Discuss the problem of accounting fraud. How can it be detected and controlled, and how can this help corporate growth
Accounting fraud is one of the biggest problems faced by companies and organizations. Most companies suffer from accounting fraud which damage its financial position and reputation and lead these companies to bankruptcy. There are several ways to commit accounting fraud. For example manipulation in the financial statements and change some of the figures in the accounts of assets to add value not real to mislead investors.But in the world of economics and finance each problem hurting the economy, specialists may find solutions to prevent these practices. In these case of accounting fraud begins to discover by the auditor. Auditing is used to detect any account fraud. Furthermore, Auditor must have a good understanding of control systems, which has been built by management to insure detecting and preventing any accounting fraud, because when designing and implementing a control system by the company, they reflect the nature and extent of the control with management choses to implement. This essay will identify accounting terms, and explain accounting fraud problems. Also, this essay will argue that detecting and controlling accounting fraud can insure steady growth for companies.
To understand accounting fraud, this section will include important definitions related to this topic. Accounting is a measurement of social economics that process and presents all financial information of a corporate (Business Dictionary, n.d.). This information is based on economic events. Accounting is used in different areas of a corporate, including financial accounting, auditing, and tax accounting. Accounting has internal benefit where it measure and analyze all the corporate activities that can be used by management to make decisions. Furthermore, stakeholders and other external users can benefit from accounting report such as financial statements (Business Dictionary, n.d.) .The other word have to be defined is fraud. Fraud is defined to be any illegal or unfairly activities for financial or personal gain. The purpose of fraud is to gain exorbitant amount, for example, money or stock. Changing of the accounting records including financial sales, revenues and expenses is considered accounting fraud. Moreover, hiding loss, falsification of invoices, and avoiding debt obligations, which led to a profit, are examples of accounting fraud. The law has subjected all accounting fraud as criminal prosecution if discovered and employees will be punished even if directed by their employer (Business Dictionary, n.d.).
When talking about accounting fraud comes to mind who they are involved in accounting fraud and the answer that comes; senior management of companies. Mostly engage in accounting fraud because they have access and power to change the transactions and recommendations as well as the authority to change any figures in the financial statements with the cooperation of some accountants in the company. Accounting fraud mostly occurs while preparing the company’s financial report by manipulating in inserting financial records to show falsification of the company’s position in the market. This fraud could take two forms. The first involves inserting false prices of good and stocks into the company’s financial statement while the second involves showing unreal prices for the company’s assets (Ngai, Wong, Chen & Sun, 2011). The purpose of committing fraud is to gain good position in the market and keep the cash flow at a good rate. Bhasin has categorized company’s fraud at senior management level into three types: fraud committed by the Chief financial executive, Chief executive, and by the company itself (Bhasin, 2013). To detect fraud activities and stopping it from happening, corporates need to have an experience auditor with professional skills and knowledge about fraud. Also, auditors need to maintain their skills by involving in training and keeping up to date information.
There are several ways to detect fraud including comparing prices on the market with sales and financial statement with capital are some of the methods for detecting fraud. For example, when the Purchasing Management purchase some tools such as cars or equipment for the company then typing bills much higher than the original price in the market by agreement with the supplier to be included in the financial statements then the responsible benefits from the different price for him. Furthermore, detecting fraud can be done by comparing prices in the market with sales profits (Yu, 2013). It can be done by going into the real market and see the prices of the company's goods and compare these prices with sales profit in the company's financial statement. A financial statement is usually the source that provides banks, investors, and other institutional investors with a company’s financial affairs (Bhasin, 2013). Another method of detecting fraud is by creating an audit of a financial statement with the capital and financial statement (Yu, 2013). Moreover, having a good internal auditing department can detect and eliminate fraud activities and provide companies with procedures and protocols that can be followed whenever fraud activities have been discovered. Audits can be done either quarterly or annually. Also, the auditor must have the power to conduct audit at any time for any department in the company. However, external audit is the best option for companies since external auditors do not know anyone in the company and no one can force them to overlook the manipulations in the financial statements while doing their audit. Managers have the option to choose the suitable method to detect fraud activities and get a true picture of the performance of their companies.
Preventing accounting fraud probably help in growing companies. The most important pillar of control in the accounting fraud is internal control which enables the company to do their duty to the fullest. Internal control provides the cornerstone for the president and board of directors through the provision of efficient management to preserve the integrity of the organization and protect their assets by using latest technology. Decision-making, planning and evaluating in companies is done by the internal control which guides and helps in the optimal use and utilization of available resources. (Bhasin, 2013). The integrity of the management by using the technology could help internal control to committal crimes (Bhasin, 2013). Furthermore, the intensity of the control of the corporate leads to regulate the resources and assets of the corporate's financial accounting. Detecting fraud fast reflects the strength of the internal control (Bhasin, 2013). Accounting software may ensure for the investor that the manager and staff can not commit fraud because accounting software shows all the variables that occur at all times and because it commits the staff to do their accounting duties. Accounting software controls might be minimising the chance for managers and staff to commit fraud as limited access to employees. Also, records that show time and staff ID of those who accessed entered or altered information can be attained. The manager can be controlled by the senior management mechanism system to ensure that he do not deviate from his mission (Farber, 2005). The aim of these instructions and methods that are designed to prevent fraud is to clarify the transactions and economic reality of businesses to protect companies and organizations from the effects of the accounting fraud and manipulation of financial statements, and it must appropriate manner and economical (Bhasin, 2013).
In conclusion, accounting fraud is considered the most dangerous in the accounting field. Two methods have been addressed to detect and control accounting fraud such as comparing prices and reviewing assets to capital. The main purpose of detecting and controlling accounting fraud is to help companies grow and protect stakeholders’ interests and rights. Some of the ways that have been addressed in this essay to detect and eliminate accounting fraud are conducting either internal or external audit and refer into the real market to get and know the real prices of the company's goods and then compare it to the sales profit. Also, using accounting software should be minimising the chance for accounting fraud since everything is controlled by the software.