The Concept Of Corporate Fraud Is Very Broad Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The concept of corporate fraud is very broad and encompasses a variety of criminal and civil violations. We can say that corporate fraud is a type of fraud committed by large organizations rather than individuals, for example, auditing irregularities. Corporate fraud is fraud, misrepresentation, or deceit, made with intent to defraud. Some examples of corporate fraud may include, but are not limited to, fraud or illegal practice in the issuance or sale of securities, false reports or entries on corporate documents with intent to deceive, or purchase or sale of securities by a person having access to material information not available to the public through a special relationship with the issuer.

By the way, there are ways for us to detect corporate fraud. We can look at some of the warning signs, for example: complaints by outsiders are not investigated; quality standards are not being met in a manufacturing environment, employees' reluctance or refusal to go on leave, altered or destroyed records, frequent use of one or two suppliers, reputable suppliers shy away from submitting bids, frequent entertainment of employees by vendors, frequent entertainment of employees by vendors, references given cannot be verified or located, large or significant customers are handled exclusively and jealously guarded by one or few employees, and large amounts of advances are made to affiliates or subsidiary businesses. If we can keep an eye on all the warning signs that stated above, then it definitely will help in detecting corporate fraud in the corporation.

Other than that, to detect corporate fraud, we need to understand the reason of fraud occurs. Frauds are more likely to be committed where controls are weak rather than absent. The most common weaknesses that give rise to opportunities for fraud are: lack of separation of transaction authority from custody of assets and the accounting for assets, too much trust in employees, lack of frequent audit or review, inadequate documents and records and lack of proper procedures for authorisation or the neglect of such procedures. Beside detect corporate fraud; the most effective way to solve corporate fraud is prevent it. Conscious efforts must be made towards the deterrence and detection of fraud. Very often, the possibility of being found out acts as a deterrent to some who might otherwise commit frauds.

There are some of the methods that can employ to deter fraud: appropriate screening of employees, reduction of opportunities for stealing by doing separation of duties, implementation of appropriate audit controls, having spot checks and unannounced audits, commitment to security and the implementation of security measures and follow up, Installation of fraud "hot line" to take anonymous calls on suspected fraud, assignment of responsibility, authority and accountability to appropriate employees, and regular review of up-to-date management accounts.

Audit risk

Risk is a fundamental concept that underlies that audit process. An auditor engaged to audit a set of financial statement faces a certain level of audit risk. Audit risk is the risk that the auditor expressed an inappropriate audit opinion when the financial statements are materially misstated. In simple terms, audit risk is the risk that an auditor will issue an unqualified opinion when the financial statements contain material misstatement. It is the risk that an auditor will not discover errors or intentional miscalculations (i.e. fraud) while reviewing a company's or individuals financial statements. There are two general categories of audit risk - risk regarding assessment of the financial materials and risk regarding the assertions produced by evaluation of the financial materials. 

The auditor should perform the audit to reduce the audit risk to a sufficiently low level that is, in the auditor's professional judgment, appropriate for expressing an opinion on the financial statements. The auditor cannot be expected to eliminate audit completely because there are certain inherent limitations in an audit that affect the detection of material misstatements. The following are the main factors that give rise to these limitations:

The use of testing (sampling)-When the auditor does not examine a 100 percent of the accounting population, there is a risk that the auditor may draw a wrong conclusion about the fairness of the account balance.

The inherent limitations of internal control, for example, the possibility of management override or collusion.

The drawing of audit conclusions based on audit evidence that is mostly persuasive rather than conclusive.

As a practitioner providing public accounting services, the auditors is also exposed to business risk relating to financial loss and damage to his professional reputation or loss his professional practice from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on. For example, an auditor may conduct an audit in accordance with established auditing standards and still be sued by the client or a third party. Although the auditor has complied with professional standards and may ultimately win the lawsuit, his professional reputation may be damaged in the process by the negative publicity.

Risks that related to public practice cannot be directly controlled or completely eliminated. However, the auditor can indirectly limit and modify such risks by exercising control through the careful acceptance the retention of clients and controlled by the scope (nature, extent and timing) of the audit procedures.

A 2001 brochure by KPMG LLP, which claims to have pioneered the risk-based audit during the early 1990s, explained the difference between the old and new ways. Under a traditional "bottom up" audit, "the auditor gains assurances by examining all of the component parts of the financial statements, ensuring that the transactions recorded are complete and accurate." By comparison, under the "top down "risk-based audit methodology, auditors focus "less on the details of individual transactions" and use their knowledge of a company's business and organization "to identify risks that could affect the financial statements and to target audit effort in those areas." Facing a crush of shareholder lawsuits over the accounting scandals of the past four years, the Big Four accounting firms say they are pouring tens of millions of dollars into improving their auditing techniques.

Companies request an audit in order to provide confidence to investors that their financial statements and reporting are accurate. In order to insure against potential litigation arising from missed financial improprieties, such as material misstatements, auditors need to carry malpractice insurance.

Data Collection Method

Initially, we try to find out the articles journal which is relevant to our topic by using search engines such as Google, Business Week, Yahoo, and Alta Vista. The articles journal that we had found was related to audit risk and corporate fraud. Besides that, we also try to search the recent issues on the topic of audit risk and corporate fraud from newspapers and Wall Street Journal. We are trying to understand the basic concept and issues of audit risk and corporate fraud based on the articles, journal, and newspapers that we found.

Next, we started to analyze the articles that we had found. We retrieved the meaning and basic concept of the audit risk and corporate fraud from the articles. We also try to refer to the textbooks that we are using all the while. We have summarized the theory and effective way to detect the audit risk and corporate fraud that exist in the company from all the articles, journals and newspaper that we found. From the articles, we know the big changes in the way auditors were performed due to the corporate fraud. If the auditors perceived that the company have higher risk of occurs corporate fraud, then the auditors would performed far more tests than a company that the auditors perceived that have lower risks of occurs corporate fraud in the company.

After that, we find the annual report of manufacturing firm and try to analyze and found out whether their company got audit risk. We try to apply the theory of the audit risk in the process of analyzing the company's annual report. The annual report of the company we used is Annual Report of London Biscuit Berhad in the year of 2008. We search at the internet to find the news/articles of the company to retrieve the news which is related. P/s: we can add more details after refer to the part of findings.

Finally, we made a conclusion based on the analysis of journal articles, news and annual report.


We find a new from article "compliance today" in internet mentioned that London Biscuits Berhad reprimanded for breach of paragraph 9.16 (1) of the Listing Requirements of Bursa Securities ("LR") in respect of the Company's announcement dated 29 August 2008 on its fourth quarter report for financial year ended 30 June 2008 which failed to take into account the adjustments as stated in the Company's announcement dated 30 October 2008. The Company's audited net profit was RM10.5 million, which was RM2.2 million or 27% higher than the unaudited net profit. As such, London Biscuits Berhad was required to carry out a limited review on its quarterly report submission. From this article, we think that London Biscuits Berhad had the potential audit risk in the company. It warnings sign for us to examine more specific in this company. Besides this, the action of breach the rule of the Listing Requirements of Bursa Securities maybe it is because of inefficiency in internal control. Maybe the company has lack of separation of transaction authority from custody of assets and the accounting for assets, lack of frequent audit or review, inadequate documents and records and lack of proper procedures for authorization or the neglect of such procedures. Therefore, there have probability have fraud in this company due to the audited net profit was higher than the unaudited net profit. (Refer to the news attached in the appendix)

Balance Sheet (Refer to the annual report of the company in the appendix)

Based on the balance sheet of the company, regarding the property, plant and equipment, there has been an increase of amount from RM 167, 361, 800(2007) to RM 191, 526, 174 (2008). Although the increase of asset was a good incident (as an investment to increase the future benefit), the company need to identify that the property, plant and property was clearly existed with a correct amount and has the proper right and obligation. The difference between the amounts can be considered as quite a huge amount (around RM 25, 000,000). There is a possibility that there is a false amount stated in the purchasing documents. To illustrate it is, the collaboration of the employee with the asset seller regarding the amount that the company going to buy. These both parties might have agreed in an amount but charged another amount. Therefore, information regarding the market value should be obtained. There might have different value, but it should not be too huge. Therefore company can use it as a reference to judge whether there is an unacceptable value. As for another part of the property, plant and property, regarding the reclassification and the disposal of the asset, there is an audit risk as it was mainly based on the experience and the judgment of the auditors. The use of professional judgement is an essential part of the audit process. However, in making judgemental decisions, there is always a risk that the judgement may be flawed. In this company, the plant, property and equipment had been revalued and the leasehold properties of the subsidiaries were revalued by a firm of professional. As the assets had increased, the auditors need to make sure the estimated useful life of the assets, depreciation methods used for the book and tax purposes and any expected residual value are reasonableness.

Noted that the inventory in the balance sheet increased from RM 13, 814, 140 (2007) to RM 15, 506, 005(2008) which is a matter that can be discuss of. This indicates that there is three possibility that are first, there is an obsolesce; second overproduction; or third over valuation of the inventory. If there is an obsolesce, it indicates that the management did not have an effective and efficient enough to distribute their products in the market. If it is overproduction, it indicates that the production and the management did not incorporate well enough to produce their goods. If it is the valuation of the inventory, it indicates that there is a wrong judgement or misrepresentation by the management when handing in the management assertion. Determining a proper inventory value may be more difficult when the production process involves numerous processes The reason for such incident is that judgement made are based on the experience and knowledge of the auditors. Different auditors have different opinion or judgement. As for the management assertion handed, a good management assertion leads to sufficient and reliable audit evidence. Besides that, audit evidence is more of a persuasive and not conclusive. The nature of the evidence obtained are seldom provides the absolute assurance about the audit objective and the related assertions. Furthermore, an auditor is not expected to be exerts in authentication of records and authentication. The complexity of auditing inventory may also be affected by the degree of processing required to manufacture products. This is because there are many considerations in evaluating the inventory. The considerations included the materials costs, labour costs, overhead costs, the technology used in manufacturing and other costs that are related in the manufacturing.

As for the account receivables (include trade receivables and other receivables), deposits and prepayments, all of them has increased around RM 2,000, 000 to RM 3, 000, 000 (refer to Note 10 and 11).Even though the allowance for doubtful debts has no significant changes (which is good), but the trade receivables has increase, which means the company's customers own the company money. This indicates that the approval for the credit sales. These credit sales approvals might have lead to the possibility of fraud as it creates opportunity toward fictitious accounts. Besides that, the sundry deposits have increased in a huge in amount whereby it should not have. This indicates that it is possible that unnecessary money was spent. If the company could specifically identify the expenses well, the sundry deposits would not have increase in a huge amount. Therefore, there is a possibility that ineffectiveness and inefficiencies of resources occurs.

Since the deposits, cash and bank balances have the most liquidity, the possibility of fraud to happen is higher compare to any other transaction. As stated in the balance sheet, the deposits, cash and bank balances have a huge increasing amount. However, it does not specifically state that it was from their profit. This is because their borrowings are high and the debts towards their creditors are also in a huge amount. Therefore, the increase of the deposits, cash and bank balances could have been due to the borrowings and debts. That is why, it is better to have more attention towards the deposits, cash and bank balances received. Since there is not specific explanation and information of the cash transaction, whereby, in each and every company has its own petty cash, it is better to have a have a detail substantive procedure on the petty cash funds. This is because in most cases, auditors seldom perform substantive procedures on the petty cash fund, except fraud is suspected.

In the report of balance sheet, noted that the amount of hire-purchase creditors is extremely different from year 2007 to 2008; there is increase from RM 3, 554,720 to RM24, 954, 611. We suspected that there is a probability of audit risk in this account occurred. Refer to the Note 15 (for the company), the hire-purchase minimum payment later than 1 year and not later than 5 year (non-current liability) are increased dramatically from RM 3,554, 720 to RM24, 954, 611. Besides this, the amount hire-purchase minimum payment not late than 1 year (current liability) increased from RM 1, 180, 185 to RM 7, 095, 977. This indicates that their company has a lot of instalment to be done as they entered year 2008. The company needs to make sure that payments are made at the right amount and at the right time. This is because employees made have made fictitious documents regarding the payments. As for the interest for the hire-purchase creditors, even though the interest was stated in the Note 15, the effective borrowing rate ranges for year 2008 from 2.45% to 3.65% and for year 2007 is from 2.45% to 3.19%. As you can see, there is an increase of effective borrowing rate from 3.19% (2007) to 3.65% (2008). There are two possibilities the borrowing rate increased. First is due to the Bank Negara or the creditor to increase the borrowing rate (for new hired purchase). Second is due to extra interest rate charges for late payments or other circumstances. However if it is for the former hire purchase the increase in interest rate due to the Bank Negara or the creditor is not that relevant. This is because, in year 2008, as far as my knowledge, the base borrowing rate did not increase at that year. So this lead to our conclusion that the increase is due to extra interest rate charges for late payments or other circumstances. Therefore, the auditors need to investigate the cut-off for the hire purchase borrowing rate; whether or not the company had made the right payment on time.

In the report of balance sheet, we found that the account trade payables are increase dramatically from year 2007 to year 2008, that RM 11, 979, 606 to RM 17, 875, 063.This means that our debt towards the creditors has increased. There isn't any specific calculation or the amount that the company own towards each of their creditors. That is why, it is suspicious that fraud could have happened .There is a possibility that the employees of the company had cheated on the company's resources. Employees could have created false amount regarding the payment made which means that the employees pay lesser than the suppose amount and took the balance. Therefore, we have reason to doubt that have probability have fraud in this account.

Income Statement

(2008) (2007)


OPERATING REVENUE 112,010,823 102,482,544

COST OF SALES (81,333,877) (66,820,322)

GROSS PROFIT 30,676,946 35,662,222

This is a part of income statement for the year ended 30th June 2008 of London Biscuit Berhad. As we can see, the operating revenue is increase from 2007 to 2008, which the amount increase RM 102,482,544 to RM 112,010,823. However, the gross profit is decrease within these 2 years, from RM 35,662,222 to RM 30,676,946. That means the cost of sales is extremely increased in a large amount from RM 66,820,322 to RM 81,333,877, although it may due to the increasing price of material. However, it may be consists corporate fraud in this amount also. Thus, it may increase the audit risk that auditor may fail to detect the immaterial misstated. For example, the employee cans cooperation with the material supplier and charge illegal "commission" with the supplier. Therefore, the company should be carefully which the employee purchases the material frequently with the same supplier. However, that just is our opinion, we need to gather more evidence to justify whether the amount of gross profit are accurate or not.

(2008) (2007)


PROFIT BEFORE INCOME TAX 6,726,845 14,616,013

INCOME TAX 472,717 5,532,107

PROFIT AFTER INCOME TAX 7,199,561 20,148,120

Above this statement is come from a part in the income statement for the year ended 30th June 2008 also. As we can see, the profit after income tax is higher than profit before income tax, around RM12, 948,559. Although the statement is support by note 20 of financial statement that the account of income tax referred to overprovision in prior years and transferred from deferred income tax liabilities, but there are quite unreliable that 2 year (2007 and 2008) income tax is overprovision income tax, and then company did not pay the tax to government. Moreover, the profit after income tax is higher than profit before income tax. We think that may have fraud consist in income tax, because the higher profit can attract public to buy their share and attract more investment to their company. Besides, it may also increase their reputation of the company. Therefore, the audit risk is higher in account income tax.

Besides this, there is extremely decrease profit after income tax from 2007 to 2008, which the amount moving from RM 20,148,120 to RM 7,199,561. The profit of 2008 is decrease more than half of the profit of year 2007, although the operating revenue is increase. Maybe the decrease income tax is due to decreasing in account other operating income, but why the other operating income will decrease from RM 4,541,063 to RM 2,111,083. Moreover, there is no disclosing in note to financial statement. Therefore, we have reason to doubt the account consist fraud in the company and there are contain high audit risk at here. The decreasing of other operating income may because of the employee of the company manipulate the account or steal the money. Moreover, it does not mention that what the meaning of other operating income, because every company have their own policy and regulation, we think that the London Biscuit Berhad should be describe more clearly about this account. Besides this, the company should more concern about their performance, because the decreasing in profit after income tax will become a big issue, not only within the company but also the confidential among the public to the company.

(2008) (2007)



- Basic 9.25 28.07

- Fully diluted 8.65 28.07

Above this statement is taking from a part in the income statement for the year ended 30th June 2008. As there mention that, the basic or fully diluted of earning per share are decrease from year 2007 to 2008. Although refer to the note 21 mention that, the decreasing in earning per share are due to the decreasing of profit attributable to the equity holders of the company. However, there have possibility that consist fraud in profit after income tax, therefore the earnings per share should be consider whether it accurate or not.

Basically, cash flow statement is one of the financial statement that used by the company to reflects the company's liquidity. The cash flow statement will provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances, and provides additional information for evaluating changes in assets, liabilities and equity. Generally, the cash flow statement divided into three main parts, which contented cash flow from operations activities, cash flows from investing activities and the cash flows from financing activities.

In the part of the cash flow statement, the auditor has to examine the statement and enhances the credibility of the information in the statement. The transaction in the company's operation and the figure, will tell the auditor the status of the company. The auditor should able to examine and learn the latest status of the company after understanding the figure and the item in cash flow statement.

In the part of cash flow statement, the probability of the error and fraud occur is the people would like to shows that all the transaction of the operation is normal and the company status is healthy but actually not.

In the part of the cash flow statement of Annual report of London Biscuits for the year ended 30th June 2008, we can see this part by part which operation, investment and the financing part.

In the part of operating activities, we found that the profit before income tax has extremely decrease -117.28 %. From RM14, 616,013 in 2007 decrease to RM 6,726,845 in 2008. This is considering as a big issues in the business world because the extremely decreasing in the profit would make the shareholder and potential investor lost their confidence on this company's operations. This is believed to be an error and the company maybe got mistake in collecting the data.

However, it was a lost in the disposal of property, plant and equipment which is RM 501,284 in year 2008 and the company did not prepare related disclosure and note to describe more information regarding this transaction. This is possible a fraud and error occur in this transaction. This is possible that the company wish to cheat the company's asset, by selling it at the price which is much lower than it's market value to other company. The company should clarify the calculation of the disposal in note or disclosure and the buyers of the assets.

The dividend income in year has also decreased RM17216, which are RM 18332 in year 2007 and RM1116 in year 2008. Besides that, we found that is significant decreases in interest income of the company which is RM36, 888 in year 20007 but RM4, 633 in year 2008. These items decreases significantly and need to be concerned and find out the main factor on it. There are few possible factors that make the dividend income and interest income decreased. The first possible factor is the company makes the bad investment and caused the company received the lower dividend income. The company has failed to make the right investment and this make the company gain less than the previous year. The second possible factor is the economic downturns. The economic crisis in year 2007, bring the impact to the investment in year 2008. The economic crisis makes the investment made in previous year lost or gains less. The third possible factor is the error and fraud occurs in the transaction process. But we have not enough and strong evidence to shows that the error and fraud occur in this. Besides that, there are few possible factors to make the company gain the less interest income. First, the debtors already clear the payment. Second, the company has faced the bad debts, which the debtor failed to make the payment on the interest. Third, there's an error or fraud occur. By the way, we should aware and serious in study this issue as this will affect the company's future performance well.

In year 2008, there's a significant increasing in the inventories which is RM 1,691,865. The possible factor of the activity maybe is the company buying the inventories. But, there were lack of information regarding the price of the goods and the quantity that purchased by the company. The companies maybe purchase the goods with the higher price in lower quantity of goods. This makes the company has to pay more in cash to get the inventories. The second possible factor is the company forecast there's a greater sales in incoming year, so the company made the decision to make a big purchasing order. The third possible factor is error or fraud occurs. The fraud may have been done by the employee in this issue on he/she own interest to cheat the company resources. The employee maybe made a big purchase order to the supplier with the higher price but lower quantity. This probability is high because the result of the comparison of the inventories between year 2007 and 2008. There was a decrease in inventories in year 2007, but it increasing extremely in year 2008. This significant difference makes the hypothesis become more persuasive.

Other than that, there were significant differences in the dividend received which is 13316 in year 2007 and 826 in year 2008. This was believed got the same factor which stated at the previous paragraph.

In the part of the investing activities, there was an acquisition of additional shares in subsidiary companies in year 2008. But, there was no additional and related information regarding to this activity. The company should provide the information regarding this issue as the amount is big and may raise the doubts of the user of this report. The purpose of this acquisition should state in the report so the shareholder understand whether this is a reasonable activity or not.


As a conclusion, we found that corporate fraud and audit risk are always occurs in a company in the business world. It is almost impossible for a company to heal it completely, so a company can only try their best to do take few measure to try to avoid corporate fraud appears in the company, for example reduction of opportunities for stealing by doing separation of duties. But a company can take some other measure to help them detect the corporate fraud and audit risk earlier, so that they can minimize their losses cause by corporate fraud and audit risks.

Typically fraud and risk in an annual statement is low. However, as the Malaysian manufacturing does not reveal any news regarding the corporate fraud or audit risk, referring to the annual report was one of the choices to evaluate this report. The statements and evaluation of this report are mostly based on our opinions and judgements with the auditing knowledge that we had obtained so far

Therefore, based on the company that we have chosen, we can conclude that the finding of our report has quite a high debt whether towards the bank or creditors. Due to the increase of certain items, we had summarized the possibility of the corporate frauds and audit risks for each of the items that had been identified. As in the cash flow statement, we find that the management of the company in cash flow is stable. This can be clearly seen if we observe and compare the current amount with the previous year's amount. Although the current amount is bigger than the previous year, but the cash & cash equivalents carried forward in 2006, 2007and 2008 is not much difference.

Finally, we suggest that deeper investigation and a more explanation or information should have been included in the annual report at the notes to the financial so that the interested party could have a more vivid understanding. As for the investigation, a more significant audit procedure should have been done in the transactions that are less significant to the company profit (e.g. sundry deposits, petty cash and etc.). This is because; it can unexpectedly appear to have more fraud in this transaction. The auditor and the shareholder should be aware with significant difference of some part in the cash flow statement. It's a signal for the outsiders to observe the company's operation. We also suggest that the internal control (include the Human Resource in recruiting or training; superior evaluation and monitoring the subordinates behaviours and attitudes) to have a more in-depth evaluation on the company's employees.