud is more likely to result in criminal prosecution. The Serious Fraud
Office (SFO), which is part of the UK criminal justice system, investigates and
prosecutes cases of serious or complex fraud, including financial statement fraud. As
in the US, the SFO investigates cases only where there is a high probability of success
and, because of the cost and time involved, only where the fraud results in a loss of
more than £1 million; “smaller” cases will not be officially investigated.
External auditor and fraud
Palmrose (1987) studied the relationship between business failures or management
fraud and legal actions brought against auditors. The findings show that nearly half
the cases of alleged audit failure relate to the economic climate auditor litigation
increases with economic recession. Actions against auditors are more likely in cases
of audit failure when management fraud is involved, possibly because auditors are
seen to represent deep pockets from which investors and creditors can recover their
losses.
RESEARCH QUESTIONS
The purpose of the research is to consider documented cases of financial statement
fraud and to note any commonalities. Six questions are addressed:
1. Who is committing financial statement fraud?
2. How is financial statement fraud perpetrated?
3. What are the motivations for financial statement fraud?
4. Are there any organisational factors related to financial statement fraud?
5. How and why is financial statement fraud detected?
6. What was the outcome for the perpetrators and their victims?
7
10. RESEARCH METHODOLOGY
Case selection
Fourteen companies are analysed in the research nine US and five European.
The nine US companies were selected following a search of the SEC’s Accounting
and Auditing Enforcement Releases (AAER) relating to violations of Rule 10-b of the
Securities and Exchange Act 1934 and Section 17(a) of the Securities Act 1933.
These are the main rules relating to financial statement fraud. The AAER are
available on-line at www.sec.gov.
The European cases are UK companies with the exception of Lernout and Hauspie
(L&H), a Belgian company. The main source for the European cases was the financial
press. The SFO website, www.sfo.gov.uk, provided a summary of the results of
successfully prosecuted cases.
Table 2 lists the official names of the companies used as case studies.
TABLE 2: COMPANIES USED IN THE RESEARCH
US cases
Livent Inc
Sunbeam Corporation
Cendant Corporation
Kurzweil Applied Intelligence Inc
Automated Telephone Management Systems Inc (ATM)
Waste Management Inc
Aura Systems Inc
Xerox Corporation
Cypress Bioscience Inc
European cases
Wickes Group
MTM Plc
Powerscreen International
Lernout and Hauspie Speech Products (L&H)
Azlan Group
A detailed appendix which is available on request contains
a summary of each of the 14 cases.
Steps in assessing case studies
The approach to assessing the case studies is that suggested by Ryan et al (1992).
Cases were deemed suitable for inclusion in the research where information about
methods and motives was on the public record and where persons involved in the
fraud had been publicly identified. The main source was documented evidence from
SEC and SFO reports. Secondary evidence such as newspaper reports and articles was
also used.
Each case was analysed for recurring results, using the six research questions. The
results were brought together in Table 7, which shows the interrelationship of all
factors relating to financial statement fraud for each of the 14 case studies. Using
8
11. totals to summarise the evidence, the companies were ranked by the number of factors
found.
RESULTS
Results for each of the six research questions are presented separately in Tables 3-6
and 8-10. The results are brought together in Table 7, ranking the cases according to
the number of fraud factors. This shows that factors relating to financial statement
fraud are inter-linked, and that fraud does not occur in a vacuum.
Perpetrators of financial statement fraud
As Table 3 shows, senior management was responsible for the financial statement
fraud in most cases. This is due to senior management’s ability to override controls
and direct others to commit and conceal the fraud. Others responsible included sales
director, trading director, finance director, chief operating officer and a managing
director who was also one of the company founders. These are all senior positions in
the control structure of the firms. Most of the senior accounting staff held responsible
were qualified accountants.
TABLE 3: PERPETRATORS OF FINANCIAL
STATEMENT FRAUD
Perpetrator Number Percentage of 14
of cases cases studied
Internal perpetrators
Senior management
CEO/Vice-president 12 86%
Chairman/President 9 65%
CFO/Finance director 7 50%
Entire senior management 4 29%
Senior legal officers 2 14%
Accounting staff
Senior accounting staff 9 64%
Middle accounting staff 2 14%
Junior accounting staff 1 7%
Non-senior staff 3 21%
Others 5 36%
External perpetrators
Auditors 2 14%
Other outsiders 2 14%
In two cases the auditors were held responsible for not detecting the fraud or for not
taking appropriate action in relation to the fraud. On one occasion, the audit partner
alone was deemed responsible as he knew (or should have known) of the fraud. In the
other case the entire audit firm was held responsible, as all those involved in the audit
knew of the fraud and yet the auditors gave an unqualified audit report. It has long
been the view that auditors are watchdogs, not bloodhounds, and are not expected to
detect fraud (Kingston Cotton Mill Company (No. 2) (1896) Ch 279, at 288–9). More
recent case law suggests that auditors take into account the circumstances of the
individual business (eg, Pacific Acceptance Corporation Ltd v. Forsyth (1970) 92 WN
9
12. (NSW) 29), and the possibility of fraud (WA Chip & Pulp Pty Ltd v. Arthur Young &
Co. (1987) 12 ACLR 25) (Tomasic 1992). AUS 210 now requires auditors to conduct
audits so as to have a reasonable expectation of detecting material misstatements
arising from fraud or error.
In each case, more than one individual was involved, which is why the number of
cases in Table 3 is greater than the number of cases researched.
Methods of financial statement fraud
Table 4 shows the most common method of financial statement fraud to be the
inflation of revenue. Different methods of revenue inflation were used, the most
popular being forging sales, used in 57% of cases. Asset-intensive firms such Xerox
manipulated depreciation provisions, while revenue-rich firms such as Wickes and
Cypress falsified sales. Results suggest that each firm will commit fraud however and
wherever it is easiest to commit and conceal. Other methods used include:
• recording false profits on disposals;
• side agreements relating to sales;
• entering sales agreements which produce no profit, solely to increase revenue;
• offsetting gains against losses not previously recorded; and
• manipulating lease agreements.
TABLE 4: METHODS OF FINANCIAL STATEMENT FRAUD
Methods Number of Percentage of 14
cases cases studied
Inflating revenue
False/forged sales 8 57%
Recognition of incomplete sales 4 29%
Misclassifying sales 3 21%
Early recognition of rebates from suppliers 2 14%
Others
Deleting expenses from the books 2 14%
Creating secret reserves through 2 14%
restructuring charges
Incorrect valuation of stock 2 14%
Under-providing for depreciation 3 21%
Others 5 36%
In some cases more than one method was used, which is why the number of cases in
Table 4 is greater than the number of cases researched.
Motivations for financial statement fraud
As shown in Table 5, influencing share prices to meet external forecasts, or for
personal gain, was the most common motivation for the fraud. Where personal gain is
cited, it was the overriding motivation for the fraud. In every such case, the
perpetrators gained from their actions, whether it be promotion, keeping a job, gaining
favour with senior personnel or receiving increased bonuses. However, in 43% of
cases, personal gain was the sole reason for the perpetrators’ publishing misleading
financial reports. Even where the pressure to meet external forecasts was cited as the
motivation, it is not clear that personal gain was not also involved. It would be
10
13. interesting to study share dealings by directors and executives before the fraud came
to light, to test whether individuals made personal gains.
Most of these individuals were found guilty of insider trading or of obtaining bonuses
unlawfully and were forced to repay their gains. The motivation for the fraud was not
explicit in some cases and where this occurred the motivation was deduced from the
perpetrator’s gains and the outcome of the official investigation.
In some cases there was more than one motivation, which is why the number of cases
in Table 5 is greater than the number of cases researched.
TABLE 5: MOTIVATIONS FOR FINANCIAL STATEMENT FRAUD
Motivations Number Percentage of
of cases 14 cases studied
Influence stock prices
Meeting external forecasts 6 43%
Personal gain 6 43%
Success of Initial Public Offering (IPO) 2 14%
Increase value of firm by inflating stock prices 2 14%
Others
Loyalty to the organisation 1 7%
To make new strategy succeed 1 7%
Organisational factors related to financial statement fraud
Each company had a weak control environment, as shown in Table 6. The presence of
this factor is necessary for any type of financial statement fraud to occur. Details of
audit committee activity were not available for every case. Further research into the
composition of the board of directors could enable a more detailed analysis of
organisational factors relating to financial statement fraud. The research did not
uncover evidence on the independence of the board of directors in every case.
Individuals were classified as having too much power when they held more than one
senior position in the organisation, such as vice-president and CFO. Boards of
directors and audit committees were classified as weak where they were not
independent or were controlled by one or a few individuals.
In each case, more than one organisational factor was related to the fraud, which is
why the number of cases in Table 6 is greater than the number of cases researched.
11
14. TABLE 6: ORGANISATIONAL FACTORS RELATED TO FINANCIAL
STATEMENT FRAUD
Organisational factors Number of cases Percentage of 14
cases studied
Weak internal control 14 100%
Culture of meeting targets 6 43%
Too much power held by one person 5 36%
Weak audit committee 4 28%
Weak board of directors 3 21%
Case analysis summary
The 14 cases have been analysed individually. However, it is important to extract a
broader picture by analysing all 14 cases together. All factors relating to the fraud
(shown in Tables 3 to 6) were summarised and listed by company in Table 7. For each
of the 14 cases, a mark is recorded where the fraud factor was present. In all cases, the
fraud involved the presence of a large number of fraud factors, ranging from 14 in
Livent, Sunbeam and Cendent to six factors in Azlan.
Generally, the more people involved in the fraud, the greater the number of methods
employed and the greater the number of outcomes. Livent emerges as having had the
worst case of financial statement fraud. US cases tended to have more fraud factors
than European cases. The worst European case (Wickes) ranked only seventh. The
three cases with the least number of fraud factors were all European. It is difficult to
know whether this is due to differences in the business environments or the regulatory
regimes (there may be differences in enforcement strategy between the SEC and the
SFO), or due to the thoroughness of reporting of fraud in the US compared with
Europe.
12
16. Discovery of financial statement fraud
As shown in Table 8, the length of time to discovery varied between one and five
years, with only one fraud incident discovered within one year and three not
discovered for more than five years. The person discovering the fraud did not bear any
relation to the time taken to discover it, contrary to expectations.
TABLE 8: TIME TO DISCOVERY
Time period Number of cases Percentage of 14 cases studied
< 1 year 1 7%
1 – 5 years 9 64%
> 5 years 3 21%
unknown 1 7%
Table 9 shows that management discovered the fraud in five cases. In 21% of cases,
the fraud was uncovered when new management was appointed. Incumbent
management who became aware that other members of management were “cooking
the books” uncovered 14% of the frauds. In most of these cases, junior staff involved
confessed to management that they had participated in the fraud scheme.
TABLE 9: DISCOVERY OF FRAUD
Discovery of fraud Number of cases Percentage of 14
cases studied
Internal discovery by:
New management 3 21%
Incumbent management 2 14%
External discovery by:
Public allegations of fraud lead to 3 21%
internal investigation
Auditors 3 21%
Failed rights issue 1 7%
SEC notice discrepancy between 1 7%
press release and filed accounts
Unknown 1 7%
Only in 21% of cases was the fraud discovered by the external auditor. In 3 cases
(21%) the fraud was highlighted by allegations in newspapers and other public
forums. These public allegations led to internal investigations into the possibility of
financial statement fraud, followed by public admission that the financial reports were
fraudulent. Pizzani (2004a and 2004b) has analysed some of these public allegations.
In the case of Sunbeam, the fraud was first stumbled upon by a journalist, with the
assistance of an academic. In the case of Xerox, the SEC launched an investigation
into rumours of irregularities, possibly started by an internal whistleblower. The Wall
Street Journal brought the Lernout and Hauspie case to public attention (Carreyrou
and Maremont 2000). In the case of ATM, how the fraud was discovered is not clear
from the SEC reports.
14
17. Outcome for the victims and perpetrators
Only cases where the fraud had been proved by an official body, either the SEC or the
SFO, were used in the research (see Table 10). The Belgian company L&H was
prosecuted by the Belgian courts and its US division and at the time of the research
was still under investigation by the SEC. Most perpetrators were ordered by the
SEC/SFO not to violate anti-fraud laws again. Those perpetrators who were also
accountants were prevented from appearing in front of the SEC again as practising
accountants for between three to five years. Prison sentences were imposed in only
four cases. Monetary penalties imposed mainly related to the repayment of illicit gains
such as profits from insider trading or bonuses received due to fraudulently increased
earnings.
All companies except one (which closed soon after the discovery of the financial
statement fraud) issued re-stated financial reports for the fraud periods. Three
companies filed for bankruptcy protection as a direct result of the fraud. Others would
have been forced to do the same had not their bankers refrained from foreclosing lines
of credit.
Although auditors were held responsible in two cases of financial statement fraud, at
the time of the research only one audit firm had been fined. Arthur Andersen was
fined $7 million for unprofessional conduct in the case of Waste Management. At that
time, this was the largest penalty to be awarded against an auditor in a case of
fraudulent financial reporting. In the second case, KPMG was held responsible in
respect of the audit of Xerox. In April 2005 (after the conduct of this research),
KPMG arrived at the largest-ever settlement with the SEC of $22 million.
(Subsequently, in August 2005 KPMG settled with the SEC for $456 million in
respect of tax-shelter fraud.) In 86% of cases, the auditors were deceived by their
clients yet only two auditors took action against their clients. In both of these cases
the auditors themselves are being sued by shareholders.
Only in the case of Cendant Corporation was the shareholders’ lawsuit against the
auditors completed at the time of the research.
In each case there was more than one outcome as a result of the fraud, which is why
the number of cases in Table 10 is greater than the number of cases researched.
IMPLICATIONS AND CONCLUSIONS
Financial statements are the responsibility of company directors. In 71% of cases
studied the CEO or chairman was responsible for the fraud. Prevention of financial
statement fraud must therefore begin at board level, and especially at executive
director level.
Tone at the top
The “tone at the top” refers to the attitude of top management towards the financial
reporting process. The Australian Stock Exchange (2003) makes it clear that boards of
directors are responsible for setting the tone at the top. The correct tone is an
unrelenting insistence that the numbers are truthful and are never massaged for any
purpose. Once such an attitude is established at the top it must be communicated to
every division, every department and every individual throughout the organisation.
15
18. Without the right attitude, internal controls are less effective. Maintaining the right
attitude in the control environment requires continuous vigilance, as fraud generally
starts small, within the grey areas of accounting rules. While the tone required at the
top is one of unrelenting truthfulness, the specifics of achieving this vary among
firms.
TABLE 10: OUTCOME FOR PERPETRATORS AND THEIR
VICTIMS
Outcome Number Percentage of 14
of cases cases studied
Perpetrators
Perpetrators prosecuted by the SEC/SFO 11 79%
Case investigated by SFO but no charges brought 1 7%
Investigation by SEC not completed at time of research 2 14%
Perpetrators receive prison sentences 4 29%
Company disciplined staff members involved 3 21%
Perpetrators receive monetary penalties 3 21%
Company
New management employed as a result of fraud 10 71%
Company taken over as a direct result of the fraud 2 14%
Company bankrupt due to fraud 3 21%
Company no longer in existence 1 7%
Company closed but re-formed under new name 1 7%
Auditors
Auditors sue company for concealing fraud 2 14%
Auditors are held responsible for the fraud and fined 1 7%
Shareholders
Sue company, auditors and perpetrators for loss of 4 29%
investment.
Audit committee and internal audit
Most stock exchanges now require listed companies to have an audit committee (eg,
US SEC Section 10A(m)(1) of the Securities and Exchange Act 1934, Principle C3.1
UK Combined Code (Financial Reporting Council (FRC) 2006), Principle 4
Australian Stock Exchange 2003). However, the composition and operation of audit
committees is often not prescribed. Research shows that existence of the committee
alone is not sufficient to prevent fraud, although fraud is less likely where there is an
audit committee (Beasley 1996). To be effective, the audit committee must be
independent, meet regularly and have financial expertise (Farber 2005). Many stock
exchanges require audit committees to be composed of non-executive directors only.
The committee should have a written charter, outlining its duties and responsibilities.
To be effective, the audit committee must have the technical knowledge to identify
when things are going wrong. The UK Combined Code requires at least one member
of the audit committee to have financial expertise (FRC 2006). The Australian Stock
Exchange suggests in its guidance (but does not explicitly require) audit committee
members to possess appropriate technical competence. Finally, the audit committee
must be willing to give as much time as is necessary to their duties. There need be no
set number of meetings in a year; rather, the financial reporting process of the firm
will determine how much effort is required from the audit committee.
16
19. The internal audit, like the audit committee, needs to be able to function without
interference from management. Detailed guidance on internal audit standards is
provided by the Institute of Internal Auditors in Australia (http://iia.asn.au). Internal
audit has an advantage over external auditors, being continuously present in the
organisation and thus better able to form a judgment about the control environment.
Good communication between internal audit and external auditors is expected.
Capability of accounting department
The accounting department should be adequately staffed to enable the division of
duties. Staff should have the technical knowledge necessary to fulfil their tasks. The
accounting department does the work and preparation behind the financial statements;
if it lacks the necessary skills, the likelihood of fraud occurring increases
dramatically. The issue of human resources, training and competence is referred to in
AUS 402 in relation to external auditors’ assessments of risk (AARF 2004b). Many
corporate governance regulations require the audit committee to ensure the internal
audit function is adequately resourced, but the requirement tends not to extend to the
accounting staff generally.
Implications for external auditors
Auditing standards have been strengthened and auditors carefully assess the risks of
fraud, taking into account the control environment and the general quality and the
independence of the board of directors and audit committee. Auditors nowadays also
spend more time examining the control environment and focus on areas which can
easily be manipulated, such as revenue recognition. In the light of the findings of this
study, auditors should consider any unusual revenue patterns in their efforts to detect
fraud. Revenue increases before the end of a quarter, or revenue patterns that do not
fit the business cycle, could be an indication of something untoward. The auditor
should also consider any unusual or unjustified reserve movements, not just at year-
end but also throughout the year. Reserves that are based on subjective judgments
alone warrant extra consideration.
When deciding whether adjusting errors are material, auditors need to consider the
qualitative, as well as quantitative, aspects of materiality (see Brennan and Gray 2005
for a review of the concept of materiality). An abuse of the concept can lead to
“nonmaterial adjustments” not being made, leading to misleading financial statements
Implications for regulators
Legislation
Much recent regulatory change, such as Australia’s Corporate Law Economic Reform
Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9), the
Australian Stock Exchange’s corporate governance principles and the US Sarbanes-
Oxley Act 2002, has been aimed at improving the integrity and transparency of
financial reporting (KPMG 2004b). The bar has been significantly raised from a
regulatory point of view in many jurisdictions. This has led to many complaints from
business that it is over-regulated. The collapse of Refco in the US in October 2005
perhaps illustrates the truism that no amount of regulation can prevent fraud. Some
argue that the substantial extra cost of Sarbanes-Oxley exceeds its benefits to society
(eg, Zhang 2005) but the evidence is mixed on this point (Leuz et al 2004).
17
20. Enforcement
In many of the cases studied in this paper, there were numerous warning signs. Many with
responsibilities for reacting to or dealing with red flags chose not to do so. This may suggest
that regulations are not taken seriously enough by responsible parties. Regulators may need to
re-focus their attention away from imposing further regulatory burdens on companies, and
towards ensuring that the regulations on the books are actually enforced. It could be argued that
passivity by regulators and other responsible parties could amount to collusion in cases of
fraud.
Continuous disclosure
Young (2000) suggests that the current financial reporting process, by producing information
only quarterly or annually in some jurisdictions, is failing to meet the needs of the financial
markets. The markets demand instantaneous non-stop information, and the gap is filled by
financial analysts whose earnings predictions are based on their knowledge of the firms’
activities. The financial markets respond to quarterly or annual results only when they fail to
coincide with the analysts’ predictions. Given that the research found meeting external
analyst’s forecasts to be a motivation for fraud in 43% of cases, there is support for his
argument. Perhaps regulators need to consider ways to reduce the pressure on companies to
match analysts’ targets.
Continuous disclosure rules were introduced in 1994 by The Australian Stock Exchange,
requiring the immediate announcement of material price-sensitive information known to the
directors. Enactment of the Corporate Law Economic Reform Program (Audit Reform and
Corporate Disclosure) Act on 30 June 2004 significantly enhanced the enforcement of these
continuous disclosure rules by introducing on-the-spot fines of up to $1 million and extending
liability beyond listed entities to include individuals involved in breaches of the rules. It would
be naive to expect these rules to eliminate the management of earnings in attempting to meet
analysts’ forecasts, but they may restrain the degree of aggressiveness applied in doing so.
Limitations and further research
This research is subject to a number of limitations. First, the findings are based on a small
number of cases. Research could use a greater variety of case studies from different countries to
provide a greater contrast of financial statement fraud incidents, methods and motives in
various financial markets. The use of more cases would produce results capable of greater
generalisation. Second, the research is based only on published data. Interviews with market
participants could yield enhanced insights.
It would be interesting to research in greater detail the organisational factors influencing
financial statement fraud. Since each company studied was registered on a stock exchange, it
would be possible to obtain detailed information on the directors’ tenure, experience, personal
connections with the company and compensation. This could be investigated in connection
with the independence of the board of directors and the audit committee.
Most previous research is based on US data. This study included European cases. The
relationship between regulation and financial statement fraud in different jurisdictions requires
more careful analysis. Such research might assist in answering the common question from
business: Are companies over-regulated?
Professor Niamh M. Brennan is Michael MacCormac Professor of Management at University
College Dublin. Mary McGrath is audit manager at KPMG, Dublin. The authors are grateful
to two anonymous referees whose comments served to considerably improve this paper.
18
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