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Enron Fraud

Essay by   •  February 4, 2016  •  Essay  •  3,584 Words (15 Pages)  •  1,512 Views

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Introduction

        Fraud is a very broad subject. Fraud can occur in the workplace, at school, over the telephone, through the mail, and heavily on the internet. Why does fraud occur? The fraud triangle explains that fraud occurs due to a perceived pressure, rationalization, and a perceived opportunity. A depiction of the fraud triangle is given in Exhibit 1. Although pressure and rationalization is the hardest to dodge, companies can use their knowledge of fraud, prevention, and detection techniques to minimize the occurrence of fraud. Companies can use internal controls, the tone at the top, whistle-blowing programs and company policies to deter individuals away from committing fraudulent actions. Defining what types of fraud can occur, learning how to prevent fraud, and learning how to detect fraud are key characteristics accountants, controllers, and top management need to gain in order to not let this issue dramatically affect them personally and the company’s bottom line.

The Types of Fraud        

Fraud is very serious business. Before a company can stop or detect it, a company must know what fraud can consist of and how can it occur in their company. Fraud is all the multifarious means which human ingenuity can devise, which are resorted to by one individual, to get an advantage over another by false representation[1]2. Fraud includes surprise, trickery, cunning and unfair ways by which another is cheated. The Albrecht brothers define fraud as “deception that includes a representation about a material point, which is false, and intentionally recklessly so, which is believed and acted upon by the victim to the victim’s damage2.”  Therefore, fraud is not an accident; fraud is carried out with intent to deceive.  There are several types of fraud that companies, CEO’s, CFO’s, Controllers, and Accountants will encounter. These frauds include – employee embezzlement, vendor fraud, customer fraud, management fraud, investment scams, and consumer frauds. First, the most common type of fraud is employee embezzlement, which is when employees misappropriate assets belonging to their employee. Employees will steal either cash or inventory without the employer knowing it. Next, vendor fraud is when vendors overbill or provide fewer goods than specified on a purchase order. This fraud usually involves multiple people, in which the vendor and a perpetrator within the company agree on terms to misappropriate assets. Many perpetrators will set up dummy addresses and fictitious vendors to carry out this type of fraud. Furthermore, customer fraud is when customers do not pay their bill, pay less than their actual bill, or manipulate a company to distribute assets the customers do not deserve. For example, if one calls a pizza business and lies to them saying they were promised free food due to a hair follicle being in their pizza, then the pizza business falls for it, then this is a case of customer fraud. Although employee embezzlement is the most common type of fraud, the most expensive is management fraud. Management fraud is fraud committed by managers and top executives, in which they will manipulate the financial statements to depict the company in a more favorable financial situation. Most management frauds allow executives to take higher compensations, stock options, and will make the company look very attractive to investors. A few companies who experienced management fraud debacles were Enron, WorldCom, HealthSouth, Tyco, Waste Management, and Sun Beam. Investment scams are typically carried out by someone who is convincing, manipulating, and confident. Investment scams involve getting investors to invest in worthless schemes. The highest dollar investment scams are known as pyramid schemes or Ponzi schemes, where investors are paid returns with money from other investors. This type of fraud has the ability to occur continuously. Lastly, consumer frauds can be classified as – telemarketing fraud, Nigerian letter or money scams, identity theft, advance fee scams, redemption fraud, letter of credit fraud, and internet fraud[2]2.

Fraud perpetrators face many consequences if caught. Although most companies will not pursue criminal or civil charges for employee embezzlement, perpetrators can face jail time and the payment of restitution. Many top executives that participated in or orchestrated fraud within their company received prison sentences that ranged from one month to over twenty years. Fortunately, the Association of Certified Fraud Examiners was established to help fight fraud and many employers contain CFE’s such as the government, CPA firms, corporations, consulting firms, and law firms. These fraud examiners are established within these organizations to help diminish fraud activity within companies. Fraud is costly to companies that are not prepared; however, through fraud prevention and detection these costs can be eliminated or minimized.

Fraud Prevention

Having a strong fraud prevention program to stop fraud before it happens is a necessary part of maintaining an organization. Fraud prevention is the ideal strategy, as it is harder to recover fraud losses once they are detected4. The establishment of an effective fraud deterrence program requires the leadership of an organization to be attentive to the motivations of perpetrators and to the opportunities provided by lax internal controls. The paragraphs that follow will outline various fraud prevention techniques that organizations use to combat pathways to fraud, including development and enforcement of anti-fraud policy, establishment of a whistle-blowing hotline, maintenance of adequate internal controls, and use of internal auditors.

The establishment of a fraud prevention culture characterized by honesty and ethical behavior is a function that begins at the top of an organization[3]3. By establishing controls and investigating reports of suspected fraud, upper-level management can set a tone at the top. The tone at the top strategy can be further strengthened by the formalization of anti-fraud policies and processes that are completely separate from the organization’s corporate code of conduct and ethics policy5. Managers should detail clear and written guidelines for preventing and reporting fraud and specifically define what is considered fraud. In order to maximize the impact of this strategy, managers should be direct and explicit about the consequences of committing fraud by implementing classroom-style staff awareness training. Through mandatory fraud awareness training, managers can explicitly communicate to employees what fraud is and the consequences of committing fraud within the organization. Consistent reinforcement of these messages through employee education emphasizes that these messages are important, and that continued employment with the organization depends on compliance with the policies and procedures outlined by upper-level management10. This education and subsequent reinforcement helps to prevent fraud that might have occurred due to ignorance. Other avenues of communicating fraud policy to employees include use in orientation of new hires and annual performance evaluations5. By ensuring that employees are knowledgeable about what is considered fraud, upper-level management can deter unintentional participation in fraud activities by employees.

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