Accounting Fraud: Analytical Essay

1.0 Introduction

Accounting fraud happens in a many of ways that includes deliberate acts, including misappropriation or manipulation to financial reports or documents relating to things such as expenses, sales and profits. Accounting misconduct may be perpetrated by staff, accountants or the company itself. An organization may distort its financial reports by exaggerating its revenue or assets, not recording costs and under-recording liabilities. Accounting fraud has taken place during the Industrial Revolution 4.0, as companies are checking things on the Internet in a small way. The accounting scandal in the period of the 4.0 Industrial Revolution is on the rise as more and more technological facilities are available. Nonetheless, technology in the era of Industrial Revolution 4.0 has made it easier for accountants and auditors to detect accounting fraud.

2.0 Identification and Analysis of Issues

Industry Revolution 4.0 launched in 2011 and changes every aspect of government. Others are concerned about potential downsides, such as safety and on how employees will be impacted by new changes. But no matter what the term, the explosion of new technologies has taken place in the last several years. The Sharing economy, Data analytics and Automation can have an effects on how businesses operate and how CPAs perform their jobs. It is therefore important that accountants look at these technological developments, consider the resulting changes and see what part they will play in the new economy that will be developed.

2.1 ENRON Corporation

Accounting fraud has been rampant in the past. One of the biggest issues related to accounting fraud is Enron Corporation. Enron Corporation known as Houston Natural Gas Company that merged with Inter North Incorporated to form a gas pipeline company. In August 2001, CEO of Enron Corporation has received a memo with respect to accounting problems, the company was at risk of developing several accounting scandals. Regarding to the memo, the CEO persuaded the workers of Enron to buy stock because astronomically the value of the company was to increase. It has begun to rely on suspicious accounting practices, including the 'mark-to-market accounting' technique, to address these issues. Mark-to-Market' accounting allowed the corporation to write down unrealized future gains from certain trading deals in current income reports, giving the illusion of higher current profits. However, A month later, Enron reported earnings of $618 million in its third quarter, which resulted in an investigation. As accounting fraud reports emerged, the share price fell from $90 per share in mid-2000 to very little than $1 by the end of November 2001, taking into an account the value of Enron's 401(k) employee

compensation, largely related to the company's earnings. The dispute resulted in a wave of new regulations and laws aimed at improving the performance of the funding of publicly traded companies financial reporting. The Sarbanes-Oxley Act (2002), the most critical of these measures, imposed harsh penalties for the destruction, modification or manufacture of financial records.

2.2 1MDB Scandal

1MDB scandal is one of the accounting fraud issue that occurred in Industry Revolution 4.0. 1Malaysia Development Berhad (1MDB) is a tactical technology company founded in February 2009 by former Prime Minister Najib Razak. as a foreign investment vehicle for the country's long-term economic development. 1MDB invested in the production of energy projects in Arab countries, including Petro Saudi. At the beginning of 2015, media attention was drawn to 1MDB after payments were skipped and banks and bondholders owed $11 billion. 1MDB was investigated in July 2015 for suspected impropriety after investigators traced payments of some US$ 700 million to the personal bank accounts of Najib Razak. In 2016, Swiss and U.S. investigators disclosed purchases made using a 1MDB account. In 2017, US investigators named persons linked to 1MDB, such as former Singaporean banker Yeo Jiawei, Jho Low, Miranda Kerr and Leonardo DiCaprio. The suspected use of 1MDB funds to support the 2013 vote was a major campaign problem in urban areas during the 14th general election in 2018.

3.0 Application of Accounting Knowledge

Forensic accountants as auditors are individuals responsible for handling fraud cases in accounting. They are responsible for investigating how fraud is done based on their accounting knowledge. There is a study that show forensic accountants outclass financial statement auditors in fraud and fraud related case. Below example on how application of accounting fraud that used by some company throughout the year.

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3.1 ENRON Corporation

Enron used ‘mark–to–market’ accounting method in its trading business. The company started funding billions of dollars into other business such as online energy trading of stocks and bonds and betting on future prices. This trading business then converted into outstanding contract,

which means a long–term contract that supposed to happen in the future, were sold to investors. One rule of this ‘mark–to market’ method is the company must adjust these unrealized future gains or losses to fair market value into their income statement. Its to assume that the company’s has high profit. The company was able to hide their huge debts from their investors’ knowledge by misrepresenting the earnings. Assets and profits were purposely expanded even some do not exist. After Enron's investigation and collapse, the Securities and Exchange Commission adopted a statute aimed at preventing any further Enron-like accounting fraud scandals.

3.2 1MDB Scandal

1MDB cases investigation is still ongoing till date. It is believed that more than $4.5 billion dollars was stolen. This huge amount were borrowed via government bonds and transferred into bank accounts in different countries such as Switzerland, Singapore and The United States. A quite suspicious figure had flowed into personal bank account of previous Malaysian prime minister which is Mohammad Najib bin Abdul Razak and it was reported that the amount was used up to pay his politicians, credit card bills and for his wife’s shopping expenditure. However, Mohammad Najib bin Razak denied those allegations by insisting the money was a gift by a Saudi prince. Another important character in this scandal is Malaysian businessman, Jho Low who is literally enjoying a luxurious life with the state fund. This scandal was unmasked when a British journalist was handed over some 227,000 leaked documents containing the details of the fraud in depth. The investigation is still ongoing in order to bring both Jho Low and the stolen money from overseas back to Malaysia.

4.0 Suggestion

4.1 ENRON Corporation

Enron's train wreck offers crucial lessons for strengthening corporate governance and financial incentives, as well as institutional structures that improve moral accountability. One of the key concept to prevent the Enron Scandal is release of evaluation processes by applying subjective judgement to any generic quantitative performance measures that may be needed by business plans, Designing and applying compensation programs that recognize successes other than economic performance and penalize mistakes is also how to prevent the Enron Scandal. There

have been many incentives at Enron to enormous personal benefit that have diverted top executives from the core duties of preserving organizational credibility and establishing stable relationships with investors and staff to make sure that we can avoid this issue during Industrial Revolution 4.0.

4.2 1MDB Scandal

Anti-corruption Malaysia had to use new application technologies in the 4.0 industrial revolution that can growing accounting fraud. Multilateral Development Banks (MDBs) are one of the systems. Multilateral Development Banks (MDBs) follow suit with a range of innovative software configuration and monitoring tools. Data gathering is used for tendering reviews to monitor policy tenders and to spot red flags, bribery patterns and false information. This event also used data visualization to define corrupt intentions in payouts or purchases. Successful integration of these resources into state e-government and e-procurement systems would not only improve policy making but would also increase transparency by program simplification. Other than that, Big Data application should be apply in the Accounting environment in Malaysia. It has traditionally been challenging to expose the truth Due to a huge amount of data. Nevertheless, digitalism and the emergence of big data also culminated in new data management techniques designed to prevent fraud and abuse in the public sector. Fraud analysis can now predict patterns of possible fraud in areas such as taxes, and organizations have been able to detect, deter and resolve fraud subsequent in billions of potential cost savings through real-time detection.

5.0 Conclusion

Accounting fraud happened since then. Even in this era of the modern revolutionary industry, accounting fraud is rampant. There's no denying about the Industrial Revolution 4.0 made it easier for accountants to do their jobs. Moreover, there are also unethical accountants who use the 4.0 technology industry to conduct accounting fraud. This accounting fraud is due to human greed no matter who the officer or subordinate is. Therefore, every individual whether an accountant or auditor must be honest and transparent in their work using the industry revolution 4.0 to make their work easier, detect and eliminate accounting fraud. In nutshell, all parties must take their own initiative to reduce fraud to create a harmonious society.