7-1 Final Project Milestone Three: Hypothesis Development and Investigation Planning

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>ACC 646 Milestone Three Guidelines and Rubric

Overview

Forensic accounting has been identified as the fastest growing area of accounting. Fraud examiners must understand the legal aspects of fraud and what constitutes fraud. To be successful in this industry, they must be able to determine why people commit fraud and how to prevent it from happening. Through this analytical process, examiners may then provide organizations with recommendations for improving their internal controls, thus preventing further financial losses and additional harm to their reputations.

For Milestone Three, you will submit your hypothesis development and investigation plan for your company. Consider potential frauds and perpetrators in your company, how the fraud could be investigated, regulatory issues, and any other fraud risk inquiries required. Once you have developed your fraud hypothesis, propose an investigation plan. Describe the process of how you would investigate the potential fraud and all of the factors that must be considered for carrying out the investigation.

Prompt

Develop a fraud hypothesis for your case and a plan for investigating the fraud.

Specifically, the following critical elements must be addressed:

1. Hypothesis DevelopmentWhat frauds could occur in the environment you researched? How are these related to the specific company, the industry, and the economic conditions as a whole?Of all of the employees mentioned, who would have incentives or opportunities to commit fraud? Why?Which of the employees who had the incentive or opportunity to commit fraud is in a position to cause the financial anomalies found? Explain why.
2. Investigation PlanningDescribe the process of how could you investigate the potential fraud and the appropriate steps to complete the process.What documents might you need? Who might you need to speak with regarding the fraud? Support your responses.Illustrate how regulatory issues such as Sarbanes–Oxley or SAS No. 99 would impact the investigation.What other fraud risk inquiries are needed to investigate the suspected fraud? What steps would need to be taken to address these risk inquiries?

What to Submit

Your fraud hypothesis and investigation plan must be submitted as a 2–3 page Microsoft Word document with double spacing, 12- point Times New Roman font, one-inch margins, and at least three sources cited in APA format.

Milestone Three Rubric

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Hypothesis Development: Occur in the Environment

Hypothesis Development: Incentives or Opportunities

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Hypothesis Development: Which Employees

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Investigation Planning: Process

14

Investigation Planning: Documents

14

Investigation Planning: Regulatory Issues

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Investigation Planning: Fraud Risk Inquiries

14

Articulation of Response

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100%

Criteria	Proficient (	100%	Needs Improvement (75%)	Not Evident (0%)	Value
Explains what frauds could occur in the environment researched and how they are related to the specific company, the industry, and the economic conditions as a whole	Explains what frauds could occur in the environment researched but does not explain how they are related to the specific company, the industry, and the economic conditions as a whole or explanation is cursory or contains inaccuracies	Does not explain what frauds could occur in the environment researched							14
Determines which of the employees would have incentives or opportunities to commit the fraud and defends response	Determines which of the employees would have incentives or opportunities to commit the fraud but does not defend response	Does not determine which of the employees would have incentives or opportunities to commit the fraud
Determines which of the employees with the incentive or opportunity to commit fraud is in a position to cause the financial anomalies found and explains why	Determines which of the employees with the incentive or opportunity to commit fraud is in a position to cause the financial anomalies found but does not explain why	Does not determine which of the employees with the incentive or opportunity to commit fraud is in a position to cause the financial anomalies found
Describes the process of how the potential fraud could be investigated and the appropriate steps to complete the process	Describes the process of how the potential fraud could be investigated but description is cursory or lacks important steps	Does not describe the process of how the potential fraud could be investigated
Determines what documents might be needed and who might need to be spoken to regarding the fraud and supports responses	Determines what documents might be needed and who might need to be spoken to regarding the fraud but does not support responses	Does not determine what documents might be needed and who might need to be spoken to regarding the fraud
Illustrates how regulatory issues would impact the investigation	Illustrates how regulatory issues would impact the investigation but does not apply a variety of regulatory issues to the case study	Does not illustrate how regulatory issues would impact the investigation
Determines what other fraud risk inquiries are needed to investigate the suspected fraud and the steps to address these risk inquiries	Determines what other fraud risk inquiries are needed to investigate the suspected fraud but does not determine the steps to address these risk inquiries	Does not determine what other fraud risk inquiries are needed to investigate the suspected fraud and supports response
Submission has no major errors related to citations, grammar, spelling, syntax, or organization	Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas	Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas
Total:

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3-2 Final Project Milestone One: Introduction
Christine Sarkissian
Southern New Hampshire University
ACC-646: Introduction to Forensic Accounting/Fraud Examination
Professor Edward Cho
March 17, 2024
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3-2 Final Project Milestone One: Introduction
Elements of Fraud
In 2001, it was discovered that Enron was involved in an infamous corporate fraud due to
its massive accounting irregularities and fraudulent activities (Jones & Stanton, 2021). The Enron
case was considered a fraud because it encompassed the three characteristic elements namely:
intent, concealment, and materiality. Whereas the first element requires the perpetrator to make
deliberate action to deceive or manipulate another in order to achieve personal gain or cause harm,
the second element requires the perpetrator to conceal the action to avoid detection. The third
element, on the other hand, requires the consequence of the perpetrator’s action to be significant
to the financial statements or operations of the affected entity. The Enron case qualified because
all the three elements were involved. The primary significance of studying fraud lies in enabling
accountants detect fraud and thus, prevent it by employing effective mitigation strategies.
Secondly, the knowledge about fraud enables organizations and stakeholders to protect their assets
by implementing proactive measures and thus, preserving their reputation and maintaining trust.
Thirdly, the knowledge about fraud enables organizations to comply with the relevant laws and
avoid lawsuits from stakeholders and regulatory bodies, thus avoiding fines and other liabilities.
Beyond the field of accounting, the knowledge of fraud benefits the management, employees in
other departments, and regulatory bodies. Whereas the management utilize insights gained from
the knowledge to implement effective corporate governance policies within their organizations,
employees from other departments become aware as they recognize fraudulent activities within
their day-to-day activities, thus avoiding them and reporting them promptly. Regulatory bodies
use this knowledge to identify fraudulent activities within business operations.
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Theories of Crime Causation
The rational choice theory, social learning theory, and strain theory are some of the most
prevalent theories of crime causation (Opp, 2020). After identifying the cause of fraud,
contemporary investigators are in a position to understanding the perpetrator’s impetuses and
techniques. Therefore, their identification enables clear assessment of the crime’s scope and more
informed decision-making. In Enron, for instance, investigators could identify that the company’s
executives made “rational choices” to pursue financial gains. As perpetrators, the executives’
behavior led to fraudulent accounting criminal practices.
Red Flags of Evidence
According to Cressey’s fraud triangle, the three red flags of evidence in fraud include:
incentives such as personal debt or lifestyle pressures; opportunities such as lack of oversight,
availability of sensitive information, and frail internal controls; and rationalizations such as
justifications for inappropriate behavior (Al Sharif et al., 2023). According to the authors, the three
red flags converge to precipitate fraudulent actions in profit and not-for profit organizations.
Regulatory and Legal Factors
The Sarbanes-Oxley Act is one of the major laws that impose stringent accounting and
auditing requirements for organizations with the aim of enhancing transparency and accountability
(Meyer, 2020). The authors add that the Securities Exchange Commission (SEC) is a regulatory
body that is obligated to monitor the compliance of these firms. SEC is an enforcement body that
also investigates any wary operations in organizations to dissuade companies from committing
fraud (Lund & Sarin, 2021). The legal frameworks impose interventions for fraudulent behavior
to deter organizations from committing crime and provide recourse for victims.
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Developments in the Accounting Industry
High profile accounting fraud cases such as that of Enron’s have spurred recent
developments in the industry to improve transparency and accountability. For instance, there have
been reforms in the Sarbanes-Oxley Act to ascertain heightened regulatory scrutiny and guide
stricter reporting standards and controls in contemporary organizations (James, 2023).
Furthermore, there have been notable technological advancements in the areas of data analytics
and forensic software to enhance fraud detection capabilities. These developments seek to stress
on the need to combat financial misconduct through proactive measures and leveraging on
technology.
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References
Al-Sharif, N., Plastiras, A., & Menexiadis, M. (2023). Fraud triangle red flags as a methodology:
Lessons from the greek case. Vie & Sciences de l’entreprise, (6), 324-345.
James, J. (2023). The Need for Sarbanes-Oxley. The Business Lawyer, 78.
Jones, M., & Stanton, P. (2021). Negative accounting stereotype: Enron cartoons. Accounting
History, 26(1), 35-60.
Lund, D. S., & Sarin, N. (2021). Corporate crime and punishment: an empirical study. Tex. L.
Rev., 100, 285.
Meyer, S. (2020). Mother Nature Needs Her SOX: Reviewing the Impetus and Goals of the
Increased Financial Regulations of the Sarbanes-Oxley Act and How They Parallel the
Needs of Today’s Environmental Protection Agency. Wm. & Mary Env’t L. & Pol’y
Rev., 45, 601.
Opp, K. D. (2020). Analytical criminology: Integrating explanations of crime and deviant
behavior. Routledge.
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5-1 Final Project Milestone Two: Business Environment and the Industry
Christine Sarkissian
Southern New Hampshire University
Acc-646: Introduction to Forensic Accounting/Fraud Investigation
Professor Edward Cho
March 31, 2024
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5-1 Final Project Milestone Two: Business Environment and the Industry
Industry-Specific Challenges
Prior to its demise, Enron faced industry-specific challenges. Considering that Enron was
among the leading companies in the rapidly evolving energy and telecommunications industries,
it was subjected to the sophisticated financial instruments and volatile markets during the start of
the twenty-first century. For instance, Enron sought to expand into the new emerging
telecommunications sector, exposing it to increased risk in the new markets (Weiss &
Murtazashvili, 2023). Secondly, the company faced unique challenges in its pursuit to specialize
in energy trading and innovative financial products. Although Enron was the pioneer in providing
energy derivatives and structured finance, it over-depended on mark-to-market accounting
practices and off-balance-sheet entities. The over-reliance on these entities functioned to conceal
the company’s true financial status. The organization’s suffered from the opaque financial
disclosures because investors and regulators in the industry would not effectively assess their risks
accurately.
Employees’ Behaviors
Enron proposed an ambitious growth trajectory in the industry, forcing its executives and
managers to formulate aggressive and short-term financial objectives and targets. The executives
were incentivized to promote unethical and fraudulent practices in order to achieve the short-term
and aggressive financial targets. The organization’s ambitions functioned to create pressure on
employees because they were needed to deliver consistent earnings. Many employees in the Enron
were overwhelmed by the pressure, compelling them to engage in fraudulent activities in order to
avoid repercussions such as job loss (Hannah et al., 2022). To meet Enron’s ambitious financial
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targets, many employees applied their technical capabilities to propel fraudulent schemes such as
inflating revenues and concealing losses. Furthermore, Enron used performance-based incentives,
exacerbating the pressure on employees. Considering that the company prioritized meeting
financial targets over business ethics, employees’ fraudulent behaviors were not only tolerated but
also encouraged.
Contemporary organizations should prioritize business accounting ethics and integrity over
profits to avoid suffering the repercussions faced by Enron. The organizations should encourage
open communication channels between the management and human resources, enabling
employees to raise their concerns without pressure, fear, and intimidation. Therefore, companies
should initiate training programs that center on cultivating the ethics on employees and managers
at all levels of their respective organizations.
Assessing Internal Controls
On the surface, Enron’s internal controls seemed robust and its sophisticated procedures to
oversee financial operations appeared to be in place. However, it later transpired in 2001 that the
organization’s internal controls suffered from substantial weaknesses. First, Enron’s internal
controls lacked effective oversight and accountability (Lartey et al., 2023). Considering that Enron
has a complex corporate structure, it was difficult to apply its decentralized decision-making
processes in maintaining control and oversight over financial activities. Due to the underlying lack
of centralized oversight, Enron’s executives and managers were in a position to exploit existing
loopholes and manipulate financial transactions. Secondly, Enron had weak internal audit
functions, leading to its failure to detect and address the prevalent symptoms of fraudulent
activities and irregularities. Courtesy of these weak internal controls, Enron’s executives and
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managers were in a position to commit fraudulent activities. In essence, the weaknesses in
oversight and internal audit functions created room for the executives to manipulate financial
statements by inflating revenues and concealing losses.
Addressing the Weaknesses
Contemporary executives and managers should enhance oversight and accountability in
their organizations by establishing clear lines of authority, implementing regular monitoring
procedures, and conducting independent audits to detect and dissuade fraudulent activities
(Mahony, 2022). The authors encourage the executives and managers to implement robust risk
management strategies that start by identifying potential risks, assessing mitigation strategies, and
monitoring the risk management processes. Furthermore, organizations should prioritize on
transparency and disclosure practices through clear and accurate financial reporting. Organizations
should also cultivate the culture of ethics among their workforces by facilitating ethics training
and whistleblower protection programs. These measures would enable organizations to improve
their internal controls, mitigate fraud risks, and safeguard their financial integrity.
Anomalies
There were numerous anomalies in Enron’s financial statements that were indicative of
organization’s fraudulent activities. For instance, a thorough analysis of its financial statements
reveals consistent reporting of inflated revenues. These reports raised suspicions of accounting
fraud because there were stagnant business operations at Enron. Another anomaly in Enron relates
to insider trading activities by top executives. High-ranking executives at Enron were found to
have sold off their shares before the company’s financial fraudulent issues were revealed to the
public (Gottschalk & Benson, 2020). Therefore, the executives knew of the impending collapse
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before it occurred. Therefore, the executives aimed at deceiving investors and stakeholders about
the company’s financial performance.
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References
Gottschalk, P., & Benson, M. L. (2020). The evolution of corporate accounts of scandals from
exposure to investigation. The British journal of criminology, 60(4), 949-969.
Hannah, D. R., Fu, F. Y., & Parent, M. (2022). CARD tricks: Understanding magical processes
in organizations. Business Horizons, 65(6), 751-763.
Lartey, P. Y., Akolgo, I. G., Jaladi, S. R., Ayeduvor, S., & Afriyie, S. O. (2023). Recent
advances in internal control: Soft control overcoming the limits of hard control. Frontiers
in Management and Business, 4(1), 289-302.
Mahony, J. (2022). Best practices in combating fraud in financial institutions. Journal of Risk
Management in Financial Institutions, 15(3), 270-277.
Weiss, M. B., & Murtazashvili, I. (2023). Risk Management and Historical Bandwidth Markets
in US Telecommunications. IEEE Communications Magazine.