fraud-for-accounting

1ContentsIntroduction……………………………………………………………..................…1.Accountingtheoriesforfraud…………………………………………………1.1PositiveAccountingTheory……………………………………………………Agencytheory………………………………………………………………1.2CriticalAccountingTheory………………………………………………………Stakeholdertheory………………………………………………………………Legitimacytheory………………………………………………………………Institutionaltheory………………………………………………………………1.3NormativeAccountingTheory………………………………………………Conceptualframework………………………………………………………………2.Accountingpracticeforfraud……………………………………………………2.1Misappropriationofassets……………………………………………………2.2Misrepresentationoffinancialstatements……………………………………Revenue………………………………………………………………Impropercapitalization………………………………………………………………FalsificationofInventory…………………………………………………………UnderstatementofLiabilities………………………………………………………3.Casestudy………………………………………………………………3.1TheSatyamScandal………………………………………………………………Whatwashappening………………………………………………………………AnalysisofTheories………………………………………………………………3.2TheWorldComScandal………………………………………………………Whatwashappening………………………………………………………………AnalysisofTheories………………………………………………………………Conlusion………………………………………………………………Reference………………………………………………………………2IntroductionThearticlewhichwrittenbyZabihollahRezaeerevealsthatfinancialstatementfraudproblemhasbecomesevererinrecentyears.Atruehistoryoffraudwouldhavetostartin300B.C.,whenaGreekmerchantnameHegestratostookoutalargeinsurancepolicyknownasbottomry.(AndrewBeattie)Andin1792,Americafirstlyproducedafraudafteritbecameanation.Thepublichasbeendisputedonthistopicovertheyearsandaccompanywiththebackgroundofthenewtimes,somenewconflictsbetweendiferrentgroupshasappeared.Fraud,whichcanbedefinedasthemisrepresentationoralternationofacountingrecordsinorderttoearnprofitsoravoiddebts.Asthisalwaysleadstocorporationscandlesandresultsinbankruptcy,damagetheprofitsoftheshareholders,fraudforacountinghasgraduallydrawnattentionwithinthesocialscope.Someofthebusinessschoolshasalsoputthismodeintotheircorecourses.(BrianFox,2013)Thisessaymainlyfocusontheaccountingtheoriesandpracticeswhichrelatedtothebehavioursofaccountingfraud.Thefirstpartintroducestheconceptionsofeachaccountingtheoriesbasedonthethreecoretheoryframework.Inthesecondpart,somecommonpracticesofmisbehavioursinaccountinghasbeenputforwardfollowedbythelastpartwithtwoexamplesofthefirmswhocomitedfraudintheirfinancialreports,somestatisticshasbeengiveninthispartandsometheorioticalanalysishasalsobeenmade.31.Accountingtheoriesforfraud1.1PositiveAccountingTheoryThemainhypothesisofPositiveAccountingTheoryisthattheselectionofaccountingmethodsdosen’tdrivebythemarketdemandbuttheperformanceofthecompany,incontrasttotheconceptionofthe“correct”valueinClassicalapproach.Inotherwords,thestatisticsarejustatoolforinformationprovideandcontrol.AgencytheoryThisconceptioncanbefoundinagencytheory,whichidentifiestwoparties,oneplaysaroleoftheprincipalandtheotheroneistheagency.Theagencyrepresenttheprofitoftheprincipalandworkforthem.Inacompany,managersaretheagentandshareholdersaretheownersofthefirm.What’smore,insomescholar’sview,“agencyrelationshipsarecontracts,andtheincentives,monitoringdevices,bonding,andotherformsofsocialcontrolundertakentominimizeagencycostsconstitutetheelementsofthecontract.”(SusanP.Shapiro,2005)Becausethesetwoseperatepartsarebothself-interestparts,thistheoryhassomecorruptpracticesitself:theagentwillprobablynotseekthebestinterestfortheprinciplesbysomemeans.Forexample,theagentwillpursuetheireconomicinterestbyusingtheirpowerimproperly.Meanwhile,becauseoftheinformationasymmetry,theagencywillsometimesgetmoreinformationsthantheprincipal,thisisunfairandsometimesmayhurtthebenefitoftheowner.Themanagersmustbemonitiredtoensuretheydonotabusetheirpower,somesuperviseshouldbeimplementedtopreventthemfromusingillegalmethodstoseekprofit.1.2CriticalAccountingTheoryAsRoslenderannoucedinhisessay,criticaltheory“seekstoprovidealternativeknowledge;tocritiqueexistingsocialarrangements;topromotechange;nopretenceatbeingobjective”(Roslender,2006)IntheCriticalTheory’sview,thedevelopmentofaccountingisnotaffectedbythesocialtechnicalbutbythepractice.Itappearsbecause“dissatisfactionwithtechnocraticdecision-makingtoolsrootedinpositivism4andneo-classicaleconomics,asexemplifiedbydebatessurroundingtheuseofcost-benefitanalysisandsimilartechniques.Philosophically,appealsfornewmethodsareembeddedinthedemocraticratherthancapitalisttraditionsofWesternsocieties”(JudyBrown,2009)Thusthistheoryembodiestheideaofliberaldemocraciestosomeextent.StakeholdertheoryStakeholdertheorytakesabiggroupofpeople’sbenefitintoaccount,suchasemployees,customersandsuppliersandoppositetotheviewpointofshareholdertheory.Traditionalshareholdertheorythinksthatshareholdersarethe“recipientsoftheresidualfreecashflow”(ChristineA.Mallin,2004)Thustheyhavetherighttoownthemaximumeffectwithinthecompany.Moreover,nospecificdefinitionsonhowtomeasuretheinterestsofeachstakeholdersgroupsmake,asasuggestiontosolvethis,Jensen(2001)advocatestheenlightenedstakeholdertheory,whichmaitainsthestructureofstakeholdertheoryandusethelong-runvalueofthefirmtoevaluatethetrade-offsamongi