The Causes of Accounting Fraud - Essay Example

The causes of accounting fraud and how it affects the personal and international security Student Name: Institution: Date: Introduction Security has become a fundamental issue in today’s banking industry. Over the years, different fraudulent transactions committed by third parties have occurred tremendously. As a result, fraud prevention is increasingly becoming a major concern for customers, banks and individuals involved in public policy-making. Fraud is defined as the mechanism by which the fraudsters gain an unlawful financial advantage or cause unlawful loss through implicit or explicit deception. Since banking fraud can ultimately affect the quality of customer relationship as well as customer loyalty, effective communication of the importance of fraud prevention has become a central subject for academic research (Hoffmann & Birnbrich, 2012, p.390). Corruption is considered a widespread phenomenon which affects all societies to varying degrees and at different times. Due to their shared system of democracies, dictatorship and increased corruption scandals, bribes have become so rampant in all countries despite their differences in income levels as well as law systems. However, recent scandals related to corruption have revealed that societies allegedly considered to be free-from-corruption are also affected fraudulent activities. It is notable that different countries are faced by large differences in regard to the level of corruption. Research shows that in some societies, there is no transaction completed without being affected by corruption and yet in other countries, corruption is exceptional and rarely tolerated (Pellegrini & Gerlagh, 2007). Definition of terms related to accounting Creative Accounting is the use of flexibility in accounting to effectively manage the measurement and presentation of accounts information to meet the needs or interests of prepares. Although creative accounting seems to be a common technique, it can be a costly approach to financial management. Generally, businesses are under pressure to be seen profitable so as to attract more investors and resources. However, fraudulent accounting practices cause drastic consequences. Therefore, creative accounting increases income because it helps to recognize premature sales, while minimizes expenses by providing accounting capitalization of interests. Fraud involves going outside the regulatory framework with the intention of giving false information of the accounts. For example, the main methods used in fraudulent activities include fictitious transactions or misappropriation of assets by stealing cash and inventory. However, it is important to note that creative accounting and fraud are related activities. Fair Presentation is applying flexibility in accounting to give accurate and fair picture of the accounts information to meet the needs or interests of users. Impression Management is applying flexibility in the accounts particularly use of narrative and graphs to provide a more favourable perception than it is justified of a company’s results that serve the interests of preparers (Jones, 2011.p.5-8). The causes of accounting fraud Taking into consideration the nature of and trends in today’s retail banking fraud, it has been observed that customers depend more on the web for their various banking business. While this has increased the number of people involved in online transactions, fraudsters are widely reacting to these changes based on how the Internet supports them to attack customers. Generally, the Internet enables the individuals involved in cybercrime to organize themselves as a network whereby they encourage one another in their fraudulent attack. Therefore, it is notable that fraudsters are more interested in an unauthorized access of customer’s online bank accounts. It has become a common practice among fraudsters to steal access data through “phishing.” This is an approach where an email is sent from an allegedly authorized source to customers of a certain bank requesting his or her confidential information. Recently, phishing has become a major threat to the online security because credit cards are the main payment instrument used for the web-based transactions that have attracted the attention of different fraudsters (Hoffmann & Birnbrich, 2012, p.392). In a case study to investigate payment card fraud, it has been discovered that criminal revenue caused by card fraud is hard to estimate. However, the UK banking sector often publishes direct losses due to online and offline payment card frauds as those losses discovered by the banks only. Additionally, it has been observed that online fraud covers a large fraction but does not constitute majority of the direct losses. Although indirect losses prevail over direct losses, they can be hard to measure. Loss of confidence among consumers has been cited as an example of indirect losses where merchants lose confidence by rejecting legitimate transactions. An industry research of merchants refuse 4.3% of the transactions avoided to be fraudulent. Furthermore, survey finds direct losses to be twice more as other sources. A number of cybercriminal infrastructures are also used in many fraudulent scams such as botnets and spam. Loss of trust and antivirus software has been considered as common scams that affect indirect losses as well as defense costs. Therefore, unreasonably large cybercrime cost-estimates are a major cause of accounting fraud (Ross eta.al, 2012). The effects of accounting fraud on personal security Security is a fundamental issue in contemporary banking industry. Over the past few years, the various fraudulent transactions that have been committed by third parties have increased tremendously. As a result, fraud prevention has become a major concern for customers, banks and individuals involved in public policy-making. Since banking fraud can ultimately affect the quality of customer relationship as well as customer loyalty, effective communication of the importance of fraud prevention has become a central subject for academic research (Hoffmann & Birnbrich, 2012, p.390). It is important to note that banking fraud greatly hurts banks and their customers. On the one hand, banks incur huge operating costs in refunding their customers’ monetary losses and on the other hand, bank customers undergo considerable time and emotional losses. To ensure personal security, customers are required to detect any fraudulent transaction, and subsequently communicate such activities to their banks. This involves initiating the blocking and re-opening of both a card and account so as to dispute all the re-imbursement associated with their monetary losses. As a fraud victim, the person may cause a great impact on customer’s perception on being secure and protected at his or her bank. Due to lack of trust and confidence as well as increased dissatisfaction resulting from service failure, fraud can damage the bank-customer relationship. As a result, customer loyalty is negatively affected which in turn cause them to switch their behaviours, and thus spoiling the bank’s reputation (p.391). The effects of accounting fraud on international security The effects of accounting fraud on international security or significance of corruption for welfare levels requires a clear view of the sources of corruption, differences in various countries and how to develop relevant policies to address the issue of corruption. This is because corrupted or fraudulent practices have pernicious effects on the economic growth and investment, human development as well as environmental policies of countries. Although it is intrinsically difficult to obtain evidences of corruption due to increased secrecy surrounding the illegal deals, several measures have been put in place to detect proxies of the level of corruption (Pellegrini & Gerlagh, 2007). Based on the Transparency International (2004) research findings obtained from various international interviews that were conducted for the Global Corruption Perception Barometer, it can be noted that about 90% of Brazilians consider petty and grand corruption as big problems, 50% of Finnish interviewees see petty corruption as no problem at all, while 35% perceive grand corruption as no problem. Considering the negative effects of corruption or fraudulent activities on welfare, it has become an obvious research question to determine: why is corruption a common issue in some countries while in others corruption has been successfully controlled or prevented from hampering their welfare? Treisman (2000) is considered the most inclusive and widely cited cross-sectional study for economic analysis of the causes of corruption or fraudulent activities. This is because the study tests empirically the different theoretical explanations regarding corruption and discusses the mostly fixed factors that drive corruption. The study shows significant explanatory variables of corruption are persistent over time and impossible to change whether in a short or medium run. Since the sources of corruption are considered persistent, it means that corruption itself will maintain its stability over time. It is also apparent that corruption or fraudulent activities can hardly be affected by mere policies. This implies that corrupted countries are rather forced to live with fraudulent activities. Conclusion It can be noted that a number of victims face direct losses due to accounting fraud yet such losses or transfer costs are typically excluded when analyzing the costs of crime. The existing literature on fraud has mainly cantered on cost issues, and thus little attention has been given to the behaviours of offenders or how ready the public at large is to engage in the fraudulent activities. Banking fraud affects the quality of customer relationship as well as customer loyalty. It is apparent that lack of trust and confidence or increased dissatisfaction resulting from service failure is caused by fraudulent activities, which in turn damage the bank-customer relationship. Taking into account the negative effects of corruption or fraudulent activities on welfare, it has become a fundamental research question to determine why corruption is still a major issue in some countries while in others it has been successfully controlled or prevented from hampering the their welfare. Corrupted or fraudulent accounting practices have pernicious effects on the economic growth and investment, human development as well as environmental policies of countries. Due to increased secrecy surrounding the illegal deals, it is intrinsically difficult to obtain evidences of accounting frauds. However, fraud prevention has become a major concern for customers, banks and individuals involved in public policy-making. Reference List Hoffmann, O.A & Birnbrich, C. (2012). The impact of fraud prevention on bank-customer relationships: Research conducted in retail banking. International Journal of Bank Marketing. 30(5), 390-407. Emerald Group Publishing Limited. Jones, M. (2011). Creative Accounting, Fraud and International Accounting Standards. University of Bristol. Pellegrini, L & Gerlagh, R. (2007). Causes of corruption: The survey of cross-country analyses and extended results. Springer-Verlag. Ross, A, Barton, C, Böhme, R, Clayton, R, van Eeten, G.J.M, Levi, M & Tyler, M. (2012). Measuring the Cost of Cybercrime. Retrieved January 28, 2014 from, Transparency International (2004). Global corruption barometer. The Transparency International. Berlin. Treisman, D. (2000). Causes of corruption: A cross-national study. Journal of Public Economics. 76(3), 399–457. Read More