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

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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.

5. Analyze how ethical leadership could have averted this situation.
6. 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.