Addressing issues related to fraud

 

 

Fraud memo

To    : Firm management and employees.

Subject: addressing issues related to fraud    

From    : Forensic Accounting Services division

Date    :

 

Executive summary

Being part of this company means more than just showing up for work, accomplishing your duties and collecting your pay slip. Like all members of this organization, everyone is expected to exhibit a sense of professionalism so as to achieve the common goal of the organization. It is expected that all staff members at K-Mart will play their role in ensuring that cases such as fraud are prevented and avoided. This memo will therefore discuss issues related to fraud, state examples and show what could be done to prevent it from happening.

Facts on the case and charges

            In the United States, businesses incur over 400 billion dollars every year used to cover employee fraud. This means that most businesses loose over 6 percent of the income they get every year through the fraudulent activities that some members of staff engage in (Ozkul & Pamucku, 2012). With such statistics, it is correct to state that companies loose more from the fraud that their staff engages in than they do from their customers. While male are more likely to engage in fraud than women, 5 percent of employees in an organization are determined to engage in fraudulent activity while 10 percent could be inclined to do so no matter what position they hold in an organization. While this number may be small, over 85 percent of employees could be inclined to engage in fraudulent activities if the right opportunity presents itself (Ozkul & Pamucku, 2012). As the statistics reveal, fraud is common in various organization and there is a need to regulate it so as to prevent losses.

            In 2001, eight people were charged with accounting fraud where the individuals involved co signed accounting documents that were misleading and false. They also provided third party confirmations to the independent auditor of K-Mart that was false. The executives from K-Mart identified, prematurely, millions of dollars in the form of vendor allowances intended for promotions, which fraudulently boosted revenue by 10% which is an equivalent of 24 million dollars in the fourth quarter of the 2001 fiscal year (Accounting Today, 2004). Despite being a large organization, these employees found a way to commit fraud and if it was not identified, the company would have incurred millions of dollars in losses.

            Another example of fraud is information technology fraud. With various technological advancements, businesses are relying more on information technology and communication to conduct business. If well implemented, IT could have a lot of benefits for an organization as it makes operations more efficient and convenient. However, if poorly designed, employees could take advantage and use it to engage in fraudulent activities such as cyber fraud (Ozkul & Pamucku, 2012). Such was the case when Raju, the chairman and founder of Saytam falsely boosted the company’s revenue by billions of dollars by falsifying cash balances, margins and revenues. There is also fraudulent financial reporting where those in charge of making financial statements for an organization either fail to present correct firm positions or provide falsified statements. As a result, the company encounters improper balance sheets as a result of the false revenues and expenses created (Ozkul & Pamucku, 2012).

            Another type of fraud is misappropriation of assets where employees use a company’s assets for their own personal use or gain.  In cases where employees are entrusted to use company assets for the purpose of accomplishing their duties, they may decide to use them for personal reasons that do not benefit the organization (Ozkul & Pamucku, 2012). Lastly is payroll fraud where and employee such as the human resource manager colludes with the accountant to make dummy records for ghost workers so as to benefit from their salaries.

The Fraud Triangle

            While employees are encouraged to maintain good work ethics, there are conditions that may lead them to committing fraud.  One reason may have been as a result of an identified opportunity. In the case of K-Mart, the employees may have identified an opportunity to defraud the company and get financial benefits. They may have seen the affiliation with other companies as an opportunity to embezzle money through creating false information so as to steal money and deceive the independent auditor hired by the company to help prevent issues of accounting fraud (Accounting today, 2004). Lack of a vigil forensic accountant may have also seemed as an opportunity that led the group into believing that they would get away without the fraud being uncovered. Another reason that may have led them into committing the fraud is due to motivation. Most people who engage in fraud do so because they are motivated by certain factors such as the need to have more money (Heissner, 2015). Lastly, the fraud may have occurred because lee found a way to rationalize his actions. Since K-Mart is a large organization, they may have rationalized that stealing that amount of money from them was okay.

How to prevent fraud

            Due to the huge losses that come about as a result of fraud, it is of great importance that cases of fraud are identified and dealt with before they can cause significant damage in K-Mart. As a measure to prevent fraud, the company will focus on detecting fraudulent activity within the organizations (Ozkul & Pamucku, 2012). In relation to IT and communication, software will be installed into the company systems for the purpose of identifying any red flags that could indicate fraud. When identified, the correct measures will be taken so as to prevent fraud. Free hotlines where employees could call for free and remain anonymous will be provided for to encourage staff members to report other employees that may be suspected of engaging in fraudulent activities (Ozkul & Pamucku, 2012). Most of the fraud that occurs is caused by people who are determined to engage in fraud or those who can be encouraged to do so. Having channels that help to identify cases of fraudulent activity in K-Mart will help to stop those employees that are determined to commit fraud no matter what opportunities are presented to them. The hotlines will also assist in detecting fraudulent activities because individuals will be more comfortable reporting such issues yet still remaining anonymous.

Recommendations for future fraud prevention

            Cases of fraud often occur due to opportunities present in an organization, motivation of staff members to engage in fraud and how they rationalize their fraudulent actions. Policies can be implemented to ensure that there are as little opportunities as possible for employees to engage in fraud. By doing so, the temptation to engage in fraud or being inclined to do so will be limited. To deal with the issue of motivation, K-Mart employees will be provided with proper lines of communication where they can talk about issues such as emergencies, lack of compensation or any other issues that may create an urgent need for money. The company will therefore play its part in ensuring employee benefits and bonuses are offered accordingly to get rid of the idea that the company owes them money. With no opportunity to engage in fraud and the needs of employees addressed, there will be little, if any cases of fraud and therefore no need to rationalize it.

 

 

 

References

Accounting Today. (2004) “Five settle SEC charges in Kmart accounting fraud” retrieved from,             http://www.accountingtoday.com/news/9641-1.html

Heissner, S. (2015). Managing business integrity: Prevent, detect, and investigate white-collar    crime and corruption.

Ozkul U and Pamukcu A. (2012) “Fraud detection and forensic accounting” Springer-Verlag       Berlin Heidelberg