Financial Fraud Entail An Intentional Act of Misleading

Financial Fraud Entail An Intentional Act of Misleading
Financial fraud entails an intentional act of misleading or deceiving others in money transactions for selfish gains. Indeed, it is a crime and any company involved in it violates civil law. Numerous cases of financial fraud are done by white-collar criminals, who are professionals with adequate knowledge and intend to engage in criminal activities. Some businesses become part of unscrupulous financial transactions so that they can make profits or avoid bankruptcy that occurs due to poor financial management. In most cases, when a company engages in financial fraud, some professionals are involved and they make such decisions intentionally. For example, an organization might manipulate its financial records to portray a false picture to its investors to prevent them from withdrawing their investments. However, such financial malpractices have detrimental effects and lead to heavy penalties. The paper focuses on how General Electric Co. (GE) was exposed to financial fraud and suggests proper strategies that can be implemented to develop auditing and monitoring procedures that will improve controlling, efficiency, monitoring, and corporate financial governance practices.
GE is a multinational conglomerate that was founded in 1892 and is headquartered in Boston. The organization has operations in various sectors, such as power, healthcare, transport, aviation, additive manufacturing, finance, venture capital, digital industry, and renewable energy. GE’s growth and expansion have not occurred without a fair share of challenges. In 2019, the United States Securities and Exchange Commission (SEC) found GE to be exposed to financial fraud. The SEC’s investigations revealed that GE misled its investors by manipulating its financial records to inflate profits in the first quarter of 2016 and the first three quarters of 2017 (U.S. Securities and Exchange Commission, 1). The company decreased its cost estimates so that shareholders can continue investing their money thinking that it is making profits. GE failed to tell its investors that the reported rise in cash collections happened at the expense of future cash and occurred primarily from internal receivable sales between GE Capital and GE Power. Additionally, the SEC found that from 2015-2017, GE reduced its projected costs for claims against the firm’s long-term insurance portfolio. GE did not inform its investors of the corresponding uncertainties that emanated from lower estimates of the future insurance liabilities. On that note, GE agreed to engage in financial fraud and was required to pay $200 million as a penalty for failing to disclose failures in its capital and power business units (U.S. Securities and Exchange Commission, 1). The primary reason for GE’s involvement in financial fraud was to retain its investors. However, the company can strengthen its corporate financial governance practices to avoid such accounting malpractices in the future. The various tendencies that make companies, such as GE, engage in financial fraud include capital turnover, increase profitability, assets composition, financial leverage, and retaining existing investors (Iswati, 2). Companies should refrain from financial fraud since it has adverse impacts on their reputation, operations, and might lead to bankruptcy or business closure due to heavy fines imposed by the SEC.
GE was exposed to financial fraud by intentionally misleading its investors by reducing cost estimates to inflate profits. In particular, shareholders have a primary objective of making profits from their investments. These individuals put their money where they are likely to realize more financial gains. That was why GE manipulated its financial records so that it can mislead investors that the company’s financial position was good, which was not the case. In that light, citing errors in financial operations, lack of accounting oversight, and poor application of accounting procedures made GE vulnerable. The unethical behavior of manipulating a firm’s financial statements can lead to the collapse of a company and the destruction of shareholders’ value (Jo, 3). Although no firm wants to lose its investors, being transparent and credible in accounting and financial reporting is crucial to facilitating a sustainable future. Even if a company might modify its financial records for a few years without the true picture being portrayed, eventually shareholders will know that something is wrong. At that juncture, they might conduct an investigation or report the issue to the SEC, which has detrimental consequences for an organization. As a result, the most significant thing that GE’s executive leaders should refrain from in the future is manipulating financial records to mislead investors.
The best recommendation for GE to prevent financial fraud in the future is to implement an internal control system to oversee all financial transactions between various business units. In the scenario at hand, receivable sales between GE Capital and Power business sectors were used to increase cash collections and inflate profits (Michaels, 4). Nevertheless, implementing an internal accounting control system will ensure that all transactions are monitored and recorded accurately. The strategy should have three primary integrated solutions for auditing and monitoring procedures to improve corporate governance of the firm’s finances and mitigate financial fraud risk. First, the system should only be authorized by a few executives to improve efficiency and financial governance practices. When data is entered into the system by different personnel, there should be no room to edit it. Besides, internal individuals, such as financial officers and accountants, are the ones that facilitate financial fraud by preparing fake financial statements to mislead in...