The Concept of Fraud Risk Factors

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Introduction

Generally, the term fraud is used to denote any deliberate act or omission intended to deceive others. Such an act or omission enables the perpetrator to achieve a particular gain, while the victim suffers a loss (Singleton & Singleton, 2011). The concept of fraud is, therefore, an expansive legal concept where the auditors cannot determine the occurrence of such fraud but instead, their interest is to determine the acts or omissions that lead to a substantial misstatement of an organization’s financial statement (Bell & Carcello, 2000).

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Discussion

Misstatements emanating from asset misappropriation involve theft of assets in an organization. This leads to an omission of material facts in the financial statement. Misstatements emanating from fraudulent financial reporting according to Vona, (2012) are omissions that are deliberate and meant to mislead. Consequently, the requirements outlined in the GAAP are not adhered to in the financial statement (Gillett & Uddin, 2005).

The concept of fraud risk factors is a situation that involves three conditions. These conditions include: incentives/pressures; attitudes/rationalizations; and opportunities (Beaulieu, 2001). It should however, be noted that fraud risk factors do not necessarily indicate the existence of fraud. Nonetheless, these factors are usually warning signs of an impending fraud (Singleton & Singleton, 2011).

Fraud risk assessment of DynCorp International.

DynCorp International is a United State based organization that provides global government services in support of the United States foreign policy objectives, national security, international development, diplomacy, and providing support solutions for defense in the U.S. Being a big organization, as it is, DynCorp International has a number of fraud risk factors associated with misstatement emanating from fraudulent financial reporting, while others may be related to misstatements emanating from assets misappropriation.

To begin with, since the operations undertaken by DynCorp International are massive and cuts across different states with the United States and other nations, the operations may present an opportunity to engage in financial reporting that is misleading. Such opportunities may arise in scenarios where DynCorp International has significant operations situated or carried out across international boundaries. In such scenarios, there is a high possibility that different jurisdictions have different cultures and business environment.

Owing to the nature of its operation, DynCorp International has a number of branches or subsidiary and bank accounts in jurisdictions that offers tax- haven with unclear business justification. In such a scenario, the operations may present an opportunity to engage in financial reporting that is fraudulent. In addition, the ability of DynCorp International to dominate the security support sector in the United States and its strong financial presence may present an opportunity to engage in financial reporting that is fraudulent. Such dominance allows the organization to monopolize its terms and conditions to their customers and suppliers leading to transactions that are inappropriate.

Another risk factor in DynCorp International may be associated with significant estimates used to evaluate the organization’s liabilities, assets, expenses, or revenue. Such estimates are very difficult to corroborate as they involve subjective evaluation, which may present an opportunity to engage in financial reporting that is incorrect. There is also a risk posed by the management practice within the organization, which involves committing to the company’s creditors, third parties, as well as analysts. As if that is not enough, the management of DynCorp International is usually hesitant to rectify notorious material weaknesses or significant deficiencies.

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Fraud risk assessment of Alliance Data Systems

Alliance Data Systems Corporation is an organization based in North America that offers loyalty as well as marketing solutions. Some of the activities carried out by the organization include designing and installing customized solutions across North America. The services offered by this company range from loyalty consulting, email marketing solutions, marketing consumer database, to inventive agency services. Alliance Data Systems Corporation provides its services to a number of industries forming the basis of it’s’ clientele. These industries include: financial services, grocery, health care, pharmaceutical, hospitality, among others.

The risk factors related to misstatements emanating from asset misappropriation in Alliance Data Systems Corporation may be categorized into three conditions that are common in instances where fraud subsists. These conditions include: incentives/pressures; opportunities; and attitudes/rationalizations.

The financial obligation of an individual in Alliance Data Systems Corporation may in one way or another, generate pressure on employees or even management executives who have access to assets, or cash prone to theft to embezzle such assets or cash. Employees may also be motivated to misappropriate assets or case susceptible to theft because of the adverse relationship that exists between Alliance Data Systems Corporation and some of the employees. Some of the scenarios that may cause strenuous relationship between the organization and employees include: compensation, or promotions that defy the expectations of employees, and anticipated employee layoffs in the future.

There are also some circumstances in Alliance Data Systems Corporation that may increase the possibility of misappropriating susceptible assets in the company. These circumstances include the availability of inventory items in the Corporation that are small in size and are highly priced. The company also has assets that are marketable, small in size, and cannot be easily identified.

In an effort to maintain profitability and financial stability Alliance Data Systems Corporation may be exposed to fraud risk due to the increased failures of business and the significant decline in the demand for their services by customers. The company also becomes highly susceptible to brisk changes, for instance changes in interest rates, or technology. Additionally, chances of fraud may increase due to the pressure on the company to fulfill the demands of third parties. The management executives may be tempted to misappropriate company funds or assets to mitigate the pressure.

Fraud risk assessment of AMR Corporation

AMR Corporation is an American air company and a parent company of American Eagle Airlines, Inc, as well as American Airlines, Inc. The corporation oversees all the airline activities worldwide. With respect to the nature of AMR Corporation operation, the corporation has a number of branches or subsidiary and bank accounts in jurisdictions that offer tax- haven with unclear business justification. In such a scenario, the operations may present an opportunity to engage in financial reporting that is misleading.

AMR Corporation operations are massive and cuts across different states with the United States and other nations, the operations may present an opportunity to engage in financial reporting that is fraudulent. Such opportunities may arise in scenarios where AMR Corporation has significant operations situated or carried out across international boundaries. In such scenarios, there is a high possibility that different jurisdictions have different cultures and business environment.

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The financial obligation of an individual in AMR Corporation may in one way or another generate pressure on employees or even management executives who have access to assets or cash prone to theft to embezzle them. In addition, the ability of AMR Corporation to dominate the air transport sector in the United States and its strong financial presence may present an opportunity to engage in financial reporting that is fraudulent. Such dominance allows the organization to monopolize its terms and conditions to their customers and suppliers leading to transactions that are inappropriate.

Fraud risk assessment of Baker Hughes

Baker Hughes is a company that deals with oil and natural gas production in over eighty countries. The major functions of the company are to assist countries with oil and gas exploration, development, generation, and also help them in the management of such oil and gas reservoirs. Baker Hughes operations cut across over 80 nations, the operations of this organization may present an opportunity to engage in financial reporting that is fraudulent. Such opportunities may arise in scenarios where Baker Hughes has significant operations carried out across international boundaries. In such scenarios, there is a high possibility that different jurisdictions have different cultures and business environment. Thus, providing an opportunity for fraud.

The economic obligation of employees in Baker Hughes may in one way or another, generate pressure on employees or even management executives who have access to assets or cash prone to theft to embezzle such assets or cash. Employees may also be motivated to misappropriate assets or case susceptible to theft because of the adverse relationship that exists between Baker Hughes and some of the employees. Another risk factor in Baker Hughes may be associated with significant estimates used to evaluate the organization’s liabilities, assets, expenses, or revenue. Such estimates are very difficult to corroborate as they involve subjective evaluation, which may present an opportunity to engage in financial reporting that is falsified.

Fraud risk assessment of IBM Company

IBM is a multinational company based in New York dealing with IT consultations, technology, as well as computer production. The company provides services related to information technology and produces both software and hardware.

As a computer producing company, there are some circumstances that may increase the possibility of misappropriating susceptible assets of the company. These circumstances include the availability of inventory items in IBM that are small in size and are highly demanded such as laptops, hardware and software.

Another risk factor in IBM is the possibility of misappropriation of intellectual property that is in the domain of the company’s employees. The existence of assets that are marketable, small in size, and products that cannot be easily identified also increases the risk of such assets being misappropriated easily. As a multinational company, IMB has numerous subsidiary companies as well as bank accounts in different countries. The state of affair may present a chance of misappropriating cash or assets of the company in jurisdictions where there are different business environment and cultures.

Conclusion

There are a number of ways through which fraud can be manifest in a company and the company dealings. Undoubtedly, fraud can have a negative impact on a company’s investment and business activities in general. For this reason, the management of a company has a responsibility to design and enforce policies for purposes of mitigating such fraud incidences. One of the most effective ways of preventing fraud in a company is through developing and adopting a set of core values in the company that provides primary principles that steers every action of all employees.

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References

Beaulieu, R. (2001). Earnings Manipulation Risk, Corporate Governance Risk, and Auditors’ Planning and Pricing Decisions. The Accounting Review, 79 (2), 277- 304.

Bell, B., & Carcello, J. (2000). A decision aid in accessing the likelihood of fraudulent financial reporting. Auditing: A Journal of Practice & Theory, 19 (1), 169-184.

Gillett, P., & Uddin, N. (2005). CFO intentions of fraudulent financial reporting. Auditing: A Journal of Practice & Theory, 24 (1), 55-75.

Singleton, T., & Singleton, A. (2011). Fraud Risk Assessment. London: John Wiley and Sons.

Vona, L. (2012). Fraud Risk Assessment: Building a Fraud Audit Program. London: John Wiley & Sons,

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BusinessEssay. 2022. "The Concept of Fraud Risk Factors." May 6, 2022. https://business-essay.com/the-concept-of-fraud-risk-factors/.

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