question archive case study Introduction Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy

case study Introduction Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy

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case study

  1. Introduction

Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy. Fraud encompasses a wide-range of illicit practices and illegal acts involving intentional deception or misrepresentation. According to the Association of Certified Fraud Examiners (ACFE, 2010), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party.” Fraud cheats the target organization of its legitimate income and results in a loss of goods, money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfair means.

 

  1. Magnitude of Frauds

Organizations of all types and sizes are subject to fraud. On a number of occasions over the past few decades, major public companies have experienced financial reporting fraud, resulting in turmoil in the U.S. capital markets, a loss of shareholder value, and, in some cases, the bankruptcy of the company itself. Although it is generally accepted that the Sarbanes-Oxley Act has improved corporate governance and decreased the incidence of fraud, recent studies and surveys indicate that investors and management continue to have concerns about financial statement fraud. For example: The Association of Certified Fraud Examiners’ (ACFE) “2010 Report to the Nations on Occupational Fraud and Abuse” found that financial statement fraud, while representing less than five percent of the cases of fraud in its report, was by far the most costly, with a median loss of $1.7 million per incident. Survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion. The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least

$1 million. The frauds reported to us lasted a median of 18 months before being detected. “Fraudulent Financial Reporting: 1998–2007,” from the Committee of Sponsoring Organizations of the Treadway Commission (the 2010 COSO Fraud Report), analyzed 347 frauds investigated by the U.S. Securities and Exchange Commission (SEC) from 1998 to 2007 and found that the median dollar amount of each

instance of fraud had increased three times from the level in a similar 1999 study, from a median of $4.1 million in the 1999 study to $12 million. In addition, the median size of the company involved in fraudulent financial reporting increased approximately six- fold, from $16 million to $93 million in total assets and from $13 million to $72 million in revenues.

A “2009 KPMG Survey” of 204 executives of U.S. companies with annual revenues of $250 million or more found that 65 percent of the respondents considered fraud to be a significant risk to their organizations in the next year, and more than one-third of those identified financial reporting fraud as one of the highest risks. Fifty-six percent of the approximately 2,100 business professionals surveyed during a “Deloitte Forensic Center” webcast about reducing fraud risk predicted that more financial statement fraud would be uncovered in 2010 and 2011 as compared to the previous three years. Almost half of those surveyed (46 percent) pointed to the recession as the reason for this increase. According to “Annual Fraud Indicator 2012” conducted by the National Fraud Authority (U.K.), “The scale of fraud losses in 2012, against all victims in the UK, is in the region of £73 billion per annum. In 2006, 2010 and 2011, it was £13, 30 and 38 billions, respectively. The 2012 estimate is significantly greater than the previous figures because it includes new and improved estimates in a number of areas, in particular against the private sector. Fraud harms all areas of the UK economy.”

Answer all the questions. Each question carries 15 Marks

  1. Conduct an ethical examination to describe the actions of Satyam Computers Limited executives.
  2. Apply teleological frameworks (at least three in this case). Choose among (Ethical egoism, utilitarianism, Sidgwick’s dualism, deontological frameworks (existentialism, Kant’s ethics, contractarianism)
  3. Analyze the consequences of unethical action of various stakeholders. Apply the triple bottom line in this case.
  4. Evaluate the main ethical issues regarding financial reporting in this case.
  1. Analyze how ethical leadership could have averted this situation.
  2. Evaluate the application of strategic ethical decisions to build character in the case Satyam. Analyze the importance of a code of ethics and ethical guidelines for Satyam.

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ANSWER 1

The executive members of Satyam Computers Limited engaged in financial statement manipulation to present a false picture of their company's financial condition. Creating a false financial status picture was to attract investors and convince financial institutions to award their company some loan. This bared some fruit for quite a long time until the company became overwhelmed by the loans that it was securing through the financial manipulations. After realizing that things were getting out of hand, the company's chairman decided to open up about this secret that his company had kept for so many years.

ANSWER 2

From the ethical egoism perspective, the company's executive's action was right because these individuals were acting to fulfill their personal interests. Looking at the financial manipulation activity from the utilitarianism perspective, the company's executive's action was wrong since it did not cause many people to be happy. From Sidgwick's dualism perspective, the company's executive's action was neither wrong nor good since the ethical egoism perspective says the action was right while the utilitarianism perspective is saying the action was wrong.

ANSWER 3

Creditors

The creditors' failure to hire independent accountants to assess the company's financial statements led to losses after the company became incapable of repaying the loans.

Investors

Just like creditors, investors who failed to contract independent accountants lost their money after being persuaded to invest in the company when the organization was doing poorly. This reality could have been discovered had independent accountants been hired.

Executive Members

The decision to manipulate the company's financial statements to secure huge loans and attract investors led caused the company to become bankrupt.

ANSWER 4

A few of the ethical issues associated with financial statement manipulation include exaggerating company earnings and deflating company expenses. The action of exaggerating earnings is aimed at convincing investors that they will earn high dividends.

ANSWER 5

Ethical leadership could have averted the situation by ensuring honesty in Satyam's activity of financial reporting.

ANSWER 6

The application of strategic, ethical decisions in Satyam will change the company's direction concerning financial reporting. The importance of a code of ethics and ethical guidelines for Satyam is to eliminate the existing dishonesty, thereby improving the corporate image.