The attention of the public in the past few years has always been directed by the revelation continued by the major companies of frauds, accounting misreporting, excessive compensation of executives, bankruptcy, and mismanagement. It has been noted that majority of the cases are revealed in the United States, whose accounting system and corporate governance rules had been considered as very effective and efficient. The number of corporate scandals has been raising alarms about the effectiveness and efficiency of the corporate governance of the firms. In addition, most of these scandals have been characterized by the European scenario, whereby for every corporate governance in the present economies is difficult to prevent the risks and damages of misleading accounting and financial information. In the following analysis of corporate account frauds, the discussion will be narrowed to the Dell Company.
The Dell Company is one of the worldwide leading computer systems company. The company specializes in building and customizing of products and services that satisfy different customers’ requirements. Dell’s worldwide strategy is to provide quality product and services that the customer requires to develop their internet infrastructure and information technology.
Corporate accounting frauds. This can be defined as deliberate misstatement or omission of amounts, or failure to disclose correct financial statements with the intention of misleading the users of financial statement, especially creditors and investors. It can also be regarded as earnings manipulation or accounts irregularities.
The financial misstatements can be divided into the two categories: irregularities and errors. Irregularities are defined as deliberate inaccuracies; whereas errors are defined as the inaccuracies, which are accidental. The earnings that are usually reported by the companies and used by managers and investors are imprecise numbers, which are based mainly on the subjective estimates and multiple assumptions. This does not necessarily mean that reports of the financial statements are useless, but it is essential to set a high standard for important and quality earnings.
The financial information from the external sources has been noted as the key tool for managing complex relations between a corporation and a group of stakeholders, who have different traits, cognitive objective, and interests. Financial information is also dependent on variables from the external sources, which are related to its environment. The major financial and accounting frauds are committed as shown below:
- Presentation of inadequate disclosure/deliberate omission of disclosure regarding the principles of accounts, account policies, and financial amounts, which are related;
- Intentional misapplication of policies, accounting principles, and the method used to recognize, measure, report, and disclose business transactions and economic policies.
In the year 2007, the Dell Company failed to disclose to the investors the large exclusivity payment it had received from a company called Intel Corporation, for them not to use the central processing units that were being manufactured by the Intel main rivals. These payments were making the company to meet its earnings targets, but the investors were mistaking it to be the result of the company’s management operations. When the Intel Company reduced the payments it was making to Dell, the company again did not disclose the information to the investor on why the company profitability was decreasing (Beasley, 2012).
- Alteration/falsification/manipulation of financial record material or the business transactions.
In the year 2001, the Dell Company’s revenue was inflated by $1500 billion by forcing or giving out the incentives, which were inappropriate to the wholesalers for them to accept higher inventories than they needed, in order to enable their company to meet the yearly targets.
- Misrepresentation of events, accounts, transactions, and other important information, which is used in preparation of the financial statements.
In the year 2002, a senior accountant of the Dell Company engaged in improper accounting, whereby he maintained a series of the so-called “cookie jar” reserves that were used to cover the shortfalls resulting from operation expenses from the financial year 2002 up to the financial year 2005. This made it look as if it was meeting the targets for the street earnings reducing the expenses in its operations via the operation of the company’s management (Banks, 2011).
Ethics of Fraud
Ethics plays a crucial part in all occurrences of fraud through motivation, rationalization, and also opportunity. The motivation to undertake a fraud is seen, where the fraud is committed by an individual out of greed, drug addiction, alcohol addiction, or even addiction to gambling. There are people, who also commit fraud, as a result of the pay, dissatisfaction of their job, or the recognition received (Banks, 2011).
An individual, who has rationalized fraudulent act, stays alert waiting for an opportunity. Since it is hard for a corporation to directly control the situations that can provide motivation to individuals or impact the individual ability of rationalizing the behavior; it is, thus, critical for an organization to reduce the chances of fraud in the organization. Presently, modern organizations have a responsibility to implement systems that are able to minimize the chances of fraud occurrence. The ethical responsibility should encompass employees, protect donors, venders, shareholders, and also consumers.
The strong systems, which are capable of reducing probability/chances of risk occurrence, demonstrate ethical corporation behavior.
Regulatory Oversight and Protection
Fraud has emerged as a million dollar business, which had been increasing from one time to another. It is widely known that corporations of different sizes all over the world are vulnerable to the financial frauds and scandals. Organizations have been exerting intense efforts to root out fraudulent financial reporting, assets misappropriation, and corruption, but it has emerged that fraud is a mishap, which is rising both in severity and frequency. Accounting frauds and scandals have been significantly increasing the volatility and uncertainty of the financial markets, shaking the confidence of the investors worldwide. The recent accounting and financial fraud together with the outcry of accountability and transparency in reporting has brought about the two outcomes. They are as following:
- Forensic skills in accounting have become essential in exposing accounting maneuvers that has been obfuscating the accounting and financial statements;
- The demand by the public for change and frequent regulation has transformed the CG scenarios all over the world.
The failure of corporations in reporting has made other stakeholders realize the need for the skilled professionals, who can identify, entangle, and control the structural weaknesses in the crucial areas, fraudulent accounting and financial statements, internal control, which is flawed, and poor governance.
The forensic skills in accounting are also becoming increasingly relied upon in the reporting system of corporations, which are emphasizing on the responsibility and accountability to the stakeholders. To add on that, the framework of CG needs to be strengthened and then implemented to the letter and in the right manner.
In addition to the measures above, the international federation of accounts, which is the taskforce commissioned for restoring the public confidence in financial reporting has recommended the following measures:
- Public interest corporations should be having independent committee for audit;
- The members of the audit committee have to be reporting to the corporation boards and be addressing concerns pertaining to internal controls;
- The core responsibilities of the audit committee should be monitoring & reviewing the integrity in financial reports and monitoring reports by the external auditors;
- The independent audit committee has to be holding frequent executive sessions with the internal and external auditors, which should not include any member of the company’s management. Similar meetings with the senior finance officer/key finance executive should be held excluding other members of the corporation’s management.