SUBJECT: Analysis of article in fraud in the financial reporting system

The case is about the fraud in the financial reporting system. The article is written in a well summarized way that covers all important information regarding the fraud. In the company, inventory was misplaced and misinterpreted by the employees of the company for their personal benefits on the sales. The case also presents that at the time of fraud the financial condition of the company was good and stable. The company got the loan from the bank to make the business stable and powerful in the market. Thus, the fraud was causing the double loss for the company as it was causing to increase the liability of the company by increasing loan and decreases assets by the misplacing and wrong interpretation of the financial reports.

Statement of the facts of Analysis of fraud in the financial reporting system  

    The author also presented that sales person of the company were also retained in the fraud. The president of the company Russ was personally involved in the whole fraud. The article provides the clear understanding of the case through presenting the facts and clear roles of each person that was directly or indirectly involved in the case study. The Rick was a controller and new employee in the company. The main reason for the appointment of the rick was to sort out and organize the records of the medical supply firm. In the records of the company amount about $7million was missing. Therefore, rick was responsible to find out the missing $7millions.

        According to the case Russ was trying to hide financial information from the bank as there was a huge amount of bank loans for the company in the bank records that company was not going to pay off by presenting that their financial condition is not so good to make such a big transaction. However, in the reality, the financial condition of the company was many times better from the situation projected through the financial statements. The Russ was playing the main role in the manipulation of the financial records.

            In accordance to the case study, the major data manipulation was in the sales part. The accounts receivable related to the sales of the company were not presented on the financial statement because Russ was trying to make his own money from that sales. Russ was considering that in near future company would go to bankruptcy and in such situation, the amount saved through fraud will help him out to bear the loss. Thus the fraud was not only with the bank but also with the company, and the company was going to face bad fortune soon because of his frauds and personal benefits.     

            At the beginning of the year, the financial condition of the company was not stable however with the increase in the sales during the fourth quarter the company started earning the profit. The profit was generated from the nursing home industry. According to the information in the case study, the profit generated from the sales was almost eight times greater than the cost incurred to run that business operations.

        In the whole situation role of rick was difficult as within a few days he got the information that the president of the company Russ is involved in the records manipulation. He was aware of the facts but unable to present the truth to the bank. He was new a new controller in the organization and he did not want to lose his job, therefore, he was eager to win the trust of the Russ firstly.

State the questions of Analysis of fraud in the financial reporting system 

            The whole situation raised many questions about the characters in the case study and their ethics. Under the business ethics, companies cannot hide information and manipulate financial records to get benefits. If the loan was taken from the bank, the company was responsible to pay back that amount. Under the accounting principles and standards manipulation of the data is quite unethical and illegal. there raised questions about the corporate level management of the company as if Russ was involved in the Fraud why Monica the vice president of the company was not speaking up against him.

            According to the international standards for the accounting, companies are responsible to provide complete information about their operations and financial records to their stakeholders. In case of manipulation of the records, companies can face legal consequences. But in this case, there was no one to blow the whistle against the fraud of Russ.  Even there is no evidence available in the case study about the legal action taken by any regulatory institute like taxes regulation authority. The company was hiding income but tax department did not take notice of it. Thus the case study also raised questions about the performance of the tax regulation institute of the country.

        Other than all that it also raised the question about the ethical behavior of the Rick. He was aware of the whole situation but he did not speak up against the Russ in front of bank management even after the passage of a number of months. It shows his poor ethical behavior that during that times he preferred to secure his job for the time being rather than thinking about the other employees who could lose their jobs because of bankruptcy.

            However, the Rick was no interest in playing games with other through frauds therefore after some month he got the courage to slip hints to the bank. His hints were based on the information that the financial condition of the medical supply firm is much better and stable than the condition presented in the financial reports of the company. Here again, a question raised that after getting that hints from the Rick why the bank did not take action against the Russ or the company for their attempt to fraud and manipulation of financial data. Why? Why was the bank role really weak towards the fraud? Why other financial institutions and tax regulation authorities were not taking action against the company? What was required for them to take legal action? Whether such frauds are uncontrollable for the financial institutes and banks.

        It also raised the questions as who will control the situation. Whether the role of Monica and rick was enough strong against the unethical behavior of the Russ in the organization and they could play a much better role to avoid such situations.

Conclusion and recommendations of Analysis of fraud in the financial reporting system   

            The whole case study is based on the information about the fraud of the Russ and other sales person of the company. Russ the president of the company was involved in the fraud with the bank and other stakeholders of the company. He took the loan from the bank that he was not about payback. The whole case can be concluded as fraud was made through the financial records manipulation by the employees and management of the company.

        Rick was appointed to resolve the matter of fraud as a controller of the company. He got the information and slip the hints to the bank about the fraud and financial position of the company. However, Rick did not take risk directly to speak up against the fraud, therefore, he just supported the bank by providing hints of the fraud. The whole situation was going against the company, therefore, chances of bankruptcy were increasing with the time. In accordance with the whole situation, there are some recommendations that can be helpful in this situation. 

The rick should take the risk to blow the whistle about the fraud of the Russ no matter what consequences raise. As it is his legal and ethical duty to speak up against the fraud. 

The legal institutions should take notice of the situation as tax regulations institute should have a proper check and balance system about the sales of the company as manipulation of sales also means the reduction of taxes through fraud (Ang, 2015).

The auditors of the company should take notice of the financial reports of the company. They should compare the actual sales with the presented sales to find out the fraud. They can find out the fraud from the decrease in the inventory.

·         Fraud can draw a negative impact on the employees also as bankruptcy will also take away their jobs, therefore, employees and salesperson of the company should think about their future. Misplacing of inventory and sales manipulation can also cause for them to face legal consequences.

All these recommendations are applicable in this case to resolve the matter of fraud.

Reasoning and authoritative references of Analysis of fraud in the financial reporting system    

            In the recommendation, I recommend that auditors can control the situation by playing their role effectively. Basically, the reason behind this recommendation is the roles and standards of the accounting by the GAAP. According to the GAAP accounting standard IFRS and ISA 240 its auditor’s duty to evaluate the financial reports of the company to find out the frauds and financial data manipulation (Drábková, 2015). Therefore, in this case, we can say that main role in the fraud is played by the auditors because they could prevent the company from fraud but in this case, we did not find any evidence about their efforts towards the prevention of the fraud.    

References of Analysis of fraud in the financial reporting system 

Ang, C. S. (2015). Analyzing Financial Data and Implementing Financial Models Using R. Springer. Retrieved 09 16, 2018

Drábková, Z. (2015). ANALYSIS OF POSSIBILITIES OF DETECTNIG THE MANIPULATION OF FINANCIAL STATEMENTS IN TERMS OF THE

IFRS AND CZECH ACCOUNTING STANDARDS. ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS,

63, 1859-1866. Retrieved 09 16, 2018