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Acc 578 Financials statement fraud Essay
Course name and number
Financials statement fraud is one of the most common forms of fraud that occur in companies. Financial statement fraud involves careful manipulation of the accounting system with an aim of making the financial status of the company appear healthy to investors and the shareholders. Some form of financial statement frauds perpetrated in the past include disguising loans as sales revenue, concealing losses, deliberate omission of financial figures and/or transactions, falsification of figures, lack of adherence to accounting principles, and other forms of frauds. The Sarbanes Oxley Act of 2002 was introduced to deter companies from fraudulent reporting of financial figures. The Act, however, may not be able to deter acts of fraud where the management is involved in perpetrating such cases. This paper will assess two fraud cases related to financial statement fraud, specifically the Satyam Scandal of 2009 and the American International Group fraud which occurred in 2005.
Satyam Computer Services was an Indian-based company with interests in IT services and products. The company was engaged in the fields of system maintenance, engineering design, software development and packaged software integration. The company was publicly traded and its shares listed in India’s stock exchange. In 2009, the company changed its name to Mahindra Group following a takeover by Tech Mahindra. The scandal rocking the Indian IT giant emerged in 2009 after the company’s Chairman, Ramalinga Raju, publicly acknowledged that the company’s financial reports had been doctored. The accounts had been falsified by a staggering $ 1.47 billion (Sanyal & Tiwari, 2009).
Culture of the organizations
At Satyam computer Services, the written down corporate culture reflected what can be found in majority of ethical organizations around the world. However, the actions of the top management were contrary to the outlined corporate culture of the company. Prior to its collapse in 2009, reports had emerged over the top management involvement in unethical behavior such as data theft and bribing employees (Bhasin, 2013). On 23rd December 2008, the company was banned from engaging in any form of business with the World Bank, which was a clear indication that there were fraud issues within the company. Satyam was barred by the World Bank following emergence of details of irregular payments and hefty benefits to staff members. Clearly, the corporate culture at the top engaged in unethical practices such as bribery and corruption. In 2008, a number of directors resigned from the company indicating that all was not well in the company’s leadership. Share price fell by over 14 percent, the lowest price in a span of 4 years. Following the revelation that the company’s financial records had been falsified, the company’s promoters, Ramalinga and his brother Rama, were arrested and charged with bribery, cheating, forgery, breach of trust and criminal conspiracy (Bhasin, 2013).
In 2005 and 2008, American International Group (AIG) was involved in massive financial statement frauds. The frauds by AIG was unmasked following investigations by the Securities and Exchanges Commission (SEC), which possible came to know about the fraud through a whistleblower (Brady & Vickers, 2005). AIG is an American corporation involved in providing insurance services to clients worldwide. The financial statement fraud perpetrated by the top management of the company involved falsifying accounting records. After the investigations into the scandal, the company was forced to restate financial figures for the years 2000 to 2005, which contained gross financial misstatements (“RMS,” 2013). These financial misstatements were part of an elaborate scheme by the top management to portray the company as highly performing while in reality the company was performing poorly. In 2008, the company was on the verge of collapse after years of gross mismanagement.
The corporate culture at American International Group significantly contributed to the financial statement fraud and the subsequent imminent collapse in 2008. The company was however bailed out by the government, preventing a total collapse of the international company. The major cause of this collapse was the company’s corporate culture which had embraced a culture of high-stakes risk-taking investments. The top management as well as employees engaged in highly risky investments which were meant to provide the company with quick revenue. In 2007 and 2008, AIG engaged in the sales of credit default swaps without securing collateral or hedging the investments (“RMS,” 2013). Such risky investments supported by top management with a high risk appetite resulted in the failure of the company. The corporate culture also rewarded executives who failed in their specific divisions with huge bonuses, encouraging them to take more risks. The company also believed in speculative risk-taking which ultimately led to its collapse. Prior to 2005 fraud scandal, the top management at AIG lacked integrity and honesty, as evidenced by careful financial manipulations of financial statements (Brady & Vickers, 2005).
Causes of financial statement fraud and effectiveness of fraud prevention and detection
Satyam fraud was perpetrated over a period of time, involving the careful and planned manipulation of financial statements. Satyam would create fictitious items in its balance sheets and income statements just to impress analysts. For instance in 2009, Satyam balance sheet indicated that the company had $ 1.04 billion as non-interest-bearing deposits (Bhasin, 2013). Such deposits were of course non-existent. PricewaterhouseCoopers (PwC) had been the company’s auditor since 2000. Over the entire period, the auditors did not suspect anything unusual with the company’s financial statements. What was more appalling is that deposits amounting to $1.04 billion in non-interest-bearing accounts would definitely have raised the red flag that all was not well in the company. Such a huge amount of money would either have been given back to shareholders or invested as interest-bearing deposits. Other cases of fraud involved underreporting of liabilities.
The financial statement fraud at Satyam was thus driven by greed for success, power, competition and money. This drove the chairman, Mr. Ramalinga to engage in unethical practices. Mr. Ramalinga acted with negligence towards the fiduciary duties assigned upon him (Sanyal & Tiwari, 2009). The chairman was in constant pressure to impress all the stakeholders including analysts, investors, shareholders and even the stock market. Clearly, the top management had low moral standards and lacked corporate social responsibility, only acting upon their current needs. Fraud prevention and detection policies at Satyam were not effective. To start with, the there was no effective whistle-blower policy in the company. Fraud perpetrated by the top management can only be reported through a confidential whistle-blower policy. Independent directors may be unable to uncover such frauds. According to reports, the whistle-blower at Satyam was a former director. The company’s auditors, PwC, failed to uncover the massive fraud possibly out of collusion with the top management. PwC had audited the company for over 9 years, fuelling concerns of more than auditor-client relationships.
American International Group fraud in 2005 marked an unprecedented decline in the performance of the company culminating in a financial crisis in 2008. The company had for long been under the leadership of Maurice R. Greenberg, the then chief Financial Officer. In 2005, the company was engulfed in a fraud case involving mutual funds and insurance. There were also instances of corruption and fraudulent accounting practices. AIG’s financial fraud specifically involved reporting a $500 million loan as revenue (Cohan, 2010). This action created the impression that the company had high revenues, while in reality the company had lower revenues. The $ 500 million loan had been obtained from Berkshire Hathaway. On March 30th, Greenberg was forced to acknowledge the fraudulent financial reporting at the company aimed at bolstering reserves. In addition, investigators revealed other accounting frauds which had been committed over time. In addition, the company delayed announcing annual 10-K filings, causing an inflation of its net worth by over $ 1.7 billion (Cohan, 2010).
As seen from the fraud case, the key motivations in the fraud case was solely to bolster revenue figures so that the company could seem to be performing well in the eyes of shareholders, analysts, investors and the stock market. The top management lacked the proper moral and ethical values; hence they decided to deceive the public. Fraud prevention and detection policies at the company were weak. AIG’s board lacked independence from the CEO, Greenberg. Greenberg had been the CEO for quite some years, developing close ties with the board members (Cohan, 2010). New governance regulations and shareholder pressure has forced the directors to become independent. Since the fraud was perpetrated by the top management with the knowledge of directors, it was difficult to detect.
Effectiveness of SEC regulations and improvements needed
The major aims of SEC is to protect investors, develop new capital for businesses and curb against securities fraud. In line with this, SEC also ensures orderliness on securities transactions. One of the failures of SEC is lack of a clear outline of the auditor’s responsibility with regard to fraud prevention and detection. SEC only acknowledged that fraud may exist but placed no direct obligations on the auditors with regard to detecting fraud. As a result, auditors were under no legal obligation to detect various frauds. Majority of frauds perpetrated in organizations are attributed to inadequate audits. This mainly includes the failure to acquire sufficient audit evidence, lack of due professional care, giving a poor audit opinion, and among others. The effectiveness of SEC regulations is also limited when the management is involved in perpetrating fraud. The management can be able to override internal controls in an organization in order to perpetrate fraud.
There are a number of improvements SEC can make to improve on fraud detection. One of the possible ways is the use of data-mining technology to improve fraud detection in organizations. Data-mining involves the use of quantitative data analysis techniques with the aid of computers to automatically detect fraud. The use of data-mining technology in the fight against fraud is imperative in the modern world where cases of management involvement are on the rise. SEC needs to improve the existing fraud detection procedures. Auditors should not only assess the internal conditions but also collect information from third parties such as customers, suppliers, custodians and others. Lastly, SEC needs to improve the whistleblower policy in all organizations and establish links with insiders in all organizations who can provide evidence in case of fraud.
In conclusion, financial statement fraud is the most common in organizations. This type of fraud is often perpetrated by the top management and the directors. Most companies engage in this type of fraud in order to bolster their revenues and send the picture that the company is performing well to the public. Companies must develop elaborate fraud prevention and detection policies to prevent such frauds by the top management. An appropriate whistle-blower policy can help prevent and detect such types of frauds.
Bhasin, M. (2013). Corporate Accounting Scandal at Satyam: A Case Study of India’s Enron. European Journal of Business and Social Sciences, 1(12): 25-47.
Brady, D., & Vickers, M. (2005, April 10). AIG: What Went Wrong. Bloomberg Business. Retrieved from: http://www.bloomberg.com/bw/stories/2005-04-10/aig-what-went-wrong
Cohan, W. D. (2010). Collapse of the house of Hank. Institutional Investor, 44(3): 1-9.
Risk Management Society (RMS). (2013). AIG, Credit Default Swaps and the Financial Crisis. Retrieved from: http://clubs.ntu.edu.sg/rms/researchreports/AIG.pdf
Sanyal, S., & Tiwari, D. (2009, April 17). Ex-insider blew the lid off Satyam Scam. The Economic Times.
This is for an Ashford University graduate course. The author is free to select a known and verifiable leader. This instructor uses TurnItIn and will check for plagiarism.
Leader Traits and Effectiveness Sample essay
Jeffery R. Immelt is the current CEO and chairman of the board of General Electric, an American based conglomerate. He is responsible for implementation of the company’s short term and long term strategies with the aim of increasing shareholder value. Specifically, he is responsible for developing appropriate strategies that can increase the company’s future prospects. As the chief executive officer, his role also involves making day-to-day management decisions. The CEO acts as the liaison between the top management and the Board. He also provides the Board with official communication from the management. The CEO is also charged with providing official communication to all relevant stakeholders such as the public, employees, shareholders, investors and government authorities. The CEO is also responsible for ensuring that the company maintains corporate citizenship and also social responsibility towards the community. Lastly, his role also involves putting internal and external controls or checks that ensure the company operates within its legal mandate.
General Electric is an American-based conglomerate that deals in manufacturing and provision of financial services. General Electric is a highly diversified company with operations in the following segments: Aviation, Healthcare, Power & Water, Energy Management, Oil & Gas, Home & Business Solutions, Transportation, and Capital Management. Its range of products as well as services include: medical imaging products, manufacture of aircraft engines, water processing, power generation, transmission distribution, security technology, electricity and others. As seen above, the company has heavily diversified into a number of business segments, totaling to eight different segments. Diversification ensures that the company can still make profits from other sectors in case one of the sectors fails to give positive returns (Merced & Sorkin, 2015).
Describe the qualities that are important to the leader’s success
There are a number of qualities that are important to a Jeffrey R. Immelt’s success. To start with, it is important for him to be people oriented. This is characterized by traits such as being friendly and empathy. It is important for the CEO to show concern for others and the relations he maintains with them. A CEO should be an approachable and empathetic person. In that way, employees can be able to freely interact with him. This encourages employees to contribute in decision making. Innovating thinking is critical to Jeffrey R. Immelt. The success of General Electric is largely the result of innovative thinking. According to Merced & Sorkin (2015), General Electric’s success is attributed to what Immelt refers to as “constant entrepreneurship.” In this, he attributes his success to the ability to indentify market shifts in the long run.
Adaptability is also important to the success of Jeffery R. Immelt. During the 2008 financial crisis, General Electric was heavily impacted. Through his leadership, Immelt was able to steer the company away from bankruptcy. In the recent period, General Electric has sought to move away from its financial segment due to the volatility and strict regulations in the sector (Merced & Sorkin, 2015). The company has resolved to sell off a large share of the segment to reduce risks. This also indicates the need for leaders to be resilient since the market may not perform as expected. Dependability is also important to his success. A leader should be somebody who can be depended on. For instance, he should express credibility in his duties, conformance to outline policies and procedures and show good organizational skills. A leader should show commitment to work and follow established rules. He should seldom get into trouble. Immelt exercises democratic leadership in the organization.
Overview of other leaders
There are other leaders with similar traits who are successful in different fields. One such leader is Sir Richard Branson is a prominent figure in the world of business. Branson is a successful entrepreneur who first launched a magazine at the tender age of 16 when he was still a student. Branson is the sole founder of the Virgin Group, which comprise of over 400 companies. Despite being an innovative businessman, Branson is also known for his courage and determination to succeed in the business world. He is also a risk taker who and is known for his “get it” attitude in the world of business. Immelt is also a risk taker and an innovative thinker who has contributed much in the diversification efforts at General Electric. Gary C. Kelly, is the current CEO and chairman of the board in Southwest Airlines. Kelly employs democratic leadership in the organization just like Immellt. His leadership style has been successful especially in encouraging innovativeness from employees.
Not all leaders share the same traits, even though they may still be successful. Leona Helmsley is a good example of leaders exercise autocratic leadership. Leona is the owner of Helmsley Hotel Chain. Leona is known for demanding perfection from the employees. However, this kind of leadership style resulted in conflicts with majority of the employees. Other successful leaders such as Donald Trump also exercise autocratic leadership. Donald Trump is the head of Trump Organization where decision making is centralized. Trump wields absolute power over his employees. Reports indicate that majority of his employees like him as he is not a vicious leader (Cole, 2015).
How differences in various situations faced by leaders may impact leadership effectives
According to contingency theories, the kind of situations that leaders find themselves in have a significant impact on their leadership effectiveness. Contingency theories posit that there are no correct leaders or leadership style, but it all depends with the situation leaders find themselves in. Critical situations may call for new approaches or new leadership styles from a leader. When leaders are faced with critical situations, they may make decisions quickly without looking at all dimensions of the situation. This may impact their effectiveness and the quality of decisions they make. Leaders may be effective in one situation due to their specific behaviors, traits, abilities and other reasons. However in different situations, leaders may be predisposed to failure and ineffectiveness (Hughes, Ginnett, & Curphy,2015)
The particular situations in which leaders find themselves determine the actions taken by leaders or the behaviors they exhibit. A number of factors found in the environmental context may have a significant impact on leader behavior. Certain factors such as the size of the organization, task complexity, worker maturity, past experience and other factors determine the type of decisions made by leaders. Leaders are only effective in particular situations but not in all type of situations. Leaders can improve their leadership effectiveness by focusing on their specific behaviors, traits and abilities. Thus, the situation has a significant impact on the leadership abilities of an individual. Over the years, studies have attempted to analyze the distinct attributes of a particular setting that can be affiliated with the leader’s success. Majority of studies agree on four characteristics of situations that may impact leaders’ performance. These situations include: role characteristics, structure of the organization, organizational climate and the characteristics of employees (Fairholm & Fairholm, 2009).
Cole, H. (2015). The World’s Most Powerful People. Forbes.com. Retrieved from: http://www.forbes.com/profile/donald-trump/
Fairholm, M. R., & Fairholm, G. W. (2009). Understanding leadership perspectives: Theoretical and practical approaches. New York: Springer
Hughes, R. L., Ginnett, R. C., & Curphy, G. J. (2015). Leadership: Enhancing the lessons of experience (8th ed.). New York: McGraw-Hill Irwin.
Merced, M., & Sorkin, A. (2015, April 10). G.E. Retreat From Finance in Post-Crisis Reorganization. The New York Times.