Impacts of Corporate Fraud to Relevant Stakeholders

Impacts of Corporate Fraud to Relevant Stakeholders

Introduction

            Economic growth and development depend on the effectiveness of political stability and financial institutions of the country. Nations that have eradicated tribalism, civil war, and corruption have increased Gross domestic product and net national income of the states. Economic growth is the increase in the total production of a country in terms of goods and services. Economic development is the gradual change that arises from the structural improvement of the nation and the reduction of absolute poverty in developing countries. For the national income of a nation to increase, the government should encourage both local and foreign investment to increase the total production of the country. The relevant stakeholders, for example, investors, financiers, creditors, employees, and the society, need to protect for any unethical issues that might arise from untrusted business corporate institutions (Wells, 2017). The investors and shareholders want to be protected from the greedy directors and management who are attempted to embezzle funds that belong to the shareholders. The creditors and financiers want to protect against fraud by the administration as they want to understand whether the financial statements are true and fair. The financial reports need not be absolutely correct but should be fair in terms of presentation of the financial performance of the company. The corporate institutions have to set up the internal audit department and audit committees that monitor the efficiency of the enterprise operation (Wells, 2017). n. They ensure that daily business activities and events have been verified and correctly recorded in the right books of accounts. Corporate fraud results in a financial loss to both investors and suppliers, loss of jobs to employees, and building negative goodwill to the company..

According to the fraud case conducted by A reporter:

            In the United States of American, one of the most top-performing companies in the stock exchange market became insolvent. The reporter unraveled how the senior corporate management team manipulated the figures of the financial statements to deceive investors and financiers about the financial stability of the company. Top corporate companies do not orchestrate this vice of corruption and financial deceit only in developed nations but also in developing countries where investors and shareholders are not enlightened.

What is corporate fraud?

            These are malice activities that are performed by the company management that are directed towards making it in a better position than its current position. They are fraudulent activities that are perpetuated to make the company be more advantageous in terms of profitability earnings, expanded market share, understatement of costs and expenditures, and overstatement of the profits of the company.

Theoretical background

In the past, the professional accounting requirement was to ensure that the company books of accounts were supposed to be accurate. During these periods, most businesses were small in size and terms of earnings. The accounting activities were few and required less of technology in handling the tasks. As the business world expanded, multinational companies emerged, and a company can open branches worldwide, purchase shares in a foreign country in form of a subsidiary, joint venture, or associate. This made the business operations complex and required the use of different accounting policies in the presentation of the financial statements. The accounting standard board bodies, for instance, the international financial standard of reporting, set up policies and guidelines on how financial statements of a company needs to be reported. The generally accepted accounting principles were formulated to help in reporting the financial performance of the business. Auditing standards were set to ensure that the management reports reflect true and fair of the business transactions.

Currently, the business world is very competitive as they are offering products that have an alternative supply in the market. Top managers carry research to collect primary and secondary information about customers’ needs and the way of satisfying the needs of them. Some businesses engage in fraudulent activities to attract clients, for example, spreading propaganda against their competitors, doing wrong advertisements on product features, advertising different selling prices in media, but selling at different prices at the shops and branches. The governments of different countries have set up bodies that approve the validity and usability of goods manufactured locally or imported from other countries. The employees of the setup bodies are bribed by greedy investors who smuggle unwanted goods and services into the economy.

The study conducted reveals that top companies have been bribing top independent financial auditing bodies to give an unqualified report to corporate institutions that are stealing from the members of the public. Some of the respected top corporate institutions that have been declared insolvent include Refco company, Texaco, Dana Bank, south sea company, Medic Bank, Qintex, livent company, Kmart company hand Enron company to mention a few (Wells, 2017. This company ranges from telecommunication, banking industry, insurance industry to manufacturing industries. The companies have been declared bankrupt after the scheme of fraudulent activities is ascertained.

Investigative question:

            The investigative research concentrates on corporate fraud by the management to steal from investors and shareholders of the company. The investigator decided to seek information and evaluate it on how financial fraud cripples’ companies and results in loss of confidence of the shareholders to the directors and the management. This study focuses on a gas supply company in the United States that conned its investors by manipulating the books of accounts.

Case study

Enron company fraud (United States of America):

A reporter in the United States published a report in The Wall Street Journal on how to mark-to-market accounting had succeeded in the energy industry without government and independent institutions intervention (Chadha, 2016). This story castigated investigations as many residents in California had complained about power shortage and dishonest in the energy sector. The people had held a public demonstration demanding the explanation of the existence of power shortages in some unexplained circumstances. The efforts were not taken into account as the major shareholder of the company had important links to the government and auditing firms in the country (Denteh, 2011). Enron company was manipulating financial stock and financial figures to attract customers and investors to the company.

According to the research conducted, the Enron company was instructed to present its books of accounts and the balance sheet (Denteh, 2011). The CEO was naïve about the information discovered by the members of the public who had questioned the legitimacy of Enron books of account. The company had a good reputation in the past, and nobody believed that the company would engage in any fraudulent activities. In the 1990s, Enron shares were highly valued, and the price per share was above $80, and none could doubt the income statement reported by the company (Denteh, 2011). At the end of the trading period in 2001, Enron purported to have earned $50.1 billion profit from its trading activities. The company was bribing an established audit firm to protect its image and theft from the public (Denteh, 2011). The prices of the shares in the stock market started decreasing tremendously as investors started doubting that the company is running a fraudulent business. The CEO, by the name Skilling, resigned due to pressure from the public, and investigative agency was were tracing the validity of the company transaction. The owner of the company was never interested in adhering to any corporate social responsibility but was concerned about how much earning the company generated.

Findings

After independent bodies conducting the research, it was discovered that the Enron company was involved in fraudulent activities. Investors sued the Arthur Andersen audit firm for obstructing justice for many years to Enron company (Chadha, 2016). The company was declared bankrupt no investor was willing to buy the company. Arthur Andersen’s audit firm license was revoked and surrendered to the government. Thousands of employees lost their jobs while others involved in fraud committed suicide. The company owed its investors, suppliers, and employees a debt of &67 billion that it was not able to pay. The company directors, CEO Skilling and owner Lay pleaded guilty of counts of charges against them (Chadha, 2016. Some of the charges were money laundering activities, conspiracy, making false statements, bank fraud, wire fraud, securities fraud, and insider trading of shares and stocks (Chadha, 2016. The team was convicted of the financial crime charges and were imprisoned to different jail terms depending on the number of counts each was found guilty of perpetrating.

Outcomes of fraud by corporate institutions:

Loss of jobs to employees

For a company to achieve its goals and objectives, it must recruit qualified employees to manage the organization’s resources to confirm the enterprise vision. Employees are motivated and recognized by awarding them the best employees of the month, allowing them to do in job training and attending seminars. The fundamental forces of employees enable them to minimize inputs and maximize the output of the company. When a company engages in fraudulent activities, the company will be declared insolvent, and there will be no production of goods and services. This renders employees jobless and unable to generate income.

Financial loss to investors and shareholders.

            As companies expand, some investors and shareholders have no professional skills to run the company. This allows them to appoint competent directors who recruit the management to run the company. Untrustworthy directors and CEOs award themselves bonuses and allowances, which are not stated in the expenditure account. They overstate the costs and prices of assets while they understate the profits of the company.

Loss of confidence in independent bodies

            The citizens of a country lose trust for those bodies that are entitled to the responsibilities to regulate the business activities undertaken by the investors. There should be a need for consumer protection to ensure consumer rights are not violated by unethical investors (Oktavia, Yusuf & Saptawan, 2018).

Conclusion

Corporate fraud is a vice that threatens economic growth and development to any given country. Economic and financial institutions must set an oversight body that monitors and evaluates the business activities to ensure the business conforms to the enacted policies that allow its operations (Cronin, 2018). Trusted institutions should be supported and protected by the government and the public to ensure effective service delivery and the businesses trade in activities they are registered.

References

Chadha, P. (2016). Fraud examination of Enron Corp. International Journal of Accounting Research, s1. https://doi.org/10.4172/2472-114x.s1-007

Cronin, A. (2018). Corporate fraud. Corporate Criminality and Liability for Fraud, 45-59. https://doi.org/10.4324/9781315179605-2

Denteh, F. (2011). Enron: Fraud detection timeliness. SSRN Electronic Journal.https://doi.org/10.2139/ssrn.1920747

Oktavia, M., Yusuf, M., & Saptawan, A. (2018). undefined. Sriwijaya Journal of Environment, 3(1), 37-42. https://doi.org/10.22135/sje.2018.3.1.37-42

Wells, J. T. (2017). Corporate fraud handbook: prevention and detection. John Wiley & Sons.