Question

Explain in summary of the fraud risk and illegal acts, including at least 2 examples from sources.

Answer 1

Fraud Risk- Fraud risk is the risk associated with fraudulent activities in the organization. Fraud is an illegal activity, it can be inside or outside the organization.

Illegal acts- Illegal acts are acts that are not legal in the eyes of law, for e.g. misstatement, embezzlement, stealing etc.

Reasons of fraud- These are as following:

1. Lack of internal control and poor control activities.
2. Target pressure on managers or key people that lead them to do fraud.
3. When there is large amount of cash at banks and petty cash in business.
4. Company offices have poor security, they do not have CCTVs and proper security guards.
5. Company that has not hired any independent auditor, has chances of fraud.
6. Poor corporate governance and ethics in the organization.
7. Bad accounting information system and accounting controls.
8. Excessive competition.
9. Complexities of financial statements where it is easier to hid the fraud.

Impact of fraud on organization-

• Company suffers from losses.
• Company's brand value comes down when fraud gets exposed.
• Company's share price and market capitalization come down drastically.
• Company loses many contracts and orders due to fraudulent practices in the organization.
• Company loses trust of customers, investors and creditors.
• It does not get funds to expand or rebuild its business.

Examples-

(1): In 2009, MD and CEO of Satyam computers in India was exposed as he was indulge in fraud, he inflated company's accounts and did window dressing in balance sheet to look better financial position.

(2): Enron's fraud is one of the biggest fraud in USA history. Enron was an energy company that got bankrupt in 2001 after exposing the accounting fraud.