Accounting Fraud Essay

Accounting fraud entails financial misdeeds by executives that are trusted in either the government or corporations. In essence, these misdeeds involve complicated mechanisms of misdirecting or misusing an organization’s funds, understating expenses, overstating revenues, underreporting the liabilities existing and even overstating the price of the assets of an organization. Such accounting frauds are always geared towards personal interests of enriching oneself, and are always illegal and punishable by law. This paper analyzes the Enron scandal (2001) as an accounting fraud to explain the fundamental drivers of fraud.
Before it was declared bankrupt in the year 2001, Enron Corporation was a giant company based in Houston, Texas. Enron had approximately 20000 staff and as such, it was considered by many people as being among the leading companies as far as natural gas, electricity and communication fields were concerned. According to the available information, the company claimed revenues of about $111 billion in the year 2000. For a record six consecutive years, Enron was named by Fortune as being the most innovative company in America (Fox, 2003). Amid this, there emerged allegations that the company’s financial condition that was reported early was substantially sustained by a systematic and institutionalized accounting fraud, which would later be referred to the Enron Scandal. Ever since the discovery of these facts, Enron has been used as the perfect example of corporate fraud and the impact such a move can have on an organization. Enron’s financial fraud commenced when Jeffrey Skilling was hired as. As a matter of fact, Skilling created a staff of directors who manipulated accounting loopholes, practiced financial reporting hat was poor, created entities with special purpose and as a result, they managed to hide millions of dollars that they owed other organizations as debts from projects and deals that failed. It is believed that the organization’s internal auditors were aware of these malpractices, but they were cautioned to remain silent. The organization’s financial officer often misled other executives and the board of directors of the organization (McLean et al. 2003). The result of such a fraud saw a number of executives imprisoned and as a result, Enron lost several customers to its competitors.
Several audit plans could be used to prevent or detect the fraudulent activity in the organization in its earliest stage. In the plan, the organization should have set the right tone from the beginning. This entails communicating the ethical behavior expected in the organization throughout its existence. Through its actions and words, the management must ensure it discourages and punishes unethical behavior even if such unethical move could benefit the organization. This way, employees should behave responsibly according to the stipulated rules and regulations. Second, the organization should have consistently assessed fraud risks. By being proactive, fraud opportunities would be majorly minimized. This would also allow the executives to identify possible frauds and take necessary steps to mitigate any identifiable risk (Singleton et al. 2006). It would then be essential for the company to control both financial and non-financial systems. This should aid the organization not only to detect, but also prevent fraud. Through timely and regular investigations of the financial systems and reporting, the organization has the capacity to detect any act of fraud. Sadly, this was not the case with Enron.
In executing the audit plan explained above, there are several types of audit evidence that can be used. Physical examination is the first type of evidence, which entails the physical examination of the company’s tangible assets. The significance of this to auditing is that it gives the management a clue on the value of the company’s actual assets. Confirmation evidence should then follow, which refers to the oral or written response from a third party that is independent. Such confirmations can be either positive or negative, and help in evaluating the credibility of the auditors. This should closely be followed by documentation evidence, both internal and external (Kranacher et al. 2011). This aids he organization to have clear records of the transactions that took place. Analytical procedures would then follow, where he documentation evidence is analyzed to see if it tallies with other forms of evidence available. If all these audit evidences are used, then the organization will be in a better position to discover any move of fraud at the earliest opportunity possible and employ mechanisms to control it.
In the audit plan, there are areas that need more extensive sampling while others require less sampling. Consistent assessment of fraud risks and analyzing the assets f the organization from time to time needs to be done in an extensive manner to reduce the possible loopholes. Setting the right tone from the beginning requires less sampling, although it assists in warning the employees against any fraud practices. Similarly, it would be prudent for the management to practice whatever rules it implemented so as to act as role models. It would be wrong to think that the areas that require less sampling are not necessary to the organization. The only implication of this is that they are less likely to create loopholes for fraud if not addressed. If all these steps are followed, then chances of fraud would be adequately minimized.

References

Fox, L. (2003). Enron: The rise and fall. Hoboken, NJ: Wiley.
Kranacher, M. -J., Riley, R., & Wells, J. T. (2011). Forensic accounting and fraud examination. Hoboken, NJ: John Wiley.
McLean, B., & Elkind, P. (2003). The smartest guys in the room: The amazing rise and scandalous fall of Enron. New York: Portfolio.
Singleton, T., & Bologna, J. (2006). Fraud auditing and forensic accounting. Hoboken, NJ: Wiley.