This paper seeks to investigate whether greed, corruption and fraud have grown or improved over the years in North America and to determine whether something can be done by knowing the possible reasons why people get involved in such acts or events. The analysis would involve looking into cases of fraud as experienced in the corporate world, the motivations of perpetrators, and failure of controls put in placed supposedly to control fraud or corruption. Possible solutions could be extracted based on knowing the reasons as way to helping decision makers to chart the destiny of the economic world.
1. 1 Definition of fraud: What fraud it is? Fraud is something that results from an intentional act committed to deprive another person of their right to property or by achieving gain or advantage over the victim. For the purpose of this paper in auditing course, this researcher focuses on accounting fraud or fraud involving securities, which may require the use of knowledge in accounting practices and principles as a way to achieve financial gain illegally against the rightful claimants or owners of resources and the related benefits of claims or ownership.
Accounting fraud is happens only if the people committing the same have at least some knowledge of accounting practices and principles normally the victims are investors of a company who have put their trust in the management of a business but only to find out their money will have lost their values. The cases of WorldCom and Enron will form part of firms to be analyzed on the nature of frauds committed and to apply the required concepts for the purpose of this paper. 1. 2 Origin of fraud: Structure of a company
It is believed that fraud committed in an organization has something to do with structure of a company in terms of how power and functions as well as limitations are organized. Where a company’s structure lack the application of checks and balances or the officers are given much powers without means of checking or imposing accountabilities for the decisions, there is greater chance that fraud would be committed compared to a company that applies the principles of good governance.
One of these principles is the requirement that not all of the directors of the board must be involved in the executive functions (Du Plessis, et. al 2005). 1. 3 Conflict of interest between owners and managers Under the agency theory, there is an inherent conflict between the interest of the owners and managers (Weetman, 2006). While owners would like to entrust the management of their properties to other people, managers may prioritize their self-interest over those of the owners or stockholders in the management of these properties entrusted to them.
1. 4 History of fraud: Securities Act of 1933 This history of fraud on securities can be seen in how the Securities Act of 1933 came into being. Before 1930, state regulators had put up an effort to control fraud by the adoption of the first Uniform Securities Act. However such attempt and effort reached an early death when it was repealed eventually in 1944. However, the great market crash in 1929 and the consequent depression generally provided the momentum for federal securities legislation.
Thus, Securities Act of 1933 was the first major federal act came out from the legislative mill in reaction to the stock market crash. The said Act was administered by newly created Securities & Exchange Commission (SEC), where companies need to register for the initial distribution of their securities. When the Act got further examined legislators, some wanted the said Act of to take form in providing merit tests while some wanted the application as that of the blue-sky laws of today (State of Wisconsin, Department of Financial Institutions, 2009).
As early as the original draft of the Act, there were provisions already on full disclosure of material facts under the principle of ‘sunlight theory of regulation. The theory assumed that providing investors all of the necessary information, the same investors would make wise investment decisions (State of Wisconsin, Department of Financial Institutions, 2009). The US Congress’ aim in passing the Securities Act as announced included informing investors of the facts concerning securities offered for sale for protecting them against fraud and misrepresentation.
Another aim was to protect honest enterprise from crooked competition. Many had hoped that the Act would restore investors’ confidence in the markets, by possibly freeing up capital for investment, which was believed to have been undergoing hoarding because of investor timidity. Provision of employment and restoration of buying and consuming power were hoped to follow (State of Wisconsin, Department of Financial Institutions, 2009). The strategy of the law then included a general anti-fraud provision and a registration provision.
The anti-fraud provision was intended to apply to the sale of all securities while the registration provision was made particularly to place the facts or information for the investing public in two ways. The first was to have adequate and accurate information as a matter of public record. The second was to have underwriters and dealers furnish prospective investors with a perspective based on the information in the registration statement with attached adequate and accurate information (State of Wisconsin, Department of Financial Institutions, 2009).
Fraud related to accounting or finances that necessitate the passage of the Securities Act of 1933 may be described to have started with the failure of some assumptions which are used to keep the entire accounting profession functioning well until a new accounting rule would have to be made to address new kind of fraud. These assumptions would include the required independence of external auditors and responsiveness of accounting rules to address accounting problems. It is indisputable though that the growing complexities of business could be causative as well.