The Role Of Fraud In Accounting

Fraud is defined as “the intentional deception made for personal and monetary gain” (Hill, 2005). Many people think think of fraud as making an illegal ID or forging papers. Another type of fraud that often goes unnoticed to the untrained eye is unethical accounting, also known as accounting fraud or ‘Cooking the books”. Accounting scandals are complex and can be very tricky to locate even under close inspection of a company’s accounting records. Accounting relies heavily upon numbers balancing each other out. If an accountant were to switch numbers around to increase total revenue, somewhere in the records there would be a shortage. Accounting is black and white, and like math, there is a right and wrong. In terms of accounting, it is either

Let’s say a company called TOY overstates their total revenue and interest-received numbers. It turns out that those numbers will be the highest with TOY’s market. With TOY’s high profits, they will receive more investors and will be expected to earn even more money the following year. OTher companies with TOY’s market suffer and may not gain as many investors because of TOY’s fraudulent act. A year goes by and TOY has created more debt, so accounting switches some numbers around and TOY is back on track. But is TOY really heading in the right direction? Cooking the books is a complicated process involving many steps and can easily be messed up. For many businesses, it is also quite difficult to hide millions of dollars or make excuses for overstated revenue. I believe that in the near future, TOY will eventually be caught because businesses cannot continually lose money while still making millions and expect people to believe otherwise. TOY is a perfect example of the Enron

A year before, Enron falsified their books and claimed revenues of nearly $101 billion. Here is a simplified explanation of what happened. Supported by Enron (2002), the Enron Creditors Recovery Corporation created offshore accounts, allowing them to avoid taxes and raise the profitability for their company. To make up the illusion of greater profitability, each year accountants performed contorted financial deceptions, while the company was continually losing money. The professional term for this type of fraud is called round-trip trading. “Round-trip trading artificially inflates volume [of sales] and revenues, but in reality adds no profit” (Bostan & Grosu, 2010). When Wall Street Analyst Richard Grubman asked Enron’s CEO for the company’s balance sheet along with its earnings statements, Enron stated that they could not release them (Core, 2010, p. 273-287). As stated earlier, because of Enron’s unethical accounting practices, the company filed for bankruptcy, but it also had a tremendous effect on many other people. Investors lost millions of dollars, along with the price of Enron’s share, which dropped for $90 US to just pennies. At any given point in time, those involved in the ENron scandal knew exactly what was going on. Accounting fraud is an intentional and unethical crime, and typically, in the long run, those involved are caught and