Description
Please refer to these resources for this discussion:
- Chapters 11, 12, and 13 in the Albrecht textbook
- Financial Statement Fraud (Crazy Eddie's) video - located in the Course Documents folder under ACFE videos
- Smartest Guys in the Room - Enron documentary - located in the Course Documents folder
This week, we had the opportunity to explore some of the more egregious financial statement frauds from the past two decades. Many of these occurred prior to the enactment of Sarbanes Oxley (Enron, Worldcom, Waste Management, Adelphia, Tyco, Healthsouth, Qwest Communications, Cendant, and others). Other cases of financial statement fraud have surfaced after SOX was enacted, including Lehman Bros. and Fannie Mae.
For this week's discussion, choose one of the pre-SOX financial statement fraud cases and write a brief summary (2-3 paragraphs) that outlines:
- What happened?
- Who was involved?
- How did they do it?
- How were they caught?
- What were the results (for both the victims and the perpetrators)?
In addition to this summary, write a brief evaluation of how you think SOX might have impacted and/or changed your case study. Would it have still been likely to occur? Would it have been reduced in severity or duration? How might it have changed things for the victims? the perpetrators? For this part, I recommend that you refer to Appendix A at the end of Chapter 11 in the textbook and the discussion that ensues there, including the consideration of the Fraud Triangle presented in Table 11A.1. Would SOX have made a difference in your chosen case? If so, how? If not, why not?
There are, of course, widely varied opinions of the effectiveness of SOX. Kayla Gillan, a former deputy chief of staff to the Chairman of the SEC, believes that SOX has been a beneficial and successful new law. She believes that, while no legislation can entirely eliminate financial statement fraud, SOX has been effective in rapidly increasing investor confidence. Despite acknowledging that SOX has increased the cost of participating in capital markets, she stated that many believe that the benefits far outweigh the increased costs. She believes that internal controls are more effective, auditor standards are more stringent, auditors are more competent and engaged, and the SEC has become more effective. She believes that the purpose of SOX legislation was to enhance investor protection and that it has largely accomplished this.
On the other hand, there are those that believe that SOX has largely been a failure. Billionaire investor Mark Cuban, when considering the SEC and the experiences of startup companies, feels that SOX has made it much more difficult for companies to go public because of the increased costs associated with SOX. There are many more opinions on both sides of this argument. When it comes to preventing and reducing financial statement fraud, what do you think? Has SOX been a help or a hindrance?
In summary, for this discussion (per the guidelines above):
- Write a 2-3 paragraph summary of a pre-SOX case study of financial statement fraud (20 pts.)
- Write a brief evaluation of how you think SOX might have impacted and/or changed your case study (10 pts.)
- Discuss whether SOX has been successful in reducing financial statement fraud. (10 pts.)
ENRON The Smartest Guys in the Room.m4v
How to Detect and Prevent Financial Statement Fraud, Second Edition.m4v
Explanation & Answer
Hello buddy, here is the final answer.
FINANCIAL STATEMENT FRAUD
1
Financial Statements Fraud
Name
Institution affiliated
FINANCIAL STATEMENT FRAUD
2
Financial Statement Fraud
Before being declared bankrupt and subsequently closing its doors permanently, Enron
was one of the biggest companies in the US. The firm specialized in electricity and natural gas,
and it was the dominant player in the energy industry. The Enron scandal surfaced in later2001,
exposing rampant corruption, embezzlement of funds, and corporate fraud of the highest level.
Enron's case brought to the fore the deep deregulation problems in the US corporate
environment, which had allowed the company to operate with minimal government scrutiny.
Enron was facing stiff competition at the time of the fraud that brought an end to its brighter
years. The firm's stock price fell from $90 to below $1 in a short time (Albrecht et al., 2019,
chap. 11). Instead of innovating to stay in business, the company’s executives started to use
dubious accounting practices, including the fabrication and falsification of financial statements,
to create an illusion of high profitability and financial stability. The sudden decline of one of the
country's most successful firms prompted SEC to order and inquiry, which soon became a full
blast investigation into Enron and its dealings.
The scandal involved Enron’s...