Table of ContentsIntroductionThe motivating factors for accounting fraud in organizationsOther reasons for fraudulent financial reporting Ways to Prevent Accounting FraudIntroductionRecent corporate financial accounting scandals like WorldCom, Global Crossing, Tyco, Enron and many others have increased concerns about fraud globally, cost shareholders billions of dollars and have leads to the corrosion of investor confidence in financial markets Peterson and Buckhoff (2004); Hogan, Rezaee, Riley, and Veluri (2004). Fraud costs the economy, businesses, investors and society more than $3 trillion each year. Beyond the financial cost, fraud can also generate harm to employees, customers, suppliers and society, as well as litigation costs and regulatory sanctions. Fleming et al, (2016). Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Although larger businesses are more likely to be victims of economic crimes, fraud can be more costly for smaller businesses. Per employee, fraud losses can be up to 100 times greater in small businesses than in large ones. Despite the increasing incidence of fraud and the enactment of new anti-fraud laws, many organizations still rely on outdated and somewhat superficial anti-fraud measures. Hence the need to try new and different measures to combat fraud. The Institute of Certified Public Accountants defines accounting as the art of recording, classifying, summarizing in a meaningful and monetary manner, transactions and events which are, in part at least of a financial and interpret the results. Simply put, accounting involves establishing, maintaining and reviewing the accounting records of a business in order to fully understand its financial position. There are many users of this accounting information, both internal and external. Internal users generally refer to management, while external users refer to investors and lenders. Financial reporting aims to protect the investing public and build confidence in the securities markets. Investors and lenders have the right to receive reliable financial information when making investment decisions regarding an entity. Fraud in white-collar crime is defined as “any illegal act characterized by deception, concealment, or breach of trust.” When an accounting records inaccuracy occurs, there are two possible reasons for the discrepancy: error or fraud. An error is not intentional and often occurs due to computer malfunction or human error, such as negligence or lack of knowledge. On the other hand, fraud is intentionally committed in order to obtain gain for its author. According to the Association of Certified Fraud Examiners (2016), “the two means by which fraud is committed include misappropriation of assets and misrepresentation of financial statements. “Asset misappropriation occurs when an employee steals company assets, whether those assets are monetary or physical in nature. The company's physical assets include everything from office supplies and furniture to expensive inventory items, such as cars or largemachines. Due to a lack of supervision, employees could take inventory as soon as they left an establishment. However, misappropriation of physical assets includes not only the confiscation of items, but also the unauthorized use of company assets. An example would be an employee driving a company car for personal use. Misrepresentations in financial statements often occur when financial statements are intentionally inaccurate in order to make the company's financial position look better than it actually is. This often involves an increase in reported income and/or a decrease in reported expenses. It could also involve distorting balance sheet accounts in order to make ratios, such as current or debt ratios, appear more favorable. The Association of Certified Fraud Examiners (ACFE) defines financial statement fraud as "the intentional, deliberate inaccuracy or omission of material facts or accounting data that is misleading and, when fully examined the information available, this would lead the reader to change or alter their judgment or decision. “The motivating factors of accounting fraud in organizations”. occur, three conditions must be met: rationalization on the part of the perpetrator of the fraud, incentives or pressures to commit fraud, as well as the possibility of doing so. These factors are commonly known as the Fraud Triangle, first created by Dr. Donald Cressey in 1953 while he was studying criminology, particularly the behavior of fraudsters. Pressure is usually what pushes a person to commit fraud. These are most often financial, such as the inability to pay medical or other bills; an addiction to drugs, alcohol or gambling, a strong sense of self-esteem; or the desire for expensive luxury items (University of Michigan). However, some frauds are committed simply out of greed and without any pressure other than the desire to get rich. Weak corporate governance structure, lack of effective internal controls, and an inadequate control environment provide perceived opportunities for individuals to commit and conceal fraud. If you eliminate the possibility of fraud, it can be significantly reduced. Preventing fraud costs businesses much less than detecting it later, because losses are unlikely to be recouped once the fraud has already occurred. So opportunity is where internal controls come in. The more internal controls a company has designed and implemented, the less opportunity employees should have to commit fraud. It is important that their internal controls are effective and efficient in order to get the most benefit for the business. Internal controls include: segregation of duties, supervision and IT controls (passwords, biometric scanners, etc.). Finally, rationalization involves making excuses for why it is acceptable to commit fraud in certain circumstances. A justification can be strong, such as a ransom case in which a person could die without money or a medical emergency where money is needed for surgery. However, it can also be weak, with simple reasoning such as "I want money", "I won't get caught", or "I deserve it for my hard work". “Once these three fraud factors are established, fraud will most likely be committed. As stated earlier, it is very important to prevent opportunities from arising. commit fraud infinancial statements. Management is willing to maximize shareholder value to manage certain internal or external pressures. Top managers are willing to take personal risks for company profits. The chances of fraud detection are negligible in some businesses, which is why fraudsters believe they can easily get away with anything. human nature intervenes when an individual, or group of individuals, sees an opportunity to make a quick buck. Excessively generous performance bonuses – the more generous the bonus when associated with a demanding objective; the greater the temptation to manipulate results to achieve these goals. Lack of clear moral direction from senior management. They sometimes engage in fraudulent behavior that has repercussions on all other employees. Poor accounting controls; In cases where accounting controls, such as a monthly bank account reconciliation, are expired, signals that fraud has occurred will be missed. Ways to Prevent Accounting Fraud Every organization should create and maintain a fraud policy to guide employees. A corporate fraud policy should be distinct from a corporate code of conduct or ethics policy. Any such fraud policy must be clearly communicated to employees. Various avenues of communication include use in new hire orientation, employee training seminars, and annual performance reviews. Written acknowledgment from each employee that the policy has been read and understood should be required.2. Setting up a hotlineA rather innovative and increasingly common approach to fraud is the use of anonymous hotlines. This is a very cost-effective way to detect workplace fraud and abuse. A hotline allows employees to provide confidential and privileged information without fear of the penalties that come with being a whistleblower. Helplines may be supported in-house or provided by a third party. Results of all calls are provided to the customer within two to three days. A hotline is not only an effective detection tool, but it also strengthens deterrence. Potential perpetrators will likely have doubts when considering the risks of being arrested.3. Educate Management on the Three Indicators of Fraud According to the Association of Certified Fraud Examiners, financial statement fraud involves the intentional publication of false information in any part of a financial statement. To help prevent fraudulent activity, management must implement internal controls, or structure, and know what situations to look for. Individuals commit fraud when they are under situational or financial pressure, when the opportunity to commit fraud is present, and when the perpetrator easily rationalizes their fraudulent activity.4. Separate Accounting FunctionsOne of the main factors in an effective internal control system is the segregation of duties. Management helps prevent fraud by reducing incentives for fraud. One incentive, the possibility of committing fraud, is reduced when accounting functions are separated. The act of segregation of duties separates the recordkeeping, authorization and review functions in the accounting process. To separate tasks, involve more than one person in the financial statement preparation process. Therefore, for fraud to occur, two employees must agree to..