Managerial accounting is involved in providing information to people who are directly concerned with the activities of an organization. Financial accounting is the opposite in that it gives information to people who are not directly involved in the running of the organization such as creditors and stockholders. Information that managerial accounting provides include; revenues, budgets, reports on performance and the cost of a companies products.
Managerial accounting fraud is the deliberate alteration of this information by the management of a company for different reasons despite the fact that most companies have laid down code of ethics. The code of ethics spells out the behavioral standards and rules that should be followed by all employees. The code of ethics is vital in that it defines what is right or wrong hence it is not left to personal interpretation. Another purpose of a code of ethics is that it helps a company avoid the attention of the government and media which are brought by unethical conduct. The long term benefit is the avoidance of damage to its reputation and costs that can stem from law suits. It also serves as a point of references for employees when they feel that their terms of employment are being infringed. An example is Google’s “don’t be evil” (Hilton& Hilton, 2010).
Even with the existence of codes of conduct, many companies are continuously faced with cases of wrongdoing with fraud as the leading case. A good example is Enron which filed for insolvency in 2001. Investigations into the causes of the bankruptcy unearthed a scheme used by the company’s top executive to steal from it. The company’s former chief financial officer and former two chief executives were convicted of fraud. The magnitude of Enron’s failure is estimated to have cost shareholders and creditors $60 billion (Jones, 2004).
Another case study is that of WorldCom which came down in 2002. Investigations led to a gigantic accounting fraud. Its former chief executive Bernard Ebbers was jailed for 25 years for the offences of fraud and conspiracy. Scott Sullivan got 5 years behind bars for the same crimes when he pled guilty for the same offences.
The most common form of cheating is exaggerating income and assets and at the same time reducing expenses and costs. In most cases fraud arise due to demand to satisfy the expectations of investors and creditors. An example to explain this form of fraud is when company A receives a big order for sales in January 2010, but the management is under stress to meet profit expectations of 2009. The management may dishonestly decide to “book” the sale early and enter the transaction in 2009. Although the scam has the effect of increasing the profit margin of 2009,It will ultimately reduce that of 2010. The end result of is that the management will be involved in more fraudulent activity to get sales to replace those that were wrongfully added to 2009. This explains why fraud, is never a onetime scandal (Jackson et al, 2008).
Generally accepted accounting principles (GAAP) gives the rules for the preparations of financial documents tor outside users. Unfortunately, internal decision makers may use the same documents when making decisions to promote, raise reimbursement levels and end of the year bonuses to management. The disadvantage with GAAP is that it leaves loopholes for managers to make decisions that have adverse effects on profits.
Stealing of company property presents another form of fraud. In most cases it is committed by low cadre employees and involves minimal amounts that do not have a big effect on a company’s financial outlook. Assets which can be misappropriated include; money, stock, permanent assets and other physical assets. The advance in technology has given rise to another form of theft involving the company’s data and information systems’ functioning capacity. Traditional forms of theft have a direct effect on the parties concerned but the effects of stolen data are more undesirable and of great magnitude.
There are three major causes of fraud. Circumstantial stress and incentives provide employees with the morale to engage in fraud. Financial stress is the key motivator for fraud which is driven by personal insatiability. Financial fraud is also driven by debts, low credit ratings, expenses stemming from drugs, gambling and investments that are not doing well. Fraud may also be perpetrated by employees when they feel that they are poorly paid and unappreciated for their achievements. Phobia arising from an eminent job loss is also another factor. Pressure to be identified with a certain lifestyle is another contributing factor (Crosson&Needles, 2010).
Conditions and circumstances that give employees a chance to commit fraud are termed as opportunities. Opportunities arise from lack of or presence of weak control mechanisms. Delegation of duty is one effective form of internal control. A company should separate the following responsibilities; authorization of transactions, record keeping and safekeeping of assets and records. Individual attitudes may also compel one to believe that fraud is not personal hence the justification.
Fraud can be fought by tightening internal control mechanisms. Conducting frequent audits also prevents employees from committing fraud. Other methods include educating employees about fraud and putting into place a code of ethics governing conduct of employees.
It is the dream o f each business entity to fight and stop fraud. This is due to the financial losses involved and the damage to its reputation which may be irreparable. Combating fraud needs the good will of all stakeholders involved, but the greatest role is played by the company’s top management.