Cost management accounting

Assignment
On
“Accounting FrAuds”

Submitted by:
Group 5, Section-C
Rishabh Anand (80303180014)
Navroze Mehta (80303180118)
Tanisha Methi (80303180120)
Ridhima Kalra (80303180088)
 Objectives of the study

 To understand the term accounting frauds, types of accounting frauds

 To gather information about various accounting frauds post 2014

 To examine & recommend probable ways of eliminating frauds/ scandals

 To discover auditor’s role in detecting and prevention of accounting frauds

 Accounting Fraud: Introduction

What is accounting fraud?

It refers to an intentional manipulation of financial statements with the motive of creating a

facade of a company's financial health. It generally comprises of: an employee, account or the
organization itself and is misleading to investors and shareholders. Thus, accounting fraud is
coined as the purposeful control of financial statements to create a façade of a company’s
financial health.

When a company intends to falsify its financial statements by overstating its revenue or assets,
not recording expenses or under-recording liabilities; it indulges in execution of an accounting
scandal or fraud. For instance, if a company XYZ overstates its revenue while it is actually
operating at a loss and is not generating any revenues. As a result, on its financial statements,
the company's profits would be inflated and its net worth would be overstated which would
ultimately drive its share price up and falsely depict its true financial health.

“Accounting fraud does tend to come in waves, and is discovered most often after a market
collapse, since no one is interested in investigating much when stock prices are high and
everyone’s making big money.”
Types of Common Accounting Frauds

1. Payroll Fraud: It is defined as employees cheating the payroll system at their workplace
to receive funds to which they are not entitled. Various ways in which payroll fraud can
be committed are, from-
 Salary
 Hourly and Commission workers

2. Invoice Fraud: This is defined as, when fake invoices are sent to targeted businesses in
an attempt to extract money from organizations with default in their accounts payable
processes.

3. Accounts Payable Fraud: The difference in the accounts payable fraud and the invoice
fraud is that the culprit of the accounting fraud creates a dummy or duplicate company
that never existed and afterwards makes claims for payments for goods and services
that were never delivered.

4. Financial Statement Fraud: This refers to misrepresenting balance sheets, income

statements and cash flow statements to fool the audience who reads them. The
fraudster might be out for individual gain, or is attempting to keep the business above
water.

5. Tax Fraud: In this type of fraud, the topmost level of the organization misrepresents
financial fact to hide the profits. The ultimate aim is to get exemption from paying taxes
to the tax authority. Tax evasion is subset of tax fraud.

Discussing ahead some famous accounting scams that

have taken place:
 2015-16 ACCOUNTING SCANDALS

Wells Fargo Fake Accounts Case

The Wells Fargo case that broke in 2016 included phony accounts with real customer money
was a corporate scandal. Moreover, this case offers important lessons for how organizations
can abstain from creating a culture vulnerable to corruption. In this case, the employees were
involved in furtively creating new bank and credit card accounts for clients without their
insights, resulting in overdraft and other fees. Around 5500 employees were fired because of
this issue. The major concern here was that this unethical behavior was not derived from
gaining financial benefits but was a result of workload and meeting aggressive sales goals, such
as the bank’s- “Gr-Eight initiative”. The employees working for Wells Fargo defined pressure in
Wells Fargo by saying that to meet the unrealistic sales targets they had to open bogus
accounts so that they don’t get fired.

Conclusion:

There are 2 topmost reasons that may have left employees vulnerable to unethical behaviour:

1. Pressure- One variable that was likely affecting everything at Wells Fargo was overly
aggressive goals and performance pressure. Due to this, the employees are more likely
to be ethically separated, and to think about bamboozling to match the grade.

2. “It’s just a business” thinking – This thinking eliminates the personal feelings, values,
and ethics from professional situations.

Source- http://fortune.com/2016/10/12/wells-fargo-scandal-john-stumpf/
 Weatherford international’s accounting fraud
In this case, The Securities and Exchange Commission declared on September 27, 2016 that oil
services company weatherford international have consented to pay a $140 million penalty to
settle charges that it inflated earnings by using deceptive income tax accounting. Two of the
organization’s senior accounting officials have consented to settle charges that they were
behind the plan.

As per SEC’s structure, Weatherford deceitfully brought down its year end arrangement for
money assesses by $100 million to $154 million every year so the organization could more
readily adjusts its income results with its prior declared projections and analysts’ expectations.
James Hudgins, who served as weatherfoard’s vice president of tax, and Darryl Kitay, who was a
tax manager made various post shutting changes in accordance to fill the gaps and meet its
recently revealed effective tax rate (ETR). Weatherford consistently touted its positive ETR to
experts and financial analysts as one of its key upper hands and the fraud created the
misperception that weatherfoard’s designed tax structure was far more successful than reality.
Also, weatherford was subsequently compelled to restate its financial statements on three
occasions in 2011 and 2012, lowering reported earnings by $500 million.

Conclusion:

It was believed that the Company’s non-compliance with the accounting rules and computation
of tax was deliberate and with the intention of showing high profits and to gain financially.
These adjustments made by the two topmost officers led to so much of chaos in the
organization which ultimately resulted in payment of heavy charges on the part of company as
well as the officers.

Source: https://www.reuters.com/article/us-weatherford-sec-idUSKCN11X1NL
http://www.fcpablog.com/blog/2016/9/27/weatherford-pays-sec-140-million-for-accounting-
fraud.html
 Toshiba’s Accounting Fraud

In this case improper accounting was found to have occurred through the span of seven years,
embroiling two former CEO’s in the scandal. When the investigation took place, the
investigators found direct proof of inappropriate accounting practices and overstated profits in
various Toshiba business units, including the visual products unit, the PC unit and the
semiconductor unit. Investigators discovered proof of booking future profits early, pushing back
losses, pushing back charges and other ways that result in overstated profits.

The major reason behind this scandal was Toshiba’s corporate culture, which demanded
obedience to superiors, and enabled emergence of fraudulent accounting activities. The culture
operated on the level of business unit presidents and on every level of authority down the
chain to the accountants who ultimately employed the accounting techniques.

Conclusion:

The study of this case points out the weak corporate governance and a poorly functioning
system of internal controls at every level of Toshiba’s organization. Various divisions like,
finance division, risk management division and the securities disclosure committee did not work
and co-ordinate properly, hence, failed to stop the inappropriate behaviors.

The recommendations can be-

 Reformation of the corporate culture
 Elimination of the challenge system of profit targeting
 Re-establishment of internal controls and strong corporate governance.

Source: fortune.com/2016/10/13/toshiba-accounting-scandal-lawsuit/
 Ricoh India Accounting Fraud 2016

Ricoh India, a local subsidiary of Japanese multi-national imaging and engineering solutions firm
Ricoh Company, it produces electronic products, primarily cameras and office equipment such
as printers, photocopiers, fax machines, offers Software as a Service (SaaS) document
management solutions such as Document Mall, Ricoh Docs, document solutions such as Global
Scan, Print & Share and also offers Projectors.

In 2016, it was reported that three of its local employees, along with REDHEX IT Solutions Pvt
Ltd and Fourth Dimension Solutions Ltd, indulged in fraudulent accounting practices which
over-stated revenues and resulted in product pricing inconsistencies. Later, a PwC audit
revealed that the malpractices, starting January 2014, resulted in losses of over Rs 11 billion
for Ricoh. Following this, a SEBI probe indicated wrongdoing. It ordered six top employees of
Ricoh India to stay away from dealing in the securities market and ordered a forensic audit of
its finances.

Conclusion:

It was believed that company’s non-compliance with the accounting standards was deliberate
in order to overstate their revenues and show inconsistencies in the product.

The irregularities saw the parent firm infusing Rs 11.23 billion into the local arm in 2016.
Ricoh informed the Japanese stock exchange that it has taken a hit of Rs 17.11 billion for its
India business in the year ending March 2018. The Tokyo-based parent company’s has seen
recently seen correction of its original fiscal 2017 forecast from a $26.4 million profit into a net
loss of $61.5 million – Ricoh’s first net loss since fiscal 2011 which according to Bloomberg, is
solely “due to the anticipated losses arising from the Indian subsidiary.”

In additional efforts to mitigate losses, Ricoh’s top executives have voluntarily decided to take
15% pay cuts for three months and Zenji Miura, executive advisor to take a 30% cut before his
retirement in three months.

Source: https://www.bloombergquint.com/markets/losses-at-fraud-hit-ricoh-india-hit-
japanese-parent
Source: https://timesofindia.indiatimes.com/business/india-business/Ricoh-India-files-police-
complaint-over-fin-fraud/articleshow/52247065.cms
 2017 ACCOUNTING FRAUDS

Caterpillar accused of tax and accounting fraud

Caterpillar Inc. is an American Fortune 100 corporation which designs, develops, engineers,
manufactures, markets as well as sells machinery, engines, financial products and insurance to
customers through a worldwide dealer network.

The company failed to comply with US taxation and financial reporting rules in lieu of keeping
its stock price high, with context to a government-commissioned report reviewed by The New
York Times. It was investigated that the heavy-machinery maker's tax practices were
fraudulent.

It was witnessed that Caterpillar avoided reporting on billions of dollars it brought to the US
from its Swiss units and affiliates and the company returned an estimated USD 7.9 billion in
funds structured as loans which it did not record for tax and accounting purposes.

Conclusion:

It was believed that the company's non-compliance with accounting rules was deliberate and
primarily with the intention of maintaining a higher share price since earlier the company
shares were down by 3%.

Additionally, it is noticed that in the US, multinationals like Caterpillar face a 35% tax rate which
is comparatively steeper than the prevailing rates in most other developed economies. As a
result, it further discourages them from repatriating overseas earnings and facing US taxes. And
thereby such companies tend to incline towards such means of manipulation.

Keeping in mind the prevalent scenario, President Donald Trump proposed that companies with
large stashes of overseas cash shall return the country a minimum of 10% rate which is
envisioned to curb such practices.

Source: https://amp.businessinsider.com/caterpillar-tax-accounting-fraud-law-report-2017-3
 Tesco Agrees to Pay $162 Million Fine over Accounting Scandal

Britain’s biggest retailer Tesco got involved in an accounting fraud in 2014 initially stating a
shortfall in its first-half profits being £250m. However, the company has now written off a total
of £263m in profits following an investigation that took place in 2017.

By writing off £70m in profits relating to the previous financial year and £75m "pre 2013-
2014", Tesco admitted that the practices that caused the scandal have been persistent for a
longer time. This still has an effect on its investors, although Tesco insists the impact is
"material" and will not mean the results have to be restated.

Shareholders are still furious at what they see as a failure of governance at Tesco. Not only this,
the company is also experiencing a rise in its pension deficit. Recently, Tesco's pension deficit
after tax has grown from £2.6bn to £3.4bn.

Conclusion:

The company has lately agreed to pay a fine worth USD 162 million plus compensation to settle
this investigation over 2014’s accounting fraud that sparked the biggest crisis in its near 100-
year history.

Tesco has been rebuilding itself after the scandal and a price war that hammered the whole
sector planned to take a one-off charge of 235 million pounds ($295 million) in its 2017 results,
due on April 12 on the basis of which impact for the year 2018 will be arrived at.

The supermarket group has struck a so-called deferred prosecution agreement (DPA) with
Britain’s Serious Fraud Office (SFO) which will enable it to avoid a criminal conviction provided it
meets certain conditions and pays the financial penalty along with compensation to certain
investors of around 85 million pounds.

Source: http://amp.timeinc.net/fortune/2017/03/28/tesco-accounting-fraud-scandal
 Steinhoff Losing Credit Lines as Accounting Scandal Deepens

Castellated furniture retailer “Steinhoff International Holdings” was plunged to the brink of
collapse post lenders cutting off their support in the wake of an accounting scandal that
destroyed most of its value in a matter of few days.

A makeshift management team made a plea to banks in London after an 85 percent upsurge in
the share price and further, departure of the two men who built the company into a would-be
rival to Ikea majorly due to debt-fuelled acquisitions. The fallout from crisis prompted several
resignations.

Consequently, Steinhoff didn’t possess “detailed visibility” of the cash flows of individual
operating companies and units relied on the company for working capital and forecast position
for each operation was not accurately computed.

Conclusion:

The company was apprehensive as to when it would be able to publish audited results for 2017
and 2016. Thus, PwC was hired to investigate the accounts, while corporate turnaround
specialist AlixPartners LLP worked on the scrutiny of cash flow.

Sources: https://www.bbc.com/news/business-29716885
https://www.bloomberg.com/news/articles/2017-12-19/steinhoff-says-credit-facilities-
increasingly-being-withdrawn-jbdo8tje
http://fortune.com/2017/12/31/biggest-corporate-scandals-misconduct-2017-pr/
 2018 ACCOUNTING FRAUDS

The Multi Crore Post-Matric Scholarship Scam

Recently, a huge scam of post-matric scholarship amount got busted in Shimla, Himachal
Pradesh. This scholarship was for children belonging to sects of Scheduled Caste, Scheduled
Tribes and Other Backward Classes said Union Minister- Vijay Sampla.

The Scholarship was to be given to people whose family income was below 2.5 lakhs p.a. for
their education fees, books, tuitions etc. This whole amount got remitted into Aadhar linked
accounts which were fake. An amount of Rs. 260 crore has been scammed by the state officials
and has been put into their pockets leading to the slump of education in Himachal Pradesh and
Punjab.

Conclusion:

 An FIR was lodged by Himachal Pradesh State Educational Authority wherein Mr. Shakti
Bhushan had done a Preliminary Investigation into the matter.
 The Officials say Rs. 50 crore had been distributed to government institutions within the
state and Rs. 210 crore had been distributed to private institutions within and outside
the state.
 A Central Bureau of Investigation (CBI) Probe has been set up on officials who faltered
with the cash and accounts.
 Additionally, a person of high repute should be appointed to keep an eye on the officials
handling state and central accounts.

Source: https://economictimes.indiatimes.com/news/politics-and-nation/centre-probing-multi-
crore-post-matric-scholarship-scam-vijay-sampla/articleshow/66680887.cms
 Bribery and Accounting Fraud cost Panasonic Dearly

The Japanese-based group- Panasonic has been fined $137 million by the US Department of
Justice under a deferred prosecution agreement regarding related books and record-keeping
violations. It was found that Panasonic’s US Subsidiary Panasonic Avionics Corporation (PAC)
which supplies in-flight entertainment and communications system had offered lucrative
consulting position to a government official in a state-owned airline.

Part of the SEC sanction relates to charges that the group did not have sufficient internal
accounting controls and failed to keep accurate books and records relating to “purported
consultants” that PAC had retained. A third segment of the SEC’s order covers fraudulent
overstatement of pre-tax and net income at Panasonic.

Conclusion:

 It is not enough for a company merely to set up policies and procedures that are not
enforced or are easily circumvented by employees.
 In a statement, Panasonic said that the combined total of $280,602,830.93 which it is
paying out in fines to the US government is not expected to have a material impact on
the group’s consolidated results forecasts for the fiscal year ending 31 March 2018.
 Panasonic has also revealed that PAC has agreed to engage an independent compliance
monitor for a period of two years, after which it will self-report for one year.

Source: https://economia.icaew.com/news/may-2018/bribery-and-accounting-fraud-cost-
panasonic-280m
 Samsung faces Criminal Probe for Breaking Accounting Rules

Samsung Group’s Biotechnological unit faces delisting in South Korean Market after it
overvalues its shares during Initial Public Offering (IPO). South Korea’s financial regulator stated
that Samsung Biologics Co. intentionally violated Accounting Rules prior to Initial Public
Offering.

The Financial regulator fined Samsung Biologics Co. for $7 million and recommended the
company to dismiss its CEO. FSC Vice Chairman Kim Yong-Beom said in a briefing that it would
ask prosecutors to launch a criminal investigation into the accounting violations while stock
trading of Samsung Biologics will be halted. The company will also be under review for delisting.
Kim said no companies have been delisted on accounting issues in South Korea so far.

Conclusion:
 Samsung Biologics in an Email Statement expressed it regret over the decision of the
regulator and said that they will file an administrative lawsuit against the decision.
 Critics also accused Samsung Group of orchestrating the accounting change to benefit
the merger of Samsung C&T and Cheil Industries, which bolstered Samsung heir Lee’s
succession plans.
 Samsung Biologics has said its financial books were verified by outside accounting firms
and fully reflected accounting standards in 2015. The company said it had no reason to
“intentionally” manipulate the financial numbers. Samsung Biologics also said its
accounting treatment could not have had any impact on the merger of Samsung C&T
and Cheil Industries as it was completed before the accounting change.

Source: https://www.accountingtoday.com/articles/samsung-arm-faces-criminal-probe-after-
breaking-accounting-standards?tag=00000153-f728-d105-a9fb-fffd446d0000
 Conclusion

Ways to Eliminate Accounting frauds/scandals

Divide the Responsibilities

Segregate accounting functions. One of the main factors of an effective internal control system
is segregation of duties. Management helps to prevent fraud by reducing the incentives of
fraud. The act of segregating duties separates the recordkeeping, authorization and review
functions in the accounting process. To segregate duties, involve more than one person in the
financial statement preparation process. Therefore, or fraud to occur two employees must
collude to perpetrate the crime. Even if your client’s business is very small, entrusting one
employee to handle all financial tasks is a mistake and may lead to fraud. Separate
accounting and cash handling functions allow for effective peer-monitoring

Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your company’s
assets, ensure the integrity of its accounting records, and deter and detect fraud and theft.
Segregation of duties is an important component of internal control that can reduce the risk of
fraud from occurring. For example, a retail store has one cash register employee, one
salesperson, and one manager. The cash and check register receipts should be tallied by one
employee while another prepares the deposit slip and the third brings the deposit to the bank.
This can help reveal any discrepancies in the collections.

Documentation is another internal control that can help reduce fraud. Consider the example
above; if sales receipts and preparation of the bank deposit are documented in the books, the
business owner can look at the documentation daily or weekly to verify that the receipts were
deposited into the bank. In addition, make sure all checks, purchase orders and invoices are
numbered consecutively.

Internal control programs should be monitored and revised on a consistent basis to ensure they
are effective and current with technological and other advances. If you do not have an internal
control process or fraud prevention program in place, then you should hire a professional with
experience in this area. An expert will analyze the company’s policies and procedures,
recommend appropriate programs and assist with implementation.
Awareness/Education
Educate management on the three indicators of fraud. According to the Association of Certified
Fraud Examiners, financial statement fraud involves the intentional publishing of false
information in any portion of a financial statement. To help prevent fraudulent activities,
management must implement internal controls, or structure, and know what situations to look
for. Individuals commit fraud when under situational or financial pressure, when the
opportunity to commit fraud is present and when the perpetrator easily rationalizes the
fraudulent activity.

Establish a strong control environment.

A strong control environment, otherwise known as a strong tone at the top, involves enlisting
management to demonstrate ethical behavior. The ACFE notes that whatever tone
management sets will have a trickle-down effect on employees of the company. A strong tone
is developed by establishing and complying with a written set of policies. The policies must be
concise and include consequences when procedures are disobeyed. In addition, according to
the ACFE’s Fraud Examiners Manual, one of the easiest ways to establish a strong moral tone
for an organization is to hire morally sound employees.

Regular Auditing
Initiate annual examinations of financial statements by an outside party. In many cases,
management is the party committing fraud. Management may feel pressure to meet financial
goals for the company or may receive incentives if certain goals are met. To help prevent
management from engaging in overly aggressive adjustments to the financial statements, have
an independent party examine financial statements on an annual basis. Engaging an auditor to
perform a financial statement review or audit deters employees from knowingly presenting
incorrect financial statements.Regular but unscheduled audits help keep employees on their
toes and discourages them from even the tiniest instance of fraud, like “borrowing” a piece
of equipment.

Limited Access
Access to financial data should be limited to a handful of employees.

http://www.cgteam.com/blog/six-strategies-for-fraud-prevention-in-your-business
https://smallbusiness.chron.com/prevent-financial-statement-fraud-3789.html

Following are the Auditor’s responsibilities here:

1. Obtain reasonable assurance that the financial statements are free from material
misstatements
2. Maintain professional skepticism throughout the audit
3. Should know that Risk of non-detection of management fraud is greater than of
employee fraud
4. Must be aware Risk of non-detection of fraudulent material misstatement is higher than
the misstatement due to error.

Is Auditor responsible for the Prevention and Detection of Fraud?

No, Management has the Primary responsibility for the prevention and detection of fraud and
not the auditor. Management should take all necessary steps for fraud prevention and
deterrence through implementing policies and controls.
Requirements of Auditor: Collection & Evaluation of Audit Evidence
1. Professional Skepticism –The auditor should maintain professional skepticism while
performing an audit, and identify any possible material misstatement due to fraud that
could exist despite the auditor’s past experience of Management’s honesty and
integrity.
2. The auditor can accept the records and documents as genuine unless there is a reason
to believe the contrary and investigate if required.
3. Investigate the inconsistent responses from the management related to the inquiries.
4. SA 315 which covers the Auditor’s response to assessed risks, requires discussion among
the engagement team members and the engagement partner on those matters which
are to be communicated to other team members not involved in the discussion.

https://cleartax.in/s/sa-240-auditors-responsibility-relating-fraud