Forensic Accounting Report: Fraudulent Activities and Controls

This forensic accounting report investigates corporate fraud, referencing the fraud tree classification. It examines the AIG scandal (financial statement fraud), the Enron scandal (concealing liabilities), and the Airbus bribery case (corruption). For each fraud, the report details the nature, mechanism, and practical control measures to prevent recurrence, such as establishing ethical codes, regular audits, and segregation of duties. The report emphasizes the importance of ethical practices and robust internal controls in maintaining financial integrity and preventing fraudulent activities that can negatively impact a company's market position and financial stability. Desklib offers similar solved assignments and past papers for students.

Forensic Accountant

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Overview of fraud tree................................................................................................................3
Fraud 1........................................................................................................................................3
Fraud 2........................................................................................................................................5
Fraud 3........................................................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
The forensic accounting is being defined as the field which investigates whether the
company is being engaged in any kind of financial reporting misconduct or not. While working
there can be many of the activities which can lead to the negative effect over the profitability of
the company. hence, the present report will outline the different types of fraud which took place
and the control measure which need to be followed in order to prevent and detect these types of
fraud. In accordance to the fraud tree there are different types of fraud which any person or
company can commit in order to increase the profits of the company. The current report will
include the different frauds on the basis of fraud tree provided and the preventive measures will
be provided.
Overview of fraud tree
The fraud tree is a type of classification which divides the different types of fraud in
different categories. In accordance with the fraud tree the occupational fraud is the one which
any person like employee, manager or any other stakeholder of the business commits fraud for
harming company. This occupational fraud is being divided in three categories that is corruption,
asset misappropriation and the use of fraudulent statements. Further these categories are also
divided in sub categories and other classification of frauds.
Fraud 1
The first fraud in the discussion is the American International Group (AIG) scandal in the
year 2005. The company is a multinational insurance company which has around 88 million
consumers and in the year 2005 the company was found guilty for stock price manipulation.
With the help of investigation of SEC, it was found that the accounting fraud was of
approximately $4 billion. Further with the detailed analysis it was evaluated that the company
has booked the loans of the company as revenue within the books of accounts. Also the company
forced the client to use insurers with whom the pre-existing payoff agreement can be used
(Antawirya and et.al., 2019). Along with this, the company has also asked the traders of stock to
inflate share prices of the company.
Nature and mechanism of fraud
The nature and mechanism of fraud comes under the financial statement fraud and the
sub category is net income over statement. This is the fraud because in this case AIG has

included the loans in the revenue and because of this the net income of the company was
overstated and it did not provide a fair and accurate information of the company. hence, as per
the fraud tree the company is doing the financial statement fraud. Hence, this need to be analysed
and evaluated in order to increase the revenue of the company in ethical manner. In case the
company has not conducted any kind of fraud or related activity then this will be improving the
performance of the company but in actual the company has committed the fraud and because of
this the market position of the company declined (Al-Mamun and et.al., 2022). Also, the nature
of the fraud is that it affects the financial position of the company to a great extent in negative
manner and also this will be affecting the competitiveness of the company as well. also, the
company was not complying with the revenue recognition concept in better and appropriate
manner. Hence, as a result of this the accounting information of the company will be affected
and this will result in decline in performance and proficiency of the company.
Diagram
Practical control
It is very important for the business that they must not be having any negative working
and news relating to their business. this is because of the reason that in case the company will be

indulged in any of the fraudulent activity then this will be affecting the working efficiency of the
business and its competitive environment. Hence, for managing the financial statement fraud the
measures which companies can take are as follows-
 The most essential aspect for the companies is that there must be good codes of ethics
being established in order to improve the business to a great extent (Aghili, 2019). This is
because when there will be better working guidance then this will be improving the
ethical practices of employees and they will not work in unethical manner.
 Another practical control for avoiding the misstatement of financial records is to audit the
books of accounts on regular basis. This is because of the reason that in case there will
not be proper auditing then this will be affecting the working efficiency of the business to
a great extent. this is necessary because when the proper and frequent auditing will take
place then this will result in checking of each and every single error within the working
and recoding of business.
 In addition to this, another strategy or the controlling measure for the overstatement of
revenue is that the company must be having a good and strict internal control system.
This is very important for the company to effectively evaluate and control the fraudulent
activities. the reason underlying this fact is that in case the internal control will be good
and tough then the people will be having fear and they will not commit any of the fraud
or any other unethical practice.
Fraud 2
Another fraud which is taken is of Enron Corporation which is a US energy company
based in Houston in Texas. The company was indulging in the fraud of using the accounting
loopholes for hiding the large amount of bad debts and along with this inflating the earning of
the company. as a result of this scandal, the shareholders of the company lost around $74 billion
because the share price of company declines from $90 to $1. This was the result of news of the
fraud which was circulated within the competitive market and as a result of this there was high
decline in share price which was not good for the performance of company (Onwubiko, 2020).
Moreover, with the finding it was evaluated that the CEO of the company has kept a huge
amount of bad debt from the balance sheet from recording. In addition to this, the company also
created pressure over the auditors of company to not focus on this issue. After this finding both

the CEO and former CEO were imprisoned and consequently this scandal resulted in bankruptcy
of Enron and thereafter dissolution.
Nature and mechanism of fraud
With the above analysis it is clear that the nature of fraud is the one wherein the company
hided the off balance sheet item from the investors and the creditors. Further when the fraud was
known to the public then the shares prices of the company reduced to a great extent. This fraud is
also a part of financial statement fraud. Further the sub category of the fraud is concealing of
liabilities and expenses. The mechanism of this fraud involves the fact that the liability and the
expenses will not be recorded within the financial statement and to keep it as a secret
(Todorović, Tomaš and Todorović, 2020). Hence, in the present case of Enron as well the
company has hided recording of the bad debt which is an expenses reduced from the related
debtors in the balance sheet. Hence, when this was not recorded then it resulted to concealment
of liabilities and expenses and ultimately the financial position of the company was affected to a
great extent. Along with the fraud the company has also undertaken the unethical practice of
influencing the auditors to include the key auditing areas within their report. This was also not
good and for this the company need to follow all the ethical and correct practices even the
company is facing loss.
Diagram
(Source: 3 accounting scandals in the past decades. 2022)
Practical control

By evaluating the mechanism of not including bad debt in the financial statement it is
clear that it is clear that there is requirement of keeping some of the practical control so that these
frauds are not repeated again. Hence, for this some of the controlling measures involves the
following-
 In case the bad debt it not recorded in proper manner then this will be affecting the actual
position of the company. This is because of the reason that in case the recording at the
initial level is not good then this will be affecting the business and its profitability to a
great extent.
 Along with this another strategy or controlling measure is to take time to time review of
all the debtors so that it can be analysed that whether they will become the bad debt or
not. In case the company will be continuously calling the debtors then there are more
chances that there will not be more bad debt.
 Moreover, another prevention measure for controlling the not recording of bad debt
within the balance sheet is that the company must not employ the same person for the
receivables and invoicing. This is because of the reason that in case the same person is
doing both the task then there are high chances of fraud. On the other hand, in case there
will be two or more people for both the task then there will be more responsibility of all
the people as there can be cross questioning and checking.
Fraud 3
The current pandemic has also resulted in increase in fraud and related activities for
keeping the business managed and running. This is because of the reason that because of the
current pandemic the company have lost their working and profitability of the business has
reduced. Hence, as a result of this, the working efficiency of the business has reduced. This is
because of the reason that in case the profits of company decline then they will find different
methods through which they will try to improve the profitability of the business (Wibowo and
Tobing, 2022). in the same manner, Airbus which is a France based aviation company has agreed
to pay the penalties of $3.9 billion as fine. This fine was charged for the largest bribery case.
This bribery was paid by the company in order to settle the foreign shared from the authorities of
US, France and UK. The main allegation over the company was that they have hired some third
party who were tasked to give bribe to the government officials in different countries. The aim of

giving bribe was to purchase the satellite, helicopter and Airbus planes. This bribing was
instigated by the company in order to beat the competitor that is Boeing.
Nature and mechanism of fraud
With the analysis of the fraud of Airbus it is clear that the fraud done by the company
falls under the category of corruption and the sub category is bribery. This fraud is not at all
good for the company as when the company comes in limelight with the bribe then this affects
the working of the company and its public image to a great extent. This fraud is the one which
affect the public image and competitive position to a great extent. Hence, as a result of this the
working of the business will become negative and people will not be in condition to invest within
the company (Ghofirin and Algristian, 2020). The mechanism of the fraud involves the fact that
in this company tries to give some extra money or any other equivalent thing to the other party in
order to fulfil their invalid demands. For instance, in the present case of Airbus company hired
other people to bribe the government but this strategy was not successful. Hence, as a result of
this the company was highlighted for providing bribe to other people and this resulted in
negative working and publicity of company.
Diagram

(Source: Airbus scandal. 2022)
Practical control
With the analysis of the above discussion of fraud and its mechanism it was evaluated
that there is requirement of managing this fraud so that negative marketing does not take place of
company. hence, it is necessary for the company that there must be strategies through which the
fraudulent activities must be avoided and this will improve the working efficiency of the
company. hence, for gaining competitive advantage it is very important that proper working and
ethical aspect are being followed. Thus, some of the control measures which the company can
take in order to manage the performance of the company are as follows-
 For minimising the fraud of bribery the company must comply with good anti- bribery
laws and regulations. Also the company must include different policy and practices in
order to manage and maintain good working within the company. this is necessary
because of the reason that in case there will be compliance with rules and penalties
relating to the bribery then people will not prefer to give bribe to other person. Hence, as
a result of this the bribery within the organization will reduce.

 Along with this, another control measure which company can implement in order to
manage proper working and ethical environment within the company is to set effective
fraud risk assessment (Sanad and Al-Sartawi, 2021). This is very important for the reason
that in case the employees will be working in ethical manner then they will not think of
giving bribe to other person for the completion of work. Hence, this will reduce the
chances of fraud within the company.
 Moreover, another strategy or controlling measure which company can implement is that
they must create some of the campaign frequently for the employees. The aim of these
campaign will be to promote awareness among the employees to not use any unethical
practice or strategy which can result in loss for the company.
CONCLUSION
The above report evaluated the use of forensic accounting is important for the company
in order to analyse the areas in which there is accounting fraud and misconduct. Many a times
the company faces or undertakes the fraud in order to improve their position which is not good.
Hence, the above report highlighted the three different types of fraud. The first one was AIG
which did overstatement of financial position, another one was Enron which undertook the
concealment of liabilities and expenses. In the end the last fraud discussed was the bribery of
Airbus wherein they hired some other people to bribe the government officials. With this it was
also inferred that the fraud creates negative impact over the image of the company and its market
position. Hence, there are some of the common controlling measure which can be taken like
making proper code of conduct, including ethical practices for the effective working, creating
awareness among employees and many others.

REFERENCES
Books and Journals
Antawirya, R. D. E. P., and et.al., 2019. Application of fraud pentagon in detecting financial
statement fraud. International Research Journal of Management, IT and Social
Sciences. 6(5). pp.73-80.
Al-Mamun, A., and et.al., 2022. An overview of Corporate Fraud and its Prevention
Approach. Australasian Accounting, Business and Finance Journal. 16(1). p.6.
Aghili, S., 2019. Fraud Auditing Using CAATT: A Manual for Auditors and Forensic
Accountants to Detect Organizational Fraud. Auerbach Publications.
Onwubiko, C., 2020. Fraud matrix: A morphological and analysis-based classification and
taxonomy of fraud. Computers & Security. 96. p.101900.
Todorović, Z., Tomaš, D. and Todorović, B., 2020. Anti-Fraud Strategy. Economics. 8(2). pp.69-
78.
Wibowo, T. and Tobing, A. N. L., 2022. The Implementation of Fraud Risk Assessment and
Anti-Fraud Strategy in Government Institution XYZ. Asia Pacific Fraud Journal. 6(2).
pp.285-299.
Ghofirin, M. and Algristian, H., 2020. Predicting the Rationalization Factor that works on
Accounting Fraud at Microfinance Institution. Kresna Social Science and Humanities
Research. 1. pp.1-9.
Sanad, Z. and Al-Sartawi, A., 2021, March. Financial statements fraud and data mining: a
review. In European, Asian, Middle Eastern, North African Conference on Management &
Information Systems (pp. 407-414). Springer, Cham.
Online
Airbus scandal. 2022. [Online]. Available through: <https://dailyguidenetwork.com/special-
prosecutor-requested-for-interpol-arrest-warrant-on-samuel-mahama-cid/airbus-scandal/>
3 accounting scandals in the past decades. 2022. [Online]. Available through:
<https://aavenir.com/how-far-these-top-3-accounting-scandals-cook-the-books/>