Exposing Inaccuracies and Fraud in Financial Statements with Accounting Information Systems

Subject: Business
Type: Exemplification Essay
Pages: 10
Word count: 2619
Topics: Accounting, Business Ethics, Finance, Management

Table of Contents


In 2001, we had the huge Enron scandal with the misrepresentation of the company’s financial well-being through their financial statements.  Which lead Congress to create the Sarbanes-Oxley Act in 2002 that requires all companies to comply with certain standards in their financial reporting.  This case along with several other high dollar scandals have shown how fraud and inaccuracies in accounting practices can go on for an extended period in a single business without detection from outside sources. With so many high dollar cases, it has raised concern in the professional accounting community about management and the security of accounting information systems. This has brought on a trend for changes in regulations and written policies, which should help decrease the high dollar scandals due to tighter security and the increase in ethical practices.

An accurate financial statement is an ultimate tool in the achievement of organization goals and objectives. Mainly, is there are financial fraud and inaccuracies there are high tendency of a company to collapse. Notably, to ensure organizations have a well accurate financial statement, their different institutions, for example, Sarbanes-Oxley Act which assists businesses to improve their financial exposure. Excellent and precise financial statement helps investors and public to have great faith with the company. This paper will give details on the importance, consequences, and causes of fraud in a financial statement. Besides, it will provide examples of public scandals related to financial fraud and how different institutions are dedicated to ensuring accurate financial statement in both public and private organizations.

 An accurate financial statement with Accounting Information System is essential to personal managing business, private and public organizations. Initially, financial statement was manually prepared, but the technology has made it easy using AIS. Which assist organization management in obtaining accurate financial statement through consistence collecting and storage of data (Alleyne, Elson, 2013). In this case, organizations can produce precise accounting and financial data to make effective management decisions.

Notably, an accurate financial statement with AIS helps an organization to have financial transparency in all departments. For example, using balance sheets, all assets are taken into account according to their current report. It also takes into account the depreciation and appreciation of assets present in the organization (Alleyne, Elson, 2013). Further, this gives the organization the real value of its assets and liability. Consequently, this enables organization to make the right decision on its expected resources and future objectives and goals.

An accurate financial statement using AIS enable accountants in organizations can improve payment cycle. Mostly, this is possible through entering of right calculated figures. For instance; the recording of account payable and account receivable (Alleyne, Elson, 2013). Consequently, the accountability of salaries, wages, dividends to be paid and interest associated with the loan was taken assist an organization to improve its payment cycles. 

Moreover, financial statement using AIS has assisted organizations to collect mistakes and illegal activities. In this case, it can identify which areas were affected and how to deal with the issue (Bressler, 2011). In many cases, the people involved in the fraud will be able to be charged and eliminated for the good of the organization performance.

Besides, accurate financial statement assists with AIS the company to build the trust of all its shareholders and investors as well. As a result, an organization can improve it profit maximization and revenue increase (Bressler, 2011). Mainly, if a balance sheet has shown a profit it means it is doing well, and its future expectations are excellent. Besides, company and its stakeholders are concern with an advantage, which has led to many companies to produce fudged financial statement to maintain its position in the competitive world. Therefore, the use AIS has enabled transparent in financial statement of an organization.

Lastly, accurate financial statement with AIS assists organization to reduce the cooperation taxes they pay to the government (Alleyne, Elson, 2013). In this case, an excessive profit in the balance sheet can lead an organization to pat extra fund to the government, which deprives its resources. Therefore, use of AIS will assist a company to produce accurate financial statement, which leads the organization to pay the correct tax to the government.  

An inaccurate financial statement can be hazardous and can lead to the following effects. Namely; poor decision making (Bressler, 2011). Mainly, this lead an organization to make losses, and it may end up mismanaging resources due to excessive numbers. For example, if a company financial statement shows prosperity and profit making, the management can decide to start a project. In this regard, an organization will strain to fulfill an obligation that it is not capable. Further, inaccurate financial statement unable organizations to undertake investment projects. 

An organization with inaccurate financial statement with AIS attacks terrible reputation if the public discover. Stakeholders are very much concern with the performance of the organization they have invested in (Alleyne, Elson, 2013). Therefore, if an organization has made intentional errors in the financial statement, it will lead many investors to quit. On the other hand, customers will also be affected, as most of them will not trust the goods and services offered by the organization. As a result, its customers will reduce, stakeholders will quit while potential investors will find other organization making accurate financial statement report. Further, lousy reputation will make stock value of an organization to drop, as other associate company finding a way to exit.

It is believed that inaccurate financial statement is not genuine human errors but intentional (Alleyne, Elson, 2013). Mainly, this is because an organization or some departments want to manipulate and hide unpleasant situation. In particular, this leads to criminal prosecution of some officers involved in flaws and misleading statement. 

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Lastly, inaccurate financial statement leads to the devaluation of an organization. Mainly, if institution lending money discovers the intentional inaccuracy in the financial report of the organization, it losses it trusts to financial institutions. Further, other organizations, which had signed a contract, may end up being canceled. Finally, the above consequences can lead to closure or corpse of an organization.  

In most cases, inaccurate of financial statement it can be either intentional or non-intentional. Deliberate occur when someone in the organization includes errors knowing. In most cases, this happens because perhaps the person wants to hide unusual mismanagement of resources, or they may have personal interest to buy the organization shares. On the other hand, non-experience employees who do not understand what a business statement must entail being satisfied cause non-intentional financial statement. Hence, non-intentional can be forgiven, but intentional making of error can lead to criminal trial. 

In rare cases, there are small businesses or organizations, which do not keep their books of account and do not conduct financial statement annually (Alleyne, Elson, 2013). Mainly, these firms are affected, as they do not recognize when a business is making loss or profit, when to borrow or when to pay loan. Therefore, it is advisable for all organizations should keep their books of accounts and provide an accurate book of account. 

To maintain the importance of financial statement and avoidance of many financial scandals, there have emerged many institutions both government and private which provide ways to provide recommended financial statement with AIS. Besides, these institutions provide ways to prevent errors in accounting exercises. Also, investigate financial statements of different organizations. For example, the Sarbanes-Oxley Act, this act was implemented to provide investors with the right and accurate account information (Gray, Ehoff 2015). 

SOX helped to reveal many scandals such as WorldCom, Peregrine System, and Enron. Moreover, the act was designed to prevent financial fraud in organization, which misleads stakeholders (Gray, Ehoff 2015). The SOX act states that every organization should work with external auditor who is not connected to the industry, the management, and application of AIS. SOX stress on the application of information in recording of every account related activities. Furthermore, the AIS should be well protected and secured to avoid any interruption of accounting information. In this case, AIS should have maintained its integrity to prove accuracy. 

The SOX, Accounting Information System contain some futures such as SOX 404 standpoint and Close Loop, which ensures the system records all information, which was involved, and the changes made (Gray, Ehoff 2015). Besides, SOX provides strict rules, which ensure an organization follows stated rules and regulation. To name a few chief executives are kept into their toes, as a rule, says that CEO should be reliable in case their organizations provide inaccurate accounting information.

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The corporate and criminal fraud accountability, states the penalties and criminal fines associated with imprecise accounting statement. The responsible parties have to be prosecuted to explain their intentions. In addition, the punishment warns other firms with intentions to conduct financial fraud (Gray, Ehoff 2015). 

Certified Fraud Examiner (CFE) is another association dedicated to exposing fraud-related cases in organization and provides possible prevention measure of fraud in firms. They offer education to all interest parts on how to manage resources and provide accurate financial information (Martinez-Figueroa, 2015). The exams and tests ensure people who manage organization have enough knowledge on how to conduct financial statement accordingly. Mainly, this organization contains 60,000 members worldwide, who are dedicated detect and prevent fraud. The organization contains people from all professional from executives, information technicians, and accountants. Moreover, this organization is known as the largest anti-corruption in the whole world (Michelman, 2011). 

The CFE association follows same procedures when registering new company. First, they have undertaken an exam to satisfy that each member can conduct anti-fraud obligation. The organization has gained fame as many industries are more concern about their resources and trust from investors and stakeholders (Martinez-Figueroa, 2015). Members are involved in investigation of fraud among employees, customers, clients and senior executives in all types of firms; it can be private or public.CFE work closely with Forensic accountant, which deal with financial investigation and provides evidence of financial fraud. In this matter, it offers supportive information in court concerning employees and directors frauds. A forensic accountant was involved in the investigation of frauds in Satyam Computers and Enron.  

Forensic accountants do their investigation using modern devices to identify the most hidden information in an organization. For example, they make use of fingerprint; obtain detailed information, surveillance devices and laboratory research (Martinez-Figueroa, 2015). Lastly, forensic accountant can be described as an organization dedicated in provision of court of law document concerning financial fraud. 

The issues of fraud are also taken care by Federal Regulation; it is mainly involved in reduction of fraud, prevent fraud and identifying flaws in an organization. Notably, these Federal regulations are created to ensure firms provide true financial statement. As a result, all organizations are given fair chances in the competitive market. 

There are different scandals, which have been revealed using the associations named above, for example, Enron Cooperation that collapsed due to poor resources management and accounting fraud. Mainly Enron is known as the most bankruptcy in the whole world and contained the known audit failure. Enron financial statement was not well presented as its directors provided misleading information to maintain its reputation as the best electrical company in the World (Li, 2010). Mostly, the CEO would provide the employees and its stakeholder with false information, which lead the company to fail. Although it had numerous loans which benefited senior directors, this case was never revealed as the executives provided a profit balance sheet. Therefore, accurate and transparent financial statement is very essential. 

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Another, company involved in accounting scandal is Toshiba Company in Japan. It was later discovered that Toshiba Company has been producing untruthful books of accounts. In particular, this happens in a very long time, and no one suspected the flaws (Ilter, 2014). This was because the company did not involve external auditors. Besides, research shows that Toshiba Company collapsed due to the pressure to meet short-term targets. Consequently, the company was forced to provide false financial statement to keep its stakeholders and customers as well.

Bank of Credit and Commercial International was closed in 1991 after it was discovered it owed a lot of money to its creditors. It is well known of its fraud of funds, corruption, and laundering. It was also involved in many other illegal businesses. This account mismanagement leads many associated and senior executive to be persecuted with criminal charges. 

Tyco international was involved in money fraud where most of the money was dedicated to taking care of CEO, Dennis Kozlowzki lifestyle. He also used company money to take care of his family events, as it was proved that he financed his wife birthday party using Company money and resources (Farrell, 2015). Mainly, this transaction was not included in the financial statement In this regard; they provided false and inaccurate financial statement which blinded the stakeholders the company was doing fine Finally after the discovery of fraud and company finances deprivation, Dennis and his board of director were sent to prison for twenty-five years. In addition, the company was proved to have been unethical in its practices and exercises of activities.

The scandal of Tyco Cooperative was associated with unethical leadership, Tyco CEO highly involved in finances fraud, as he used his powers to involve both senior and lower employees to get involved (Farrell, 2015). Consequently, all employees took part in collapsing of Tyco, which lead its survival with financial fraud unknown for a long time. Besides, Dennis was involved in unethical auditing practices. Therefore, with the absence of fraud by auditor film, it made it possible for public to discover underground financial fraud.  

The financial inspection institutions were important as it leads exposing Olympus with fraud of more than 1.7 billion in 2011. The company was making losses for the past thirteen years before it was revealed (Farrell, 2015). In this case, CEO, Kikukawa and other company’s employees cooperated to produce false financial statement for past 13 years, by using bad investments. 

Lastly, in 2014 Tesco retail organization in Britain had overstated its balance sheet, by exaggerating amount receivable by Euro 263 million. This was to hide all the losses the company it was making, and hold its stakeholders (Farrell, 2015). In this case, the financial statement was manipulated to fix the interest of the organization. 

In conclusion, accurate financial statement is significant to the company’s decision making and forming strong trust with current stakeholders and potential ones. Mainly, inaccurate accounting report can cause a company to collapse or become bankrupt. An incorrect financial statement can be either deliberate or intention depending on the performance of the company and the expertise of accounting officers. The experiences of numerous frauds led to emerging of institutions dedicated to scab these financial problem.  

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  1. Alleyne, B. J., & Elson, R. J. (2013). The impact of federal regulations on identifying, preventing, and eliminating corporate fraud. Journal of Legal, Ethical and Regulatory Issues16(1), 91.
  2. Bressler, L. (2011). Forensic Investigation: The Importance Of Accounting Information Systems. International Journal of Business, Accounting and Finance5(1), 67-77.
  3. Farrell, S. (2015, July 21). The world’s biggest accounting scandals. 
  4. Gray, D., & Ehoff Jr, C. (2015). Sarbanes-Oxley And Dodd Frank: Then There Was Fraud. Journal of Business & Economics Research (Online)13(1), 19.
  5. Ilter, C. (2014). Common grounds of accounting scandals reflected on Wikipedia. Journal of Money Laundering Control17(4), 440-474.
  6. Li, Y. (2010, October). The Case Analysis of the Scandal of Enron. International Journal of Business and Management, 5(10). 
  7. Martinez-Figueroa, D. (2015). Examining the growing need for trained forensic accountants in Puerto Rico: A case study. Northcentral University.
  8. Michelman, J. E., Gorman,V., & Trompeter, G. M. (2011). Accounting fraud at CIT computer leasing group, inc. Issues in Accounting Education, 26(3), 569-591.  
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