Examining the situation and causes of account fraud


In this essay I am going to describe the situation and causes of accounting fraud, which is considered to be the most serious problem in the accounting area. Most of the accounting scandals have been caused by fraud. Compared to other problems deception is more dangerous and covert. Many companies have produced a strict system to prevent fraud, and nearly every country has particular laws to punish dishonest people. But the situation has not been controlled essentially. Not only in small companies, but also in listed companies there are fraud problems. In December, 2001, the world's largest natural gas and energy wholesale dealers, Enron Corporation, whose assets reached 49.8 billion U.S. dollars, suddenly applied for bankruptcy protection to the United States Bankruptcy Court. This case was the largest bankruptcy case in U.S. history. The main cause of this case was accounting fraud. Both Enron Corporation and its auditor, Arthur Andersen, went bankrupt in this credit crisis (John C. Coffee Jr. 2002). It is noticeable that in recent years improvement has been made by both companies and society to control fraud. These developments have ameliorated fraud problems.

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There are three noteworthy problems about accounting fraud. Firstly, managers usually focus on their own bonus and the company's interests, without considering the interests of minority shareholders and investors, which worsens the fraud situation. Secondly, many enterprises do not enforce the internal control system to prevent accounting fraud. In these enterprises maybe there was a system which was created to prevent and control the accounting fraud, but the company did not truly take good advantage of this control scheme. Thirdly, the social audit should be independent. In fact these auditors always work with the directors. Because this fact and other economic reasons such as potential benefits, independence is abandoned, and social audit can not control fraud currently.

Some solutions have been worked out to guard against the listed company's accounting fraud. First, the company's shareholding structure has been improved. This is the vital step in which a company could establish a new mutual balance formation between the shareholders, board of directors and managers. So it is possible to prevent them from fraud, malpractice and abuse of power. A perfect governance structure can strengthen corporate governance, improve the company's operating performance and the quality of the financial statements and curb accounting fraud. According to a fraud theory, some listed companies require the amount of capital contributions in order to protect other investors' interest and minimize the possibility of fraud (AHMED.R.B 1992). Furthermore, it is important to establish a more standardized accounting system, improve the internal financial control system and auditing system and increase the level of information disclosure which means reduce asymmetry of information. In this way, fraud can be discovered and solved at the very beginning in the accounting office. There has been less accounting fraud and manipulation caused by managers. This melioration has benefited from the application of market prices and fair values which are part of the standardized accounting system in financial reports (CHRISTIAN.L DIETER.P ANTHONY.H 2004). Finally, social audit has a clear responsibility to accounting fraud. An audit has two results, one is to discover errors and fraud which have taken place, the other is to avoid error and fraud happening (ALAN.P 1994). Although the auditors' primary responsibility is to express their views about if the company's financial information is fair or not, rather than specifically discover fraud or error. However, the occurrence of errors and fraud and financial information is always associated. It is difficult to imagine a report including errors and fraud but is still fair. In order to enhance audit independence, the Audit Committee and the Supervisory Board have been jointly commissioned by the accounting firm to audit the accounting statements of enterprises and the implementation of audit alternation system. In addition, it has been prohibited that an accounting firm audit and consult for the same company and formulate a reasonable compensation mechanism.

The status of accounting fraud and solution of this situation have been analyzed in this essay. In conclusion, companies, society and investors are working together in order to improve this serious problem. Owing to the fact that fraud is related to three aspects including business management, financial systems and social auditing, the fraud-prevention systems have been created and applied in all these areas to curb the occurrence of fraud. The reduction of fraud cases in recent years are owing to these developments. In my personal view, which is based on what I have wrote, I believe if global governments were to increase the intensity of fraud penalty, the economic environment would be more conducive to the development of business.

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