Corporate Fraud in the US
A few major fraud scandals like Enron and WorldCom weren’t the only fraud actions in the history of US. There were many before and many are still involved in frequent activities. According to the ‘Corporate Fraud Task Force’, it has convicted more than 1,300 companies for fraud in about six years including more than 350 top executives (Tobak, 2008). The average financial cost associated with fraudulent activities is around $1 million according to the ACFE’s 2004. Furthermore companies now have to expend more on compliance to laws, hire more consultants and accountants etc. to keep their records clean. And nobody can deny the unquantifiable loss of reputation if a company is even suspected of being involved in fraudulent activities.
Solution – Ethical Training
The question then pops up is why don’t companies try to prevent it in the first place. According to some critics, if choosing the right (ethical decision) was so easy, then why doesn’t everybody do the right thing? The reason is that ethical decision is easy but the non-ethical decision may be easier thus people get involved in fraud. According to a Grundfest, people need to be scared into making the right decision and this can only happen if the government catches the wrongdoers quickly and make them suffer for their mistakes.
However this view is contradictory to the ones given by most people who believe that training the employees for ethical decisions will help solve this problem. Dr. Bauer says that people are generally good but get involved in inappropriate behavior in pressure or crisis situations. The training should not be to teach people to be ethical, but to teach people how to react in crisis situations and show them an appropriate course of action. (Singleton et al., p85-94).
Financial Statements Components to Red Flag Fraudulent Activity
The companies’ financial accounts are the first source to spot any fraudulent activities in the company. The two components that can be used are
- Sales: The sales figure gives an important idea as to how the company is growing in terms of revenue generation. From a higher sales figure, one can judge that the company will become more profitable. Thus if the company does not become more profitable, then there might me a reason explaining it like increase in costs.
- Assets: A company purchases more assets to help in the profit generation. However if the company continues to amass assets upon assets, while it has no affect on the profit, there may be something seriously wrong which needs investigation.
Fraud Detection Ratios
There are quite a few fraud detection ratios that the researchers have identified against a benchmark of companies who have been involved in fraud. One such ratio is
Sales Growth Index = Sales of Current Year/Sales of Prior Year
According to the research, companies which have a history of good sales growth may feel pressure to show good future growth thus get involved in fraudulent activities. Thus this ratio will help the auditors find if a company meets the benchmark of being involved in frequent activities.
Works Cited
About. “Investing for Beginners – Financial Ratios”. About. 2009. Web.
Baur, C. “Ethics Training – Why Not An Ounce of Prevention?” Side Road. Web.
Grundfest, J. “Stopping Corporate Fraud”. Santa Clara University. Web.
Harrington, C. “Formulas for detection: Analysis ratios for detecting financial statement fraud”. Fraud Magazine. Web.
Singleton, T, King, B, Messina, FM, Turpen, RA. “Pro-ethics activities: Do they really reduce fraud?” The Journal of Corporate Accounting and Finance. (2003): (14) 6; p.85-94.
Tobak, S. How much does corporate fraud cost you?” Cnet News. Web.