Financial Statement Fraud. Accounting, Finance, SPSS Essay

Financial Statement Fraud
Name
Institutional Affiliation
Financial Statement Fraud
Corporate Culture
Enron Corporation is a renowned corporation taking into account that it is the first major fall to go bust in the 21st Century. The company’s initial efficient and effective corporate culture was hijacked by the disregard for financial ethics. Financial greed coupled with questionable operation practices placed the firm in a downward spiral. The company’s executives were keen on maintaining an exceptional reputation to the public regardless of its deteriorating financial position. For instance, a unit in the firm referred to as Enron Energy Services “spent hundreds of thousands of dollars to build a Potemkin-village trading floor to impress equity analysts invited to a conference” (Banerjee & Barboza, 2002). In retrospect, the senior management used dubious accounting methods to hide their ever-burgeoning billions of dollars of debt that rose significantly from the extravagant parties and functions that had no real business meaning. Also, the rank and yank system that was used in goading the workforce orchestrated competition among employees leading to an ensuing distrustful environment (Hosseini, 2016). Eventually, this direction resulted in the collapse of the company.
Onwards, there was overwhelming related news on the prevailing corporate strife that had befallen Enron, many executives were ignorant of these revelations. A great example is Tyco International that faced similar financial restatement demands from the Security Exchange Commission (SEC). Tyco International that specialized in the production of security systems was doing quite well considering that it had a net income of $14.50 billion in the 2004 fiscal year. However, in 2002, the company’s top executives including its then chief executive officer (CEO), Dennis Kozlowski, chief financial officer (CFO), Mark Swartz as well as a chief legal officer, Mark Belnick were accused of stealing the company’s financial resources to the tune of $170 million (Thanos, 2015). There were further concerns over stock options that were sold fraudulently. Besides, the executives used the company’s resources to treat their family members, which is illegal. Eventually, they were found guilty of various crimes including unapproved stock sales and loans, and received sentences of between 8 and 25 years (Thanos, 2015). These cases highlight the essence of the moral compass in an organization’s dealings.
Causes of the Financial Statement Frauds and the Effectiveness of Fraud Prevention and Detection at those Companies
The primary cause of financial statement frauds is apparent in the agency theory. Agency theory dictates “how to compile the best contract between the agent and principal in measuring the performance of the agent concerning receiving incentives so that the agent acts in the interest of the principal” (Yulistyawati, Suardikha, & Sudana, 2019, p. 2). In this case, the principal (shareholders) delegates these responsibilities to agents because they possess the relative know-how and experience to run the company’s operations. They do this with the precept that they will conduct their actions to their best interests. However, when agents (company’s senior management) occupy these positions, they are in a privileged position as they bear considerable power over the company’s resources.
In this position, they prevail in financial statement frauds for various reasons. They have the desire to enhance their market capitalization and eventually, the financial position of the listed stock. Also, they can inflate sales with the ulterior motive of increasing the dividend rates that the company distributes at the end of the accounting period. Further, they could also have the motive of changing the prevailing perception of the firm in the market. However, the most profound reason is so that the firm can receive financing or at the very least, receive better terms when seeking financing. However, the means used to achieve these goals elicit major ulterior motives and that is why many companies collapse as evident in the case of Enron Corporation. On the other hand, there is much importance in detecting these scenarios early enough. For instance, associated suspicions guaranteed that Tyco International Inc. was saved in time before the situation got dire.
Commendable Implementations
In the quest to curb financial statement frauds, organizations must segregate accounting functions in the firm. Companies of this magnitude have much to lose when related frauds befall them. This situation compels the articulation of any means that is bound to mitigate against the possibility of this happening. Besides, they possess the financial resources to implement this internal control system. In this case, the company can have two groups of individuals handling these functions interchangeably. Also, the management should enhance the significance of this process by separating the accounting functions from the hand...