ACCOUNTING FRAUD Accounting Fraud: Is It Still an Issue?

1. Executive Summary

The most astonishing to be found that although the SOX Act started in 2002, the reality of the situation is that the number of corporate scandals has increased. It has been clear that with the U.S. Congress being at the foreground for reform of corporations, the congress would have the same information that was obtained for this research paper. It was not easy to believe, especially after all of the coaching, initiating, and previous research, that the number of corporate scandals has actually increased. It has been very surprising to anyone, especially by conducting more searches, with what to know about what the SEC and other agencies were going to do to curb and stop this behavior. Studies have shown that at the end of the first quarter of 2013, the SEC filed 85 legal reports. There are mainly thirty cases per month or one per day! How may the government agencies not acting back or imposing preventive regulations over those cases? And what gets me the most is the fact that these proceedings from the SEC are against the board of directors, accountants, auditors, and others. Isn’t this what SOX was supposed to stop?

In today’s culture, the public is concerning about using the stock market to grow their retirement savings. The reasons why financiers don’t want to invest in the stock market is the number of corporate scandals and fraud happening around. All of those investors are worried that their retirement’s savings will be occupied to the cleaners much like Enron, WorldCom, and other various firms that had been swept out because of corruption involving. Many studies show that the public’s trust could be achieved if there were penalty of assurance from the SEC and other governmental agencies which can limit accounting fraud cases.

Many fraud cases revealed that, with how accountants are critically important to their firms and companies, accountants would have awareness of any corporate patterns and the capability to finish it and limit many of fraud cases. However, some accountants get along with it which is motivating by some reasons. First, is the pressure coming from top management or administrators which lead to hiding the fraud. Second, accountants never like to go against their company interest where their livelihood is. Lastly, greed plays still have a hand in it that they go along with the scandal and profit from it. From the online sources that have assisted in the research process of the study, the AICPA and others accounting boards have Code of Professional ethics for their members. These codes of professional ethics publish how accountants should deal with such fraud scandals.

The topics within the code explain how those government agencies, such as the SEC, should be more authoritative in order to regulate practices and enhance the auditing standards, and to develop those changes in a certain way to make corporations commit not to attempting any fraudulent activities.

1. Fraud Introduction

Committing fraud has become a common practice in the US accounting. These fraudulent cases impacted the users of the financial information and disrupted the confidence of the public. Despite continuous legislations, the users of financial reports were shocked by recurring pattern of fraudulent activities. The SEC has filled sixty-three cases against fraud committers who commit criminal acts. Such cases involve the board of directors, accountants, and auditors.

To deter accounting fraud the SEC PCAOB, ASB, and FASB have made significant developments. In order to ensure transparency, the users of financial information have called on accounting boards to assume various changes to accounting principles and concepts. Hence, the FASB and IASB are working on a mega project to converge IFRS and US GAAP. Financial reports users in US believe that adopting IFRS in US would better place the US in a position consistent with the rest of the world.

However, It is believed that unethical behavior remains to be a major challenge with the adoption of a new set of standards. Given that significant increase in unethical behavior, the accounting professionals believe that the numbers of standards will increase to address those concerns. The AICPA has issued a professional code of conduct to direct professionals on how to deal with fraudulent activities. By publishing the code of ethics, The AICPA is aiming to set majors to limit incentives and pressures faced by accounting professions. Although the AICPA is trying to raise public awareness, accounting professionals believe that those attempts are limited and that SEC should enforce certain majors to ensure those majors are explicit in nature rather than implicit.

This work paper is designed to examine and optimistically solve two difficulties that stem from accounting fraud and corporate scandals. The first difficulty is that with the inception of the Sarbanes-Oxley Act of 2002, scandals are still happening to what was going on prior to 2002 and in some cases, worse than before. Scandals have surprised America, sent blows through the stock markets and caused the American dollar to drop in value making inflation in its market. The second difficulty that needs to be addressed and solved for is that all accounting standards and principles need for urgent updating. By updating the standards and principles that are the foundation of the accounting profession, these will in turn protect the interests of who this reform is needed for: creditors, investors, company employees, and anyone else who would have a hand in the pot with companies. By having updated standards and principles, investors should not have to worry about what corporations are doing with their money and public trust and positive perception of the accounting profession can be considered noble instead of being the forefront for all of the corporate scandals and accounting frauds.

By conducting more studies and trying to find literature on scandals after the SOX Act, viewing it up was easier than originally thought with the SEC litigation section on their website. It actually lists who the SEC is going after and by clicking into individual cases, one can see how much the dollar range of the fraud actually is. By observing this website, it shows that although the U.S. Congress helped pass the SOX Act, the number of scandal cases is still increasing and doesn’t seem to be decreasing at all. The website currently shows that through March 29th of 2016, that there were 63 cases opened this year alone (SEC, 2016). The dollar ranges for these cases are as small as $25,000 to multi-million dollar.

In the article “The Role of Government in Corporate Governance”, the author confirms that there is a needed reform in the accounting standards and principles. The writers specified that to have effective government action in hand, there will be needs to reform regulatory system, improve standards and principles, so do law enforcement stepping up (Coglianese, 2012).In order to do the right support of the claim, there will be a need reform the accounting standards and principles that are presently being used today, Mike Ng mentions that with the recent accounting and corporate scandals that have been happening, the faultfinders recommended that the U.S. adopt a principles based approach rather than the rules based one that we are using currently (Ng, 2004). By having multiple authors suggest that something like this needs to happen, that the accounting standards and principles need to be changed, means something. These authors wrote about this reform back in both 2004 and 2012. This was a couple of years after the SOX Act was passed and a decade after SOX. In that decade, it looks as though the cry for reform has fallen on deaf ears and that is something that needs to change if the U.S. wants the accounting profession to change for the better and to gain the trust of the American people back.

The American Institute of Certified Public Accountants, or AICPA, website repeated the same thoughts that all accounting workers (Auditors, Accountants) are able to discontinue and decrease fraud cases numbers. The AICPA established a Code of Professional Ethics and published it on their website. This Code has been provided to all of its members as a reference for all of the accountants who had to deal with a situation such as a corporate scandal (AICPA, 2016). The AICPA presented to its members some literature in order to reveal that number of corporate fraud cases was brought down, so why are cases number showed that they are increasing? The SEC publishes on their website that they are going to go after for these types of acts and yet the number of cases is increasing with minimal repercussions to the parties involved in the fraudulent activities. The AICPA is doing what they can to help out their members by providing guidance, but they are also trying to regain the public’s trust for the accounting profession as they are seen as the first people who could stop these scandals in the first place. Rendering to the AICPA website, the organization is calling for all of its accountants and auditors to have an “unswerving commitment to honorable behavior” even at the loss or sacrifice of having a personal advantage (AICPA, 2016).

1. Analysis

Based on when the data was pulled off of the SEC website, there has been sixty-three published cases opened this year as of March 29th, 2016 with more being updated daily. Based on SEC website components, there are like 5,568 litigation complaints since the foundation of 2002 (SEC, 2016). The SEC records went back to 1995 and showed by litigation released number, or LR, who the cases are against. Some of the cases are against one person companies, but there are corporations that are listed in these that have the “SEC Complaint” link for additional information. How is this broken down then? With 5,504 LR’s since 2002 to the end of 2015 (subtracting out the sixty-three from 5,567), that ends up being an average of 423 litigation complaints filed per year for the last 13 years. That ends up being 1.16 cases each and every single day! How are the federal government and SEC setting up with these numbers? It comes to mind that if the number of cases decreases, the SOX Act of 2002 will do some changes. Although, the cases number has stayed increased since SOX has taken action. It’s been clear that according to those numbers the law and its regulations still not enough preventive which means that the reform needs to be done. The insight of accounting profession depends on the reform and the public is keeping eye on it. One of most interesting things to discover that fraud cases never get decreased and always get increased. According to Patricia Galletta “… the 6% rise in fraud offenses from 2011 to 2012, and an additional 3% rise from 2012 to 2013, as reporting by the FBI’s National Incident-Based Reporting System” (Galletta, 2015). The rise in fraud cases year over year, can often revolves around civil law which only requires a misrepresentation of a material fact which the perpetrator knows to be false (Galletta, 2015). The writer continues showing that many agencies work hand by hand to detect fraud cases, nevertheless still more governmental agencies need to be involved. For example, in mail fraud cases, the situation requires the U.S. Postal Service to help detect the fraudulent activities. Very likely those committers know that fraud they do is going crosses multiple agencies, they will have a better chance of getting away with it. Such type of behavior must be stopping and reforming the accounting principles and standards is the most efficient way or maybe the only way to do. Meanwhile, it requires more law enforcement power giving to variety of governmental agencies other than the SEC

The question becomes, what is a corporate scheme and how is it defined. According to the research, a corporate scheme or fraud is defined as when “when there is hiding or twisting of financial information to seem strong and prosperous to employees, creditors, stockholders, and investors” (Evans, 2015). Such arrangements may involve a few or bunch of individuals which can be based on the extent to how they are informed with their business. Those, especially in the past with companies such as Enron, could include the auditors from the accounting firm there to audit the company or financial advisors and consultants. When companies does fraud, the result will extend to impact every single one in the same business .After companies like Enron and WorldCom had done their fraud case, they have never come back again and completely disappeared (Giroux, 2008). Consequently, dozens of employees lost their work and their livelihood forever including potential retirement. The same situation happened with stock market where those workforces were screwed over again by their pension and retirement fortune in stock market and got the same formal result. Otherwise, losing all of those fortunes may impact the economy so bad by not decreasing financing and investing sources. The top administration of these companies benefited from all fraud cases. However, it looks like they lost fortunes as others did but actually they found their way and used their positions to protect their interests. Whatever top executive lost can’t be compared to small workers who completely lost their livelihood.

While researching for this topic, it was clear that the public had numerous debates on corporate governance to focus on how inadequate the accounting standards and principles were as well as the enforcement of them. Although we have lot of studies showing how workers and fraud victims get lost but it never comes to what the actual lost is. It is never measured as it should be or specified in numbers. In 2002, three authors of an article titled “Cooking the Books: The Cost to the Economy, set out to show the effects that corporate scandals have on the U.S. economy. In their critique, they showed that since the 1960s, the public has trusted their money over and over into the stock market, mutual funds, and other vehicles used for pension accounts. In the report, almost 50% of households in the U.S. own some form of stock as opposed to 19% back in 1962. More than 21% of Americans placed their trust in mutual funds compared to 5% in 1990. “Mutual fund shares of 401(k) assets, were 44% percent of the total for 2001 compared to just 9% in 1990” (Graham, 2002). That is essential to note because with all of that wealth in companies’ 401(k) assets, if a scandal were to hit a protuberant company, its workers would lose the whole kit and caboodle. Regaining public trust to levels before financial scandals on record in 2002 is going to take a serious undertaking action to get it back.

Numerous people think that scandals have impacted the public trust negatively causing them to not trust who is working in finance (auditors, accountants).There is also a fact behind distrust with companies, especially with how public the executive suite’s salary, bonuses, and perks are. The SEC has been attempting to deter fraud cases by cooperating with Public Company Accounting Oversight Board or PCAOB, Auditing Standards Board or ASB, and the Financial Accounting Standards Board or FASB. Those financial agencies basically were established with purpose of protecting the interests of investors, employees, and creditors. United states are to look for and find an adoption of a reformed accounting standards and principles that might ultimately finish fraud and greed cases. Americans still away from this adoption and they need to work more on it. To quote Christopher Barker, the author of The $800 Trillion Scandal, “banking scandals have grown so common that perhaps folks have simply run out of outrage” (Barker, 2012).

To reference back to the authors of The Role of Government in Corporate Governance, “The public outcry over the recent scandals has made it clear that the status quo is no longer acceptable: the public is demanding accountability and responsibility in corporate behavior” (Coglianese, 2012). To make this a reality, it is going to take more than just corporate management to reestablish public trust. In order to get this to happen, it will have to take strong legal action by the federal government to reform the accounting standards and principles, to improve auditing standards and procedures, and to bring up the law enforcement of this criminal acts. Despite this in somewhat happened again in 2002 with the Sarbanes-Oxley Act passing, in which were commanded new financial control polices and standards reporting requests on publicly traded companies, it did not have the favorite effect that the public would want. The Act was supposed to make the SEC more of a self-regulated governmental administrator, nevertheless it produced bunch of paperwork and not real ability to deter fraud and incriminate actions. (Wilbanks, 2016).

The same as well with the quick passing of the Sarbanes-Oxley Act, it has not deterred top administration greed and has not stopped companies from practicing fraud or cooking their books. The real thing to do that accounting standards and principles must be reformed which is presently on going through convergence process between FASB and IASB. Such convergence process, since the early 2000s, is still going strong but there currently isn’t an end in sight on when the U.S. will adopt the new version of IFRS. It may need to happen so urgently. Investors and a registered voter hope that there would be rapid justice and sentence for crooks to the SOX Act. However, it doesn’t seem to be that result while companies keep producing more fraud of cases numbers. That needs to discontinue however, make reform to the present accounting standards and principles to IFRS will be very effective.

Since 2002, there have been almost 5,605 cases published on the SEC website with annually averages 424 case. With these numbers and with the SEC website that names the conspirators in these infractions or scandals, it shows that these cases are generally against an accounting professional in the form of either an accountant, executive board member, or an external auditor. Since the accountants and auditors make up the majority of the accounting professionals, it is sad to know that over 87% of the cases that the SEC publishes on their website name an accounting professional as a co-conspirator. That is almost 9 out of every 10 cases or roughly 368 cases a year. Where are ethics in the workplace? Apparently, they do not exist and ethics needs to be brought back into the business atmosphere and taught to the accounting profession.

When it comes to accounting fraud or corporate scandals, auditors and accountants are the first ones to become aware that a scheme exist in the company. For example, we are going to go back to 2002 and discuss Enron and Arthur Andersen. In the article What Went Wrong by Giroux, Arthur Andersen knew the scheme was happening and didn’t do anything about it (Giroux, 2008). One would wonder why the outside auditing firm didn’t bring this to the attention of their management and prevent a company like Enron from going under. The simple answer was greed. Both Enron and Arthur Andersen executives were in on it and to bring that to light would have meant giving away the profits that they have made based on false information. Another reason as to why Arthur Andersen didn’t bring it up was revenue or market share. Arthur Andersen at the time was performing the audits for Enron as well as the consulting portion as well. This is a huge conflict of interest in which the auditors didn’t want to fault the consultants because it would mean less revenue coming into the company as a whole. So they decided to sweep it under the rug and essentially hope for the best. Arthur Andersen could have prevented the total collapse of Enron, but didn’t because they didn’t want to lose a valuable client.

According to the AICPA website, “the principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage” (AICPA, 2016). This means that the accountants and auditors should put their greed and power hungriness aside for the sake of performing their services for their clients in an honest way. By finding loopholes to save clients money on their taxes is not fraud in my opinion as anyone can go out and get a tax attorney to ensure that they are not overpaying on taxes. Finding a loophole, although some would say is morally wrong, it is not illegal by all means. When campaigners are running their negative ads on their opponents, they always have that they are not paying their fair share of taxes. But it’s not the opponent’s fault that they hired a great tax attorney to help them out and that is not illegal. There are way to help out your clients to save money on taxes or showing them the correct way to expense things to save them money. But doing it within the boundaries of how things should be done is the way that business should be conducted each and every single day.

Ethics are the boundaries that define a person and a company’s character. Ethics should define the company as an organization and the message should be loud and clear: that the company will be ethical and will define the standards for the business and its employees to abide by. Where there is real skin in the game, such as employees and investors, the ethical standards that have been drafted and put in stone by the company should never be ignored and should never be broken. The point of establishing an ethical business is to not bend the rules for personal gain. Referring to the Code of Professional Conduct by the AICPA, accountants perform a vital role in society and business and have a responsibility to each other to maintain the public’s trust (AICPA, 2016).

It is about time for accountants and auditors to seek the approval and trust of the public once again. Afterward all of those scandals happening and all of the back office politics, it’s time to create a plan and save the insight of what the public has of the accounting profession. A good start is to have individuals be certified in ethics and the accountants and auditors attend an ethics class to freshen up on subject matter. The accounting profession needs to do what they can to win back the trust and it’s not going to be done in one giant step but more likely in several steps over the course of several years to get the confidence back of the public.

1. Recommendations

Commendations to go forward with, would be to bring up-to-date and brush up the present accounting standards and doctrines as the present ones are not very preventive. It may open doors and raises awareness that IFRS needs to be maintained U.S. The idea of having one unified international standards will enable United States for better positioning to its accounting standards and principles. There will be an urgent need to do immediate prosecute to those crooks in order to prevent fraud actions especially with such number of cases. Meanwhile the SEC needs to practice more authority when it comes to fraud penalties. Imprisonment is an option and something that would happen to normal citizens as oppose to the corporate suite that the executives have become accustomed to. Likewise it has been recommended that the AICPA and PCAOB adopt guidelines enforcing their members to study ethical classes yearly and to advance and guide whistleblower instructions for detecting fraud cases. Something needs to be done to deter this behavior and by developing a more ethical base of accountants as well as developing an understanding for a whistleblower policy to help deter companies from scandals. By instilling these recommendations, the accounting profession can improve public trust and perceptions and lower the number of accounting scandals.

1. Summary

Within the obtained research, there was applicable information provided towards the topic of accounting fraud. The SEC publishes a website in which it lists out by defendants the number of litigation cases filed this year. As of this date, there were 63 cases reported SEC’s website. In an economy that has passed the Sarbanes-Oxley Act, how can accounting fraud continue to happen? It’s been almost 15 years since the Act has been put into action and there seems to be more cases now than there were before.

There must be a change, a significant shift towards a reform in corporate governance and its applicability. After an extensive research in the codes’ of corporate governance and the current market practice it is inevitable that companies (specifically non listed on major stock exchanges) are continuing to find leeway to those codes. The 63 cases referred to above prove that accounting fraud in corporations are still happening to this day. All financial and organizations like FASB and IASB are to manage and help each other to create a unified international conduct code for businesses working. Moreover, the AICPA understands the necessity of raise awareness among its members toward ethical behaviors and train them about it. They need to have training courses for ethical awareness rising.

Sine the time in which SOX Act was passed, the SEC’s list of hearings was up by 4,700 at the beginning of 2013. Many studies show that there were 1.1 hearings cases each day in the past 15 years since SOC act, amounting to approximately 400 case annually. That pose a dangerous critical question about how may shareholders can trust financial works and its reports.

Due to previous accounting frauds, research has shown that these frauds don’t just impact the company. These frauds impact the employees, investors, creditors, and the economy as a whole. When companies go bankrupt, as most of the companies that have scandals do, employees lose their jobs, their livelihoods, and their pensions. To add to the employees losing everything, investors are impacted as well. The money that they put into the company is gone and could cause them to file for bankruptcy as well. And when corporate scandals happen, the economy feels the effects of it as well depending on the market capitalizations of the companies and the frequency of such scandals. The economy is affected by the unemployment rate rising, the currency decreases in value, stock markets drop as a reaction to the news, government spending is increased to bail out, as in 2008 crisis, and the public loses trust in accountants and auditors.

To most investors, and the public at large, there have been petitions for a better principle based accounting system as well as better corporate governance. Everyone wants a system that will protect their investments and interests and stop corporation corruption and scandals. These people want accountability of management and the accounting profession for the scandalous acts that they have done. They want the accounting standards and principles reformed, an improved auditing function, and increased law enforcement over those committing fraud.

Many individuals believe that the corporate scandals and accounting fraud were committed by accountants. People believe that to be true, because for the most part, accountants and to some extent auditors would be the first to uncover illegal schemes and be able to act on them. However, as the number of cases rise and the accounting profession taking bribes to cook the books, the perception of the accounting profession is low. Accountants and auditors have the ability to become whistleblowers, but they decide to partake in the scandal and try to cover it up because they were either pressured to or paid to. The AICPA and other organizations have created for their members a Code of Professional Ethics to guide their members to do the right thing if they were to uncover these schemes. However, these codes have been established and built to their members, the accountants and auditors are to accept by them and help the SEC correct these malefactors before it takes down the entire company.

To conclude on this topic, there was more than one way to skin a cat and believe that the SEC and other accounting community’s bodies had a better way to deduct, avoid, and eliminate accounting fraud as we know it today. It doesn’t come overnight, but these agencies need to stand up in order to assert that corporations are doing their financial statements correctly in best manner that help elevate the growing concern that investors owes.

In the auditing world, accounting firms hold onto their auditors for extended periods of time because of possible relationships that have occurred between the client and auditor. By having auditors that the client is familiar with and trusts can increase the overall efficiency of the audit while the company continues to do what they need to do to grow their business. What could happen in these cases are conflicts of interest and when the auditors stick around a particular client and are offered a career at the company. These instances, although rare, is a conflict of interest as the auditor knows the firms’ policies and procedures and the client could exploit that for their own benefit. An ideal example would be Phar-Mor Inc case.

Although the above scenario of the auditor and client should have been deterred after the institution of Sarbanes-Oxley Act, it could still happen given that accounting fraud is still happening fourteen years after SOX was passed. With better auditing standards, this could be a way to discourage accounting fraud. Moreover, by reforming the regulatory system, will also aid in deterring accounting fraud. The people that perform these fraudulent acts will still need to go through some kind of ethics trainings as there are still very unethical people in the accounting profession as evident by the number of cases the SEC has reported. For instance, local CPA communities in every state demand that accountants need to get a yearly ethical courses before getting their license renewed. Having those classes will help teaching what to do upon scandals and what the perfect ethical behavior to do. It may lower the number of fraud cases in somewhat.

Auditors and accountants are to gain back the trust of Americans and all financiers all over the world. Gaining back lost trust will add and create futures that may benefit the whole financial workers. By decreasing the number of scandals and prosecuting the offenders to the highest degree this will deter other corporations from doing something unethical. With time, the public will trust the stock market and the values that are being seen as well as more trust in the accounting profession.

References

AICPA American Institute of CPAs. (n.d.). Retrieved March 28, 2016, from ET Section 51-Preamble: http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/et_50.aspx

Barker, C. (2012, July 9). The $800 Trillion Scandal. Retrieved March 31st, 2016, from Daily Finance: http://www.dailyfinance.com/2012/07/09/the-800-trillion-scandal-how-banks-libor-lies-affected-you/

Coglianese, C., Healey, T. J., Keating, E. K., & Michael, M. L. (2012). The Role of Government in Corporate Governance. Harvard University.

Evans, M. (2015). Adding a Due Diligence Defense to 13(b) and Rule 13b2-2 of the Securities Exchange Act of 1934. Washington & Lee Law Review, 72901.

Galletta, P. Z. (2015). A Basic Field Guide to Fraud. CPA Journal, 85(3), 54.

Giroux, G. (2008). What Went Wrong? Accounting Fraud and Lessons from the Recent Scandals. Social Research, 75(4), 1205-1238.

Graham, Carol, Litan, Robert E., Sukhtankar, Sandip. (2002). Cooking the Books: The Cost to the Economy. Brookings.

Ng, M. (2004). The Future of Standards Setting. The CPA Journal, 28.

Securities and Exchange Commission. (2016, March 29). Securities and Exchange Commission. Retrieved March 29, 2016, from Litigation and Administration: http://www.sec.gov/litigation/litreleases.shtml

Wilbanks, D. (2016). The Sarbanes-Oxley Act. Professional Safety, 61(2), 23-25.