Internal_Accountant’S_Report_to_Management

Internal Accountant’s Report to Management The following report provides supporting information for a full financial status review for upcoming government contract bid. Items reviewed are the impact of occupational fraud and abuse on the company, the U.S. governmental oversights of accounting fraud and abuse and its affect, potential corruption schemes to be aware of, recommendation of types of accounting evidence and methods of gathering such evidence to support the financial status review. Section I: The impact of occupational fraud and abuse on the company The impact of occupation fraud and abuse on the company can be made clearer by understanding the difference between fraud prevention and deterrence and to focus on fraud deterrence. Fraud prevention is eliminating the motivation of committing fraud. However, fraud deterrence is altering one’s behavior (not commit fraud) by emphasizing the negative consequences. The first steps to deter fraud are separating controls, increasing the perception of detection, employee education, implementing proactive fraud policies, creating a higher stance by management, auditors, and fraud examiners. The second step to deter fraud is to a follow- up procedure. Follow-up procedures include surprise audits and more adequate reporting programs. The third step is holding corporations responsible through corporate sentencing. Therefore, there are criminal and civil sanctions, fines up to $290 million with up to a five year probation (Wells, 2005). Section II: U.S. governmental oversight of accounting fraud and abuse and its affect on the company The U.S. government missed five creative accounting practices that were abused. Five abused accounting practices were big bath charges, creative acquisition accounting, cookie jar reserves, materiality, and revenue recognition. All the practices mentioned manipulated financial data so the organization appeared to be better off than they actually were. Therefore, the chairman developed a plan to reassure the public’s confidence in financial reporting. The plan had four parts improving the accounting framework, enhancing outside auditing, strengthening the audit committee process, and pursuing cultural change. Following the chairman’s plan, the SEC responded by enforcing the securities laws. In addition to penalties, other consequences include share-price declines, class action litigation, and a delisting of a company’s shares (Mulford, 2002). Section III: Potential corruption schemes to be aware of within the company Categories of corruption are bribery, illegal gratuities, economic extortion, and conflicts of interests. Bribery entails anything of value used to influence an official or business decision. Bribery can also be divided into kickbacks and bid-rigging schemes. Kickbacks mainly affect the purchasing department on an organization. Kickbacks involve employees and vendors—they overbill a third party to give more business to the vendor. Bid-rigging schemes occur during the bidding stage and the perpetrator uses their power to influence a bid higher or lower to their advantage. Illegal gratuities are similar to bribery; however, it is given after an official or business decision is made. Economic extortion occurs when one party demands payment from another to assist the payer. Conflicts of interests, like bribery, have two categories—purchasing and sales schemes. For example, a conflict of interest in a purchasing scheme is happens when the offender works with a vendor to overbill their employer. Another purchasing scheme is a turnaround sale. A turnaround sale involves an employee who has knowledge of a future asset that the company is planning to buy, buys the future asset, and sells it back to the company at a greater price. Sales schemes involve employees that sell merchandise at a discounted rate or writes off sales to vendors to benefit themselves (Wells, 2005). Section IV: Types of accounting evidence and methods of gathering evidence The fraud theory approach has four steps analyze available data, create a hypothesis, test the hypothesis, and refine and amend the hypothesis. When creating a hypothesis it is important to remember the different types of fraud schemes and abuses; such as big bath charges, cookie jar reserves, bribery, and, conflicts of interests. Step two is testing the hypothesis. If the hypothesis involved accounting abuses such as big bath charges or cookie jar reverses, the financials can be reviewed. Step three is refining and amending the hypothesis. If the hypothesis testing was inconclusive the hypothesis should be revised and retested. The purpose of step three is to determine if fraud was committed (Wells, 2005). If fraud is committed, then the process of gathering evidence begins. Since evidence will be used in the court of law there are rules to follow when gathering evidence. “Evidence must be relevant, material, and competent to the issues being litigated, and gathered lawfully” (Singleton, 2006, p. 299). The relevancy rule for evidence gathering is based on the tendency to establish a fact. Examples of relevant evidence are motive for the crime, the defendant’s ability and opportunity to commit the crime, physical evidence, and a valid confession. The materiality rule for evidence gathering is based on the importance value. The evidence must be important to the case or prove a point. The competency rule of evidence gathering concerning a witness is that a competent witness must be legally fit—sane, qualified, and capable to present evidence that is relevant to the case (Singleton, 2006). Conclusion In summary, fraud deterrence is as important as fraud prevention and follow up procedures must be implemented to prevent occupation fraud (Wells, 2005). Five abused accounting practices were big bath charges, creative acquisition accounting, cookie jar reserves, materiality, and revenue recognition. However, the SEC responded to the abused accounting practices by enforcing the securities laws and plus consequences of share-price declines, class action litigation, and a delisting of a company’s shares (Mulford, 2002). Potential corruption schemes to be wary of are bribery, illegal gratuities, economic extortion, and conflicts of interests (Wells, 2005). The fraud theory approach involves analyzing available data, creating a hypothesis, testing the hypothesis, and refining and amending the hypothesis. To demonstrate fraud evidence is gathered. Evidence rules are evidence “must be relevant, material, and competent to the issues being litigated, and gathered lawfully” (Singleton, 2006, p. 299).   References Mulford, C. W., & Comiskey, E. E. (2002). The financial numbers game: Detecting creative accounting practices. New York: Wiley. Singleton, T. W., Singleton, A. J., Bologna, G. J., & Lindquist, R. J. (2006). Fraud auditing and forensic accounting. (3rd ed.). Hoboken, NJ: Wiley. Wells, J. (2005). Principles of fraud exa