Accounting Fraud-A Closer Look at Famous Cases and Prevention Measures

Accounting fraud has been defined as an intentional act of misstating the financial information of an organization. It has devastating, far-reaching effects and disastrous impacts on companies, investors, and, broadly speaking, economic activities. Over the past decades, numerous reported high-profile cases of accounting fraud have underscored the weaknesses in corporate governance thinking and financial reporting.

Famous Accounting Fraud Cases
Enron Corporation filed bankruptcy in 2001 and represented one of the most popular accounting scandals. Enron had been an energy firm that had used difficult and complex financial schemes to hide billions of dollars of debt and losses. Aftermath included the failure of the corporation, conviction of several executives, and significant reform of the standards of corporate governance.
WorldCom: Just like the Enron case, another accounting-related scandal was the WorldCom Company in 2002. It was a telecommunication giant that artificially and improperly inflated its revenues by classifying its operating expenses as capital expenditures. This fraud resulted in the bankruptcy of WorldCom and conviction of its CEO named Bernie Ebbers.
AIG (2008): In the financial crisis of 2008, it was found that American International Group, one of the larger insurance institutions, had taken on enormous quantities of risk via financial operations and practices that had brought the company to the verge of collapse. The only thing saving AIG from bankruptcy was the colossal bailout provided by the government. A few executives were implicated in accounting fraud.

Reasons for Accounting Fraud
Pressure to Meet Financial Targets: The companies may be obliged by investors, analysts, or management to meet or exceed the financial targets. In this direction, fraud practices may be carried out to report higher profits artificially or to hide losses.
Weak Corporate Governance: Poor governance on the corporate side can make fraud most possible. Weak internal controls, lack of oversight, and conflicts of interest are inclusive of factors that could drive fraudulent activities.

Accounting Fraud: Prevention Measures
Good corporate governance practices can be instituted as a way of attempting to prevent fraud in accounting. This shall involve the adoption of independent audit committees, internal controls, and codes of conduct to facilitate a culture of ethics within an organization. For example, strong internal controls can facilitate the detection and prevention of fraud. Basically, it would involve segregation of duties, periodic review of the financial statements, and proper risk management procedures among others based on the generally accepted auditing standards.
The organization should establish a positive ethical culture. It is done by enforcing the values of ethics, training of employees and educating them concerning ethics and providing reporting mechanisms to enable employees to voice their concerns.
The more frequent one does independent audits with qualified auditors, the greater the possibility of fraud identification and prevention. Auditors should not have any kind of conflict of interest in their work and should also possess sufficient expertise while reviewing the concerns of financial statements.
Effective regulatory oversight only minimizes fraud cases. Regulators should be in a position to investigate suspected fraud cases and impose fines, in addition to ensuring that entities institute controls that would be fitting for any situation.
In relation to these, accounting fraud is one of those critical matters that have important effects. Effective prevention methods help the business in not losing its good name and financial stability, as well as the interest of its stakeholders.