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Governance and Fraud

Governance and Fraud
Part 1 1000 words maximum
Part 2 1000 words maximum

Part 1 There have been numerous corporate scandals in the past 15 years, most of which caused the
companies affected to subsequently experience financial difficulties. Prominent frauds include HIH
Insurance and Onetel (Australia), Satyam computers (India), Societe-General and Parlamat (France),
World.com, Enron and Waste management (USA), Barings Bank and Equitable life Ins (UK) Royal Dutch
Shell (Holland), Olympus (Japan), Duetche Bank (Germany) and Siemens (Greece).

(i) Select a fraud from three different countries and describe the nature of the fraud.

(ii) Explain the causes of the frauds using the fraud triangle.

(iii) Using the fraud triangle as a framework, compare and contrast the influence of cultural and social

factors in each international jurisdiction on the cause of the frauds.


Governance and Fraud

Part 1
Corporate scandals in India, USA and Australia have indicated that corporate accounting
fraud is the greatest problem in the corporate world that is rising in occurrence and severity.
Research shows that the alarming rates of fraud have damaged the reliability of financial reports,
resulted to considerable economic losses and corroded the assurance of investors on the efficacy
and consistency of financial statements (Jones, 2011).
Corporate accounting fraud is an economic or political scandal that arises from the
disclosure of fiscal offenses by trusted organization managerial. Such fiscal offenses often
involve multifaceted ways of mishandling or misusing funds, overstatement of corporate value
assets, understatement of corporate expenses, overstatement of revenues, or underreporting the
extent of liabilities (Romney & Steinbart, 2008).
In the US, corporate accounting fraud has crippled many companies. The Enron
Corporation, an American energy company located in Texas, was declared bankrupt in 2001
following claims of immense accounting fraud that led to the loss of $78 billion in stock market
value, leading to the fall of Arthur Andersen and the enactment of the Sarbanes-Oxley Act of

  1. Following a severe fall in the company’s stock price in 2001, the shareholders of Enron
    filed a $40 lawsuit, which prompted the U.S. Securities and Exchange Commission (SEC) to
    begin an investigation. Dynegy, Enron’s rival made an offer to buy the Enron at an extremely
    low price, but Enron put down the offer, and Enron was compelled to apply for bankruptcy under
    Chapter 11 of the U.S. Bankruptcy Code. Enron Corporation’s $63.4 billion in assets made it the

biggest corporate bankruptcy in the history of the United States until WorldCom took up the
bankruptcy record in the following year.
Regardless of legislative reactions to the rising trend of corporate accounting fraud in the
United States, which led to much stricter corporate guidelines with amendments to the UN
Sentencing Guidelines and the enactment of the Sarbanes-Oxley Act of 2002, colossal corporate
fraud still continues to prevail in the country.
The collapse of a prominent Australian corporation OneTel has indicated the inadequacy
of corporate governance practices in Australia (Albrecht & Albrecht, 2004). HIH Insurance was
liquidated in 2001 with losses ranging between AU$3.6 billion and AU$5.3 billion. In a similar
way, just prior to its collapse, OneTel, which was once ranked as the fourth largest
telecommunications company in Australia and one of the ASX’s fastest growing companies,
revealed an operating loss of AU$291 in 2000. The collapse OneTel was triggered by many
problems including questionable related party dealings, potentially unnecessary management
compensations, unproductive working capital management, improper auditing, destructive
financial reports, untenable business policies, and poor corporate governance. The failure of this
Australian company highlights the significance of not only having good corporate governance
practices but also ensuring thorough execution of the same rather than plain paid “lip service”
(Jones, 2011).
The fundamental problem of Australian companies as highlighted in OneTel is their
keenness in pursuing low yielding businesses and failing to set aside adequate capital to cater for
future liabilities. Predictably, the problem has been catalyzed by the failure of management and
the board of directors to efficiently implement and scrutinize due diligence practices.

India has also experienced massive corporate fraud particularly since the wake of the 21 st
century. In 2009, it was revealed that the chairman of Satyam Computer Services, one of Inida’s
largest computer IT companies serving many global corporations such as 185 Fortune, had
manipulated corporate books in various commercial dealings. Satyam’s chairman was also found
to have engaged in mishandling of assets, increasing expenses, forging documents, and
manipulating of profits, inventory value and income, since 2001. The losses encountered by
Satyam were estimated to be US1.5 billion, that is, two and a half times the sum of the Enron
Scandal (Bhasin, 2013).
The fraud triangle consists of three components that act together to lead to fraudulent
behavior and they include pressure, opportunity, and rationalization (Albrecht & Albrecht,
2004). Pressure involves the motivation of a person to commit fraud. It includes financial,
lifestyle, and emotional motivation. In Enron’s case, financial pressure existed for top
management to meet the Wall Street analysts’ expectations. As for Satyam and OneTel, the top
management engaged in fraud due to lifestyle motivation.
Opportunity refers to the condition or situation that allows a person or an organization to
commit the fraud, hide it, and switch it to personal gain (Barney, 2009). The conditions at Enron,
Satyam, and OneTel that provided an opportunity to commit the fraud were the companies’
control framework; the control environment, the control procedures, and the accounting system.
The companies’ top management failed to accept the responsibility to provide conducive work
environment. In addition, proper and effective accounting systems could have provided an audit
trail, particularly a paper trail that could make it easier to detect fraud. Furthermore, the
conditions in the three countries provided opportunities for the perpetrators to switch the

misrepresentations into personal gains. During the respective frauds, top management received
large bonuses.
Rationalization is a form of mental justification by perpetrators of their illegal behavior.
Most perpetrators in the three fraud scenarios were first-time offenders with no criminal history
that allowed them to use rationalization to hide their dishonesty. Due to the fact that the crimes
committed were non-violent, the perpetrators did not appreciate the consequences of their
The frauds committed by the three companies were influenced by cultural and social
factors. The Enron scandal was triggered by the pressures for economic success that had
commenced in the late 20 th century and was characterized by a perceived expansive growth that
heightened the expectations of corporate success. Enron was a victim of these expectations
which resulted to the growth of a fraud designed to mislead the public until the economic face
The management in all the three companies did not carry out effective fraud education
training to the employees to tell and show them the devastating consequences of fraud. Since the
top executives of the companies condoned fraud, the other employees did not feel that fraud had
devastating consequences and thus, they could not hesitate to commit fraud. The frauds were also
influenced by permissiveness of the activities in their cultural environments and lack of an
ethical environment that condemns fraud.
Part 2
i) Ethical issues in the case with reference to the principles of professional conduct

The principles of professional conduct are varied due to the fact that every profession has
its own code (Weissman & Debow, 2003). However, all codes often work towards the promotion
of the public interest, integrity, objectivity, independence, confidentiality, technical and
professional standards, competence and due care, and ethical behavior. These principals also
apply to all members in public practice.
As regards public interest, while acting in the course of the interests of their employers,
professionals must put into account legal requirements and any loyalties and responsibilities
owed to the community. Thus, in all its endeavors, CMI should ensure that it does not disregard
public interest while furthering its own interests. Integrity requires members to show
straightforwardness, sincerity, and honesty in their approach to professional work. An employee
who discovers that his employer has committed or is about to commit an unlawful act should
make all relevant efforts to convince the employer not to continue perpetuating the unlawful act
and to rectify the matter. Objectivity requires professionals to be fair and not allow prejudice and
conflict of interest to override their objectivity.
The principle of independence requires that professionals should act independently
without any interest that is considered inconsistent with objectivity and integrity. Despite the fact
that employees cannot be independent of their employers and there are certain legal duties such
as keeping information confidential, they also have responsibilities towards directors,
shareholders, other executives and employees, and third parties such as customers, banks and
suppliers. Another principle of professional code of conduct is confidentiality. It is important to
respect the confidentiality of information acquired in the course of work and disclosure to a third
party without specific authority is unethical. Professionals also need to observe ethical behavior
by conducting themselves in a manner consistent with the good reputation of their profession and

refraining from any conduct which might bring discredit to their profession (Flanagan & Clarke,
The principles of professional ethics require all professionals to promote and support the
highest level of ethics in their profession and uphold the highest standards of professional
conduct. Professionals are also required to use only ethical and legal means in their course of
operations while protecting the public against unfair practices and fraud and promoting all
practices that bring respect and credit to the profession. It is also an ethical requirement for
professionals to provide accurate and truthful information with regard to the performance of their
duties at all times.
The facts of the case indicate that CMI has several ethical issues. The first ethical issue is
with regard to integrity. The company’s bribing of government officials and using its political
connections to outlaw unions raises integrity issues. It also raises the issue of employee
mistreatment whereby the top executive officials make decisions to mistreat other employees,
even to the point of breaking the law. The outlawing of unions deprives employees a platform for
them to raise their concerns on issues such as paid leave, working hours, wages, discrimination,
sexual harassment, and wrongful and unfair dismissal.
Other ethical issues are in respect to the company’s pollution of the environment,
exploitation of employees, and facilitation of the importation of cocaine into the US. These
issues are against the principle of protection of public interests. In addition the company’s
funding of the United Peoples Liberation Front raises ethical concerns due to the fact that the
organization is involved in harmful activities such as drug trafficking, rape, murder and

disappearances. Making payments to this unsavoury terrorist organization raises the question of
public interests, integrity, and competence and due care.
ii) What Alex should do using AAA ethical decision making model (The Institute of
Chartered Accountants in Australia, n.d.)
a) Determine the facts
Alex should establish the facts as to who, what, where, when, and how the problem was
committed. Alex should find out the facts before raising the matter with Cameron. He should
document his findings, noting that the employees have been mistreated, the company is funding a
terrorist organization, polluting the environment, and facilitating drug trafficking.
b) The significant stakeholders and definition of the ethical issues
Stakeholders of CMI include Cameron Derry, directors of the organization, shareholders, and
creditors. The ethical issues include Alex’s responsibility to Cameron Derry versus his own
integrity, Alex’s responsibility to the organization versus his responsibility to Cameron, and
Alex’s responsibility to the organization and Cameron versus public interest. Overall, Alex’s
dilemma is what further action he should take regarding the information he has gathered.
c) The applicable fundamental principles and any other rules or values
Alex needs to demonstrate integrity, technical and professional standards, and competence
and due care.
d) The alternatives
By doing nothing, Alex would breach the principles of integrity, technical and professional
standards, and competence and due care. Resignation would satisfy the three principles, though it

would abrogate responsibility. Raising the concerns with the board members informally would
not give Alex an opportunity to explain himself. By trying to convince Cameron Derry to stop
breaching ethical and legal duties, Alex would be acting in consistence with integrity and it
allows Alex the opportunity to explain himself.
e) Assessment of the consequences
If Alex decides to do nothing and allow the company to continue funding the terrorist
organization, it would pacify the ethical problems affecting the company, and this would cause
devastating legal consequences to the operations of the company. This would cause Alex to
breach his ethical standards as outlined in the Code. If he chooses to resign, the problem might
never be identified, which may cause detrimental problems to the company. If he talks
informally with the board members, it may preserve Alex’s integrity and may lead to an
independent investigation, though it can have a negative impact on Alex’s career aspirations. If
he tries to convince Cameron to put an end to harmful practices, Cameron might consider
rectifying the problem.
f) Decision-making
In light of the analysis, first, Alex can once more convince Cameron to rectify the issue
basing on his findings. If this is not successful, Alex can raise his concerns with the board and
other stakeholders. If again not successful, Alex can resign.



Albrecht, S. & Albrecht, C. (2004). Fraud Examination and Prevention.
Barney, J. L. (2009). Corporate scandals, executive compensation, and international corporate
governance convergence: a US-Australia case study. Temp. Int’l & Comp. LJ, 23, 231.
Bhasin, M. L. (2013). Corporate Accounting Fraud: A Case Study of Satyam Computers
Limited. Open Journal of Accounting, 2: 26-38.
Flanagan, J., & Clarke, K. (2007). Beyond a Code of Professional Ethics: A Holistic Model of
Ethical Decision‐Making for Accountants. Abacus, 43(4), 488-518.
Jones, M. J. (2011). Creative Accounting, Fraud and International Accounting Scandals. John
Wiley & Sons.
Romney, M. B. & Steinbart, P. J. (2008). Accounting Information Systems. Reading, mass:
The Institute of Chartered Accountants in Australia. Joint Guidance Notes GN – Members in
Business Guidance Statement.

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