Accounting Fraud can’t make Your Business Booms but Busts

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Accounting Fraud is defined as the act of falsifying accounting and other financial statements of an organization in an attempt to get financial gains. An example of accounting fraud is the act of a company informing its stakeholders that the company in question has made financial commitments instead of saying that they are bankrupt so that they might not have to pay their debts. Some companies have also been accused of accounting fraud after they highly priced their assets than the actual value so that their share prices can be valued highly and they can gain through the sale of highly-priced shares from the misrepresentation that their assets are highly valued.

Justification of the paper

The Enron scandal in 2011 happens to be one of the most famous and highly media-focused cases in the history of accounting fraud cases in the world. The Accounting Fraud in Enron resulted in many job losses which in turn negatively affected many lives because they now had no means of supporting their livelihoods. Accounting fraud cannot make businesses boom but instead results in their busts. This paper will look at the reasons why accounting companies engage in fraud, the ramifications of using accounting frauds, and also give some general suggestions to companies on how to improve the company’s performance to avoid accounting frauds.

Why companies are using accounting frauds

Since accounting fraud is mostly done by accounting professionals who hold years of experience in their specific field, the accounting fraud that is conducted is usually difficult to detect which gives the companies that use accounting fraud courage to conduct their misdeeds. Furthermore, the auditing is mostly done by organizations that might have a vested interest in the companies that they are auditing. The result is usually that of helping each other such that, the auditing firm keeps quiet concerning accounting fraud that they might detect, and in return, they might get something of monetary value from the company such as shares traded in the stock market which might give high returns when they are purchased by members of the public (Larson, 2008).

Detection of Accounting Fraud

In such a scenario where a company that is practicing accounting fraud is covered by the firm that audits them, it is even more difficult to detect. Companies also use accounting fraud so that they can appear competitive and attract a high number of clients to invest in their financing endeavors. When companies give the public the impression that they own a lot of property and that they are highly successful, this sparks an interest in the customers and makes them highly invest in such a company because they feel that this company would gain huge profits for their investments which is their main objective (the high return on their invested money).

Causes of Accounting fraud

Some managers are hired and retained in companies due to their high performance. This high-performance contract prospect may make employees bow under the pressure and resort to unethical practices such as accounting fraud. Such a manager might hire individuals to make the performance of the company appear high even though this might not be the actual case so that their benefits in form of salaries are still kept high and they pose like good performers in terms of their managerial experience and performance (Singleton & Singleton, 2010).

Unethical practices related to accounting fraud

Sometimes company executives might choose to engage in accounting fraud when they have collaborated with companies or organizations that are supposed to buy out or take over their company. This unethical practice would most likely lead to the company being bought at a lower price. The accounting fraud would involve the assets of the organization being valued at a price that is lower than the actual value of the assets of the company. Once the taking over company purchases the company, it might then turn around the performance of the company such that it makes very high amounts of profits and the managers that were in charge of the altered auditing would be rewarded for their good work (O’Brien, 2008).

Consequences of using accounting frauds

Companies that use accounting fraud usually lose clients very fast. No individual or corporate group wants to be associated with a company that is involved in fraud. Once a company that is involved in accounting fraud has been ousted, no one wants to deal with it or its former employees. Although the former employees might be unaware of the poor accounting techniques that were being used in their former organizations, their association with such companies will render them unemployable since they were former employees in these organizations (Romero & Berenson, 2006)

The overall effect of accounting fraud

Companies that engage in accounting fraud are highly likely to affect and offset other industry players because they portray themselves as being more efficient in production and often at lower costs. The result is that other players in the industry might have to lower their prices so that they can compete with the firm and thus hurt their market position. This can hurt and even bankrupt the whole industry because their profit margin might be too low for them to cover their operating costs and hence remain in business (Singleton & Singleton, 2010).

Effect of accounting fraud on the company

Most accounting frauds that occur lead to the suing of the management by the shareholders. People that have invested in the company feel that the management of the company like the Chief Executive Officer (CEO), the Chairman, and the Chief Financial Officer (CFO), have all been tasked by the shareholders to invest their funds responsibly and monitor the financial developments in the company. This can lead to even deeper financial troubles for a company that is already in a bad position financially and in public view rating (Rezaee and Riley, 2010).

Effect of accounting fraud on company personnel

Accounting fraud involvement of employees can attract serious jail terms, freezing of accounts, seizure of property, and loss of reputation for individuals involved in the fraud. This kind of loss of repute is highly likely to lead to a lack of employment for individuals in an organization. Most of the auditing firms that are associated with firms that have practiced fraudulent accounting principles are also highly likely to lose business.

Effect of accounting fraud on auditing firms

Corporate organizations and other members of the public usually associate such auditing firms with fraudulent accounting practices which hurt their business. An example is Arthur Andersen who was the auditing firm for Enron Corporation, one of the biggest accounting fraud company cases in the history of accounting. In the short run, a company might get booms from accounting fraud, but in the long run, accounting fraud results in busts that often leave irreparable damage (Needles, Powers & Crosson, 2010).

Why companies should not use accounting frauds

As evidenced by the 2001 Enron accounting fraud scandal, accounting fraud doesn’t pay. The action instead results in individuals that are involved in the scandal losing their jobs, being exposed to media and public scrutiny, and facing possible jail terms. The auditing firms that are usually involved with such accounting frauds are never spared as was the case with Arthur Anderson who had been ranked as one of the five biggest audit companies in the world. It was claimed that the company was aware of the accounting fraud and unethical principles that were being made use of by Enron Corporation. This led to change in the way that the public and other corporate organizations viewed the auditing firm which led to a substantial loss of business (Bragg, 2009).

Cases of corporate firms that have used accounting fraud

More recently, in 2008, the Lehman Brothers were involved in accounting fraud when they failed to tell the investors about repo 105 transactions that they were carrying out. Repo 105 Repurchase agreements usually result in accounting tricks whereby, companies list short-term loans as sales proceeds which are used to reduce the number of liabilities thus improving the position of the company in terms of its financial position. Companies then wait for the financial statements of the company to be published after which they then list and buy the original assets of the company using money that they have borrowed (Meller, 2002).

Cases of auditing firms associated with accounting fraud

The Lehman Brothers were being audited by Ernest & Young which was also charged with being involved in accounting fraud whereby, it was noted that for a given period, the company received a high amount of money from the Lehman Brothers Company. The Bernard L. Madoff Investment Securities LLC company in the United States, which was audited by Friehling & Horowitz was accused of a massive Ponzi scheme in 2008 which led to the loss of earnings for many innocent investors. A Ponzi scheme requires a constant flow of cash because the investors are always paid with money from fresh investors that supply such fraudulent investments with money.

Short term and long term effects of accounting fraud

Companies should not engage in accounting fraud because it would be a sure way of hurting their business and a resultant case would be the loss of clients because no investors would want to get involved with a company that has a history of losing investors money as a result of accounting fraud which the investors would most probably look at as a form of greed in the management and the auditors of the company.

Internal control

Companies should project realistic figures for their company performance so that managers and employees do not feel like there is pressure for them to perform highly, failure of which would lead to loss of their jobs. If companies project realistic figures, they are likely to remove the pressure of high performance of their companies and that of management leading to ethical practices making them avoid using fraudulent accounting practices.

Training of employees on avoidance of accounting fraud

Company staff should be constantly retrained on the use of accounting principles to ensure that they are well aware of the accounting practices that are considered unethical and would lead to negative ramifications for the organization such as irreparable damage on the reputation of the organization for knowingly using unethical and fraudulent accounting practices for monetary gains at the expense of the shareholders (Daks, 2008).

Vetting of company personnel to avoid accounting fraud

Companies should thoroughly vet their employees before hiring them to ensure that they have never been involved with fraud cases. Most of the individuals that are involved in fraud cases already have experience in such an area and companies should not have to wait until when it is too late to do vetting of their employees (Anonymous, 2008).

Response mechanisms for accounting fraud cases

Clear response mechanisms should be put in place to ensure that any fraudulent accounting practices are caught in good time and necessary measures are taken. This would save the reputation and performance of the company in the eyes of the public. To ensure vigilance among employees, accounting fraud training should be conducted regularly to stress the importance of conducting accounting using the ethical laid down principles and guidelines (Romero & Berenson, 2006).

Ethical practices of avoiding accounting fraud

Financial statements in the organization should be reconciled frequently to ensure that any discrepancies are clarified, addressed, and corrected in due time. Firms should not have to wait until investors have lost all their money for necessary action to be taken against accounting fraud culprits and corrective mechanisms to be put in place.

Involvement of company personnel in avoiding accounting fraud

Clear goals and actions needed to achieve those goals should be given to the employees of the company so that there is a clear message given early. If there is a conflict of interest, it should not be allowed in organizations as this is one of the most common origins of fraudulent accounting practices (Rezaee and Riley, 2010).


The paper has looked at why companies use accounting frauds, the consequences of the fraud that the companies engage in, and why companies should not engage in fraudulent accounting practices. The bottom line for using fraudulent accounting principles appears to be the busts. Companies that have been involved in fraudulent accounting principles have been analyzed and the consequences of their actions, all had negative ramifications for them and the company’s stakeholders.

An example of such a company located in the United States is the Lehman Brothers Company that was involved In Repo 105 Repurchase agreements which were audited by Ernest and Young and The Bernard L. Madoff Investment Securities LLC Company which was audited by Friehling & Horowitz. The Company (Bernard L. Madoff Investment Securities) was involved in Ponzi Schemes leading to the reaping off of innocent investors. Companies might experience a boom in business for a short while, but they experience busts in the long run.


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Larson C., (2008). Accounting Fraud and institutional investors. Michigan: ProQuest. Pg 7.

Meller, P. (2002). International Auditing Rules Urged on the U.S. The New York Times. Web.

Needles, B. Powers, M. and Crosson, S.V. (2010). Principles of Accounting. Ohio: Cengage. Pg 134.

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Singleton, T. W., and Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting. New Jersey: Wiley. Pg 79.

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