Find a recent instance of financial statement fraud. Include discussion of the details of the fraud, how the fraud was discovered, who was involved, and who the victims were.
Discuss how the fraud could have been prevented or detected. Include appropriate citations.
Note: This assignment consist of one main post and two classmates discussion responses. See word doc attached please.
Instructions for main post (Around 200 words) Find a recent instance of financial statement fraud. Include discussion of the details of the fraud, how the fraud was discovered, who was involved, and who the victims were. Discuss how the fraud could have been prevented or detected. Include appropriate citations. Instructions for the two classmate responses (150 words each) Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response.) Classmate post #1: Dennisha Gunn The Theranos Scandal Elizabeth Holmes a Stanford University drop out founded the Theranos Company in 2003 (Willmore, 2019). It is interesting to note that she was only 19 years of age but her influence was so much felt in the American market. The company was once valued at $9 billion before it was declared bankrupt. The Theranos financial scandal in the United States of America occurred in March 2018 (Willmore, 2019). The founder of the company Elizabeth Holmes had promised to revolutionize the blood testing system in America but ended up swindling investors more than $700 million. The company’s former president Ramesh Balwani and the company owner, Elizabeth Holmes raised money from potential investors through a project that took several years to mature. The two made false financial statements about their Company’s financial performance, business and technology. After this fraud activity came into light, Holmes agreed to give up control of the company and most of her stake as the company also gave way for further investigation. The securities exchange commission also played a significant role in this issue as it set out to file a case against the company’s President. At its inception, the company was considered as an industrial enemy because it promised to create cheaper and more efficient approaches to traditional medical tests. The company operated successfully until the year 2015 when controversy set in as other firms started questioning its technology and treating methods. In response to this heated controversy, the firm stopped running blood tests because of the several federal probes that it was facing. The victims in this case were the investors that risked their funds by relying on the false financial statements that were issued by the company’s founder and President. Classmate post # 2: Maurice Naylon Find a recent instance of financial statement fraud. Please make sure that you are posting about a unique fraud that your classmates have not previously discussed. Include discussion of the details of the fraud, how the fraud was discovered, who was involved, and who the victims were. Discuss how the fraud could have been prevented or detected. Include appropriate citations. Financial statement fraud, as the name suggests, is “a type of fraud whereby an individual or individuals purposefully misreport financial information about an organization in order to mislead those who read it” (Wells, 2013, p. 297). Individuals can conduct this type of fraud in a variety of ways, but financial statement fraud broadly falls into one of two categories: 1) overstating assets or revenues; or 2) understating expenses or liabilities. While numerous examples exist, the WorldCom scandal – and subsequent bankruptcy – proves informative due to its massive scale. When the tech bubble burst in the early 2000s, WorldCom turned to accounting fraud to hide its falling profitability. Specifically, “WorldCom inflated net income and cash flow by recording expenses as investments. By capitalizing expenses, it exaggerated profits by around $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss” (Kenton, 2019). Quite quickly, investors became suspicious of this profitability in the face of such dire post-“dot.com” market circumstances, despite CEO Bernie Ebbers public support of the financial statements. However, as Arthur Andersen – WorldCom’s auditor – collapsed in the face of the Enron scandal at the same time, WorldCom became collateral damage. The giant audit firm’s collapse and bankruptcy exposed WorldCom’s manipulation of expenses, and Ebbers would eventually be sentenced to 25 years in prison, and his CFO, Scott Sullivan, to five years. Though seemingly steep punishments, these prison sentences need to be weighed against the victims of the fraud: the thousands of employees who lost their jobs as WorldCom entered bankruptcy, despite the company eventually emerging as a going concern. In retrospect, this fraud could have been detected earlier if the WorldCom board of directors mandated – and empowered – an internal audit committee. “The primary purpose of a company’s audit committee is to provide oversight of the financial reporting process, the audit process, the company’s system of internal controls and compliance with laws and regulations” (CFA Institute, n.d.). Such an internal organization, though potentially ignored by the CEO, could have at least caught and publicized these fraudulent reporting practices prior to financial reports actually being published.