The recent high-profile accounting frauds witnessed across the world have raised serious concerns among investors and law enforcement agencies. Despite being audited by the Big Five Auditing firms, accountants and managers have found a way of duping their companies and the shareholders. This has resulted in massive losses for the affected companies. Consequently, the reputation of these audit firms has come under fire for failing to recognize, prevent, or stop accounting frauds. Many pundits point at the deterioration of quality of auditing services provided by the Big Five auditors as the most likely cause of failures in early detection. However, this paper aims at exploring the complexities in accounting and the need for forensic accounting in guarding against fraud.
On Tuesday, January 11, 2012, the world awoke to disturbing and shocking news (SkyNews, 2012). Olympus, a leading Japanese camera manufacturer, was using a number of its executives for alleged accounting fraud involving over $1.1 billion. This was and remains Japan’s worst accounting scandal ever. Interestingly, the whistleblower was then the chief executive Mr. Woodford. In a drastic effort to salvage the company’s image, the company fired all executives who were subject to the lawsuits. However, this proved a case of too little too late, as the damage caused was irredeemable.
Crimes involving financial reporting are not new (Zack, 2009). Zack further asserts that it is the techniques used that change (p. 75). In the Olympus case, the top executives of the company conspired to hide company losses from the shareholders and the public for 13 years. Over the period, the company used dodgy deals to conceal heavy investment losses incurred. This, therefore, meant that the company’s financial report portrayed a string of successes during the period while the company was incurring substantial losses. Olympus’ management embarked on an acquisition program, in which liabilities of acquired assets were overstated to make up for losses resulting from poor investment decisions.
The cover-up was an elaborate plan to make financiers and shareholders believe that the company’s financial position was stable. This was to ensure ease in securing loans and acceptable stock market operations. However, on correction of the said errors, the company’s assets became dangerously thin. It was established that shareholders’ equity was just $361 million. This translated to only 4.5% of the company’s total assets. Worst still, the company’s share price dropped by a whopping 60%.
The increased complexity in business operations today has increased the chances of accounting fraud (Singleton, 2010). The desire to post favorable financial statements for the public at the end of each financing period may push accountants and managers to manipulate a company’s financial reports. This is unacceptable, but the temptation is often hard to resist. As such, stringent measures should be introduced to curb such unprofessional practices. This should include the adoption of forensic accounting, the introduction of strict acquisition and merger rules, and strict regulation of auditing firms to reduce the chance of auditing errors.
In conclusion, accounting fraud affects business operations adversely and must be discouraged. Therefore, auditors must closely scrutinize major and minor business transactions, which may act as opportunities for auditors and managers to “smoothen” their evil and unscrupulous deeds. Accounting reporting may never be the same again after the revelation of such high magnitude cases, but all stakeholders must strive to bring sanity back to the profession.
References
Singleton, T. W. (2010). Fraud Auditing and Forensic Accounting. Hoboken, NJ: John Wiley & Sons.
SkyNews. (2012). Olympus Sues Executives Over £1.1bn Fraud. Web.
Zack, G. M. (2009). Fair Value Accounting Fraud: New Global Risks and Detection Techniques. Hoboken, NJ: John Wiley & Sons.