Accounting Fraud Thesis

Accounting fraud is defined as the "intentional misstatement of financial reports, in violation of generally accepted accounting principles, with the objective of making certain people act in detriment to their best interests" (Wuerges & Borba, 2010). The GAAP are the principles by which financial accounting statements are produced, and for a public company these need to be followed, so deviating from GAAP will constitute a violation. Where it becomes a criminal fraud case is usually when the errors are deliberate. They may overstate the company's financial position (i.e. cooking the books), or they may understate that position for the purposes of committing tax fraud. In the famous case of Enron, not producing financial statements in a timely manner can also be considered accounting fraud, along with the general lack of accuracy of those statements.

Accounting fraud can be committed in a number of ways, but the underlying reason almost always has to do with the principles of a corporation seeking to enhance their wealth. It would be unusual to find a case of accounting fraud where the principles did not benefit in some way, given the risks associated with fraud cases. Wuerges & Borba (2010) estimate that only a very small percentage of fraud cases are discovered, although their methodology used a lot of proxies, and assumed guilty a little too readily, based on their interpretation of what a fraud case might look like.

For the most part, accounting fraud is conducted at the highest levels of the organization.Sharma and Panigrahi (2012) levied what I would say is an unfair critique, arguing that internal auditing systems were failing to detect accounting fraud. Most frauds happen at levels above the internal auditing system, and in cases like Enron it was the internal auditing system that detected the fraud. More realistically, the fault in accounting fraud lies with the perpetrators -- CEOs, CFOs -- and the external auditors who accept all suppositions contained in the financial statements at face value. The Sarbanes-Oxley Act was written with this reality in mind, and placed additional emphasis on the roles of these bodies in fraud.

In the early 2000s, accounting fraud was front page news, because of the large number of high profile examples that were uncovered. Enron was probably the most famous of these, because the company was considered to be so successful. At the heart of this fraud, the CEO, Chairman and other senior managers were hiding the debts that the company had, and overstating revenues. There was very little disclosure, and for some reason the SEC let that slide. The major issue with Enron was arguably not that the fraud was committed or that it was a massive fraud, but that regulatory authorities and Wall Street turned a blind eye to it. Enron was a well-connected company, connected in the White House, and that in part allowed….....