Impacts of Financial Fraud in Society and Need for Mandatory Audit

Fraud is a practice that affects many businesses and has led to their closure. Affected companies also had to seek outside help to finance their operations in the market. The paper explores the social impact of financial fraud, financial statements, and the need for mandatory audits. This paper will focus on Mexico as the country of interest due to its record of fraudulent activity. Mexico has the highest rate of fraud with her 44%, and the US is her second with 42%. The majority of fraudulent activity in this country is related to email and card transactions made by residents.

In addition, various interpretations are offered. There are those who argue that it is legal as long as individuals are properly accountable.

Furthermore, an interpretation is offered on the different cases and percentage of nations affected by fraud. The paper also discusses what impact can the fraud examiners have in supporting the IFP? Why is the department important to a fraud superintendent who operates not in college circles, but in the channels? The primary goal is to have the agency realize its strength in reducing fraud practices in the country {Mexico}. The IFP has resorted to the implementation of a single-factor authentication and multi-factor authentication to reduce the acts of fraud. It is also witnessed with the acts of the majority of the institutions in Mexico are demanding for high authentication solutions with an aim of safeguarding their businesses.

Despite the growing rate of fraud activities and practices in the world, Mexico and the United States are the leading nations affected by this vice. It is also discovered that the majority of companies involved in fraud activities have gone bankrupt with the senior officials currently serving a jail term. Some methods like Clark study by Hollinger, Fraud Scale by Albrecht, White Collar Crime by Sutherland, and Fraud Triangle by Cressy are being applied with the aims of sensitising the public about these illegalities in business.

To the future employers, the research helps provide information on the approach that should be used in fighting fraud. An individual will also have an idea of the consequences of fraud once found guilty of the act. Similarly, there is a need to have full access to the audit and financial activities that are being executed in the firm. An employer needs to create a favourable working environment for the workers, minimising chances of fraud activities in the company.

Impacts of Financial Fraud in Society, financial statements, and the need for mandatory audit

INTRODUCTION AND RATIONALE

Financial fraud is a premeditated act of deception with a purpose of personal benefits. For example, an act of selling a particular concept that does not exist with the intentions of self-gains. Similarly, many countries consider this practice as a crime and a civil law violation and the person is always subjected to the courts for charges. The methods of financial fraud in society include the acts of embezzlement, internal theft, kickbacks, and skimming affecting the result of a particular project (Turner, 2011). The implementation of a forensic audit in any firm will help identify the credibility of any project, reducing the levels of fraud in an institution. The attainment of such results can be received from the institution’s financial statements. According to Rezaee & Riley (2011), issues of efficiency, safety, and robustness of a commercial market is critical to a region’s economic prosperity as relatively large numbers of people in society invested in capital markets. In some instances, cases of financial fraud are geared by the aspects of poor working conditions. They will seek mediums of raising money to support their way of living. Nevertheless, individual rather that organisations are left with a task of making financial decisions in this dynamic environment.

Discussion of the topic helps identify the factors that lead to acts of fraud in society. Discussing the concepts of financial fraud helps the public understand the amount of money that the economy loses to illegal activities. Similarly, the paper will also indicate who the fraud targets are the impact of carrying out surveys on the financial fraud practices. The primary goal of the activity is to estimate the correct scale and cost of fraud to the society and business. Nevertheless, findings to the practice often vary creating a difficulty in obtaining a complete picture of the issue. However, the studies indicate that the activity is common among organisations and a costly problem in the management of these institutions. The factor of advancement in technology has led to an increase in fraud activities in the current era with companies seeking external support to improve the situation. Socially, the inclusion of credit cards in the capital markets has helped gear the practices of fraud in society. Compared to the previous years, fraudsters are currently refining their methods of operation with the aim of reducing traces from the law enforcement agencies and accounting departments of the organisation.

Research Objectives

The concept of reducing financial fraud in Mexico will help improve the work environment in the country. In the long run, the mercantile in society will record a limited number of losses in a particular trade year. These profits can then be introduced in various activities that will create a larger market share for the country compared to the nations that are regularly affected by fraudsters. However, Mexico is the country discussed in the report as it is faced with a high level of fraud activities. It has the highest percentage of fraud activities in the world as the United States comes second. The objectives of this paper include;

To examine whether the practice of fraud has been reduced in Mexico. It will further investigate the practice as it exists in the different areas of the economy

To examine the factors why people commit fraud

To explore the causes of financial fraud and consequences to the economy and the fraudsters.

The execution of the research process is to understand the in-depth duties that have been played by various bodies to fight fraud. There is a need to sensitise the community (people in Mexico) about the consequences of fraud and the type of work environment that they will enjoy with limited instances of the activity. The cases of under research from various parties leave the public with limited information on how to fight the practice.

Research Problem

The chapter discusses the evil that has been brought by execution of fraud activities in Mexico. Nevertheless, various big-name frauds have led to lawsuits as auditors of particular firms have not detected instances of fraud in the financial statements. Similarly, auditors have risked losing money and their reputation. In the long run, the aspect has led to the push for organisations and auditors to improve their audit processes with the intentions of identifying risks and having accurate business records. According to Young (2014), the account receivables in a firm are fraud targets as they often viewed by the lenders. It is due to the factor that account receivables are the next thing to cash in the income statements.

The paper will help readers understand the various reasons why auditors hardly detect financial statement frauds and if identified, what improvements are being made in the audit process. Furthermore, the attainment of this target will involve the aspect of analysing cases of duplicitous financial statements of revenue acknowledgment in an institution. The chosen example is “ERON” which is a company that ran bankrupt in the year 2001 after allegations of massive accounting fraud. According to Forbes, the incident wiped out an estimated $ 78 billion in the stock market value leading to collapse of Arthur Andersen and the passage of the Sarbanes-Oxley Act of the year 2002. Additionally, the class action settlement if 7 billion was the largest in the country with the former president is currently serving a 24-year jail term that is to elapse in the year 2026.

Research Questions

Why is it important to have an Institute of Fraud Prevention?

A fraud free environment will help boost the economy. Is it a costly process for the Mexican government to implement an effective fraud policy?

There is a need for more research to be carried out regarding fraud activities, what factors led to the attainment of little information about fraud practices in the past?

Despite the fact that there are many fraud activities executed in the society, what are the consequences of these practices, and which sensitization programs can be applied to improve the environment?

Table

The concept of fraud is the main topic in the research. Question two make an inquiry on question one. Question three links to question four. Lastly, question four relates to question one

Question three relates to question 1, question two linked to question four, and question one demonstrating the aspect of question 4

Question four and three demonstrate information in question one as question one relates to question two

Sample Illustration

2 » 1 » 3 » 4 » 1

3 » 1 » 4 » 2 » 1

4&3 » 1 »2

LITERATURE REVIEW

Descriptions

The concept of fraud offers many meanings based on an individual’s location. Statement on Auditing Standards (SAS) defines fraud as inappropriate behaviour by employees or management teams with an aim to attain self-benefits. Over the past three and a half decades, the financial industry in Mexico has been affected by the consecutive number of financial crimes. Additionally, some of the institutions have been closed, and a number of the leader along with the interested parties have fallen victim to the audit practices. The looting thrifts in the 1980’s, boiler room practices of the 1990’s, and the Enron incident best elaborate the trend of financial fraud in the past decades. Despite the number of policies being drafted by institutions, the number of commercial crimes in the market has risen in the past decades.

Impact to the Mexican economy

According to Martin (2017), illegal conducts are more endemic in the financial area compared to other sectors of the economy. The author further indicates that it is time for the global aid community to provide accurate details concerning the challenges they are facing with the need to increase transparency of their global aid systems. Nevertheless, the growing crime problem of card payments compromises and fraud continues to pose a series of challenges in the payment processing industry (Hay & Webster, 2014). Endemic conflicts in Mexico will often work with a subtler and ultimately have a more corrupting influence on the independence of any activity. However, other responses may be considered responsible for internal discussions may produce benefits quite different from those in the public domain (Meyers, 2010).

Trend of Financial Fraud

According to the report from the Financial Crime Survey 2016, compliance and online fraud top the financial crime investment chart. Similarly, the primary indicator of the overall stability of the market is the aspect of variation in investments. It often happens in compliance and counter fraud. Email and wire fraud scams are rising in the Mexican territories as the fraudsters are getting more creative. The public is getting more scared with the acts of online shopping, as the majority of their personal details can be attained through online platforms. In the current situation, at least 17% of the people in the country claim to have communicated with someone through email who has misinterpreted their true identity and an estimated 14% report that someone gained access to their email accounts.

Recent Survey

One recent survey conducted by Forbes finds that an estimated 27% of debit, credit and prepaid card owners around the world have experienced a swindle in the past five years. The rates of fraud in Mexico and the United States are very high with an estimated 44% and 42% respectively.

Figure 1

Factors that Ignite Fraud in Society

According to the publication by Frost (2012), financial fraud in many firms is ignited by the aspects of greed, poor management, non-independent internal audit departments, complacency, and inadequate accounting controls in a corporation. Instances of no alterations to such actions in financial institutions will lead to the attainment of losses in every fiscal year. In the long run, the firm is likely to lose its workers to the competing companies that demonstrate best operational capacities in the industry. The odds to productions in the future markets have also had a direct impact on the applications of financial deception. The management teams of some firms will seek alternative mechanisms that will help them attain financial strength in the market (Louis & Francois, 2014). In the long run, they are forced to apply illegal means in achieving their operational goals.

Similarly, the majority of companies in Mexico does not have good information systems in their operations, creating instances of erroneous and insufficient results to use in any assessment program. The majority of firms that use inaccurate information or hardly receive results promptly are always affected by bankruptcy (McLean, 2013). The management will have no valid details that can be applied in the execution of specific activities in the form. It will then force the initiation of illegal practices to attain control over certain actions within the market.

ANALYSIS

Theories Related to the Acts of Fraud

A series of theories are being applied in organisations to control the vice of financial fraud within its operations. Some of the methods include Clark study by Hollinger, Fraud Scale by Albrecht, White Collar Crime by Sutherland, and Fraud Triangle by Cressy with the aims of sensitising the public about these illegalities in business. An individual can further raise questions regarding the significance of these actions to the organisation. For example, from small internet banking to credit cards and internal frauds to hacking, the public is currently being defrauded in multiple ways leading to the aspects of attaining better responses to the concept. According to Gottschalk (2010), the implementation of the substantial technical base will help in the practices of handling fraud in the society. The white collar crime is considered as the theory of differential association as it highly involved individuals in the corporate capacity. According to the descriptions by Akers & Jensen (2011), the impact of constant interaction with people, they can learn various values, techniques, attitudes, and motives for criminal behaviour. The involvement of unity under similar ideologies will lead to the attainment of better results in any activity. The corporate often created mergers that would help in the process of attaining their goals in business. They were considered to be the initiators of fraud in industry to safeguard their interests.

Fraud Triangle Theory

According to the author, these activities are executed based on the aspect of pressure, opportunity, and rationalisation. The implementation of fraud in society is more costly than what people may realise. The development of the theory by Cressey was to demonstrate the factors that lead to unethical behaviour among people, furthermore, when businesses and organisations interpret the triangle argument, they can execute criminal behaviour that deleteriously affects their business (Turvey, 2012). The three elements of the theory need to be present making a joint effort to lead to the success of the planned activity. For example, the factor of pressure will lead an individual to commit a crime as they will have the urge to execute the act and attain the level of comfort. For instance, a worker will be forced to carry out an illegal act in the firm if he is not paid based on what he is worth. Similarly, the factor of opportunity creates the chance for an individual to proceed with the act. According to Goldmann (2013), firms that hardly fight to control fraud offer multiple occasions to the workers to continually carry on with the activity. The context of rationalisation is based on the mind-set of the individual willing to commit a crime. However, the implementation of the theory will help in the aspect of analysing the chances of the firm getting involved in fraud. The management is left with the opportunity of relieving pressure, minimising prospects, and target the rationalised employees in the company (Abdullah et al., 2016).

Drive Theory

Hollinger formed the theory in the year 1983. It further demonstrates the concepts of theft being initiated by the issues of job dissatisfaction and that the true cost of vastly understated. The theory has a direct influence with the financial situations of a particular business. Poor monitoring skills applied in the firm will call for fraud activities to be initiated by the employees. Additionally, there is a direct correlation with the issue of an individual’s age. It is also believed that the younger workers have limited commitment to the acts of fraud in the firm. Nevertheless, people in higher positions in office make more significant thefts as they have access to the majority of facilities compared to the subordinates in the company. However, Kranacher, Riley, & Wells (2011) states that opportunity is a secondary factor in the execution of the fraud as demonstrated in theory.

Fraud Detection Practices in a Firm

The concept of financial fraud has a far-reaching significance in the government, finance industry, and customers. However, the issues of increasing dependence on technology have led to the aspect of fraud in business. The traditional method like auditing hardly provides an accurate situation of fraudulent activities since technology has the capability to cover-up these actions. Additionally, the use of the traditional method will offer inaccuracy to the results and are also time-consuming (Jarrod West, 2015). The age of big data will call for the application of technology to identify the irregularities present in the system. Nevertheless, the IFP is often used to reduce the practices of fraud in a country.

DISCUSSION

Functions of the IFP

The organization has the mandate to identify fraud activities in the economy and provide estimations of fraud costs to an organization. It is also stated that the cost of fraud to any business entity is hard to estimate as all fraud activities are hardly observed. Similarly, not all fraud activities are reported creating hardship in identifying the ideal cost of the activity. The majority of the companies will have to make an estimation on the figure and draft solutions to curb the problem. Nevertheless, it is stated that the overall cost of fraud in any firm is double the missing money or assets. Therefore, companies always draft solution that can solve the entire problem, hence generation of losses in the business. A prolonged problem may also lead to bankruptcy or closure of the business. The IFP then initiates a platform that auditors use in identification and measuring of the fraud costs. The management of these firms, then uses the figures to evaluate the damage that has been caused by these activities to the company.

Required changes to Affected Organisations

Organisations need to have an ideal process to monitor the programs that are being carried out within the facility. The classification of the best fraud type will identify the problem affecting operations in the company. Similarly, we can then infer the variabilities that are considered more important for the investigation process about the impact it has on the business. The program performance techniques in the firm help in the process of attaining valid information regarding the activities of the organisation. It is a simple model of detecting the initiators of fraud activities in the firm. Nevertheless, these accounts generated from the operations offer detailed information how the task forces organise and control the investigation, trepidation, and hearing of the financial fraud act. Additionally, it will assist in the act of identifying the various theft crimes committed by the company, and provide opportunities for the discussion of innovative and best strategies that will be implemented in the firm. Sophisticated accounting systems should be minimised in business operations, giving an opportunity to the workers to have an understanding of the activities that are being carried out by the firm. A minimal number of people knowing the operations of these systems will initiate the aspects if fraud activities in the firm. According to a publication by Fraser & Ormiston (2016), people are facing financial challenges like stagnant incomes, fluctuated costs of services, and mortgage creating the urge to seek aid. It will then lead to the concept of finding riches through the various get-quick-rich schemes in the community.

Importance of Institute of Fraud Prevention

Mexico is affected by the acts of fraud with the public registering many complaints of personal documents and money attaining a mysterious disappearance. Mexico has also created hotlines that will help in tracking fraud incidents and also making the public have trust in the IFP’s programs. However, the application of fraud alerts by the prevention body is less drastic, but potentially effective and protective measure. It will help in the acts of flagging credit reports and alerting a potential lender to verify the identity of the person receiving the information or documents. These practices are free and do not interfere with the aspect of receiving instant credit.

According to a publication by Cision Newswire, it is predicted that the fraud detection and prevention market may sum up to 41.6 billion USD by the year 2022. The growth will rise from 16.6 billion in the year 2017 at a compound rate of 20.1%, creating a significant impact on the global economy and business activities. However, the implementation of fraud alerts by the IFP is considered as a suitable approach despite the fact that it’s less drastic. A fraud alert is a potentially less effective protective measure used in reducing the execution of fraud. The application of a single-factor authentication and multi-factor authentication is referred to as an ideal solution to the problem. It will also assist in the acts of maintaining the authenticity of any transaction trough initiating the practices of blocking unauthorised access or personnel. The majority of the institutions in Mexico are demanding for high authentication solutions with an aim of safeguarding their businesses. The increasing rate of fraud activities in Mexico’s economy is affecting the various business partners that want to invest in the country.

Research Methodology

Attainment of this data will be based on practices of sampling. Financial record from firms in every location will be used to identify the financial challenges that have affected them during the fiscal year. Furthermore, it will help in the process of clustering the type of economic fraud activities that are executed in a particular region (Hyman, 2014). Similarly, time of the will also be covered in the cluster identifying the ratio of the crimes concerning the affected industry. Additionally, the strategy will offer guidance on the identification of a solution that will help in the reduction of the practice. Constant execution of fraud in business will affect the prices of commodities that are being produced by the firm (Balakrishnan, 2010). An instance of loss in any business transaction will lead to the aspects of rising prices to meet the production costs.

Research Design

According to Maxwell (2012), the type of design applied in searching for information defines the study type being carried out. Similarly, an interactive approach will be used in the collection of data, thus creating an ease in the evaluation process. Similarly, Creswell (2014) states that the type of research questions involved in the project will have a direct influence on the results that you are likely to receive. However, with the use of systematic sampling in a research process, the collected data will even be distributed making it easy for the researcher to implement the selected research design.

RECOMMENDATIONS

An existence of a financial fraud in an organisation is considered as the worst nightmare for any business owner. Complaints about scams in society and business communities are heavily linked to the use of internet in various business transactions (Dayen, 2016). There is a need for the senior management (Executive) of the firm to educate the administration on the three indicators of fraud. It will further involve the aspect of implementing internal controls and know the various situations that they have to look at during business operations (Ahmad, Hanif, & Muttlak, 2010). Secondly, there is a need for the company to segregate accounting functions within its departments. Segregation of duties helps monitor the progress of any activity in the firm and also have the ability to detect any different acts that may be executed by the company. The company should also monitor the vacation balances in the book of accounts. The manager will get surprised that some employees that have never missed a day of work in years. Therefore, they will have the ability to know the level of loyalty that a worker has to the organisation.

Outsourcing is also considered as an ideal procedure for evaluation of financial statements in the company. According to W. Steve Albrecht (2015), the management of the company has been always responsible for the aspect of committing fraud. Therefore, the team will have the urge to meet the company’s financial goals so as they can have the ability to receive incentives. On the other hand, the management of the company should know the type of employees that they have employed in the firm. The worker that has no capability of executing their mandate will be a laid-off paving the way for fresh competitors. Nevertheless, there is a need for the management to implement internal controls in the firm. In addition to the prevention measures applied in the business, the corporation should also have detection methods initiated by the company. Publication by Shanna R. Van Slyke (2016) further states that the detection methods applied in the company will keep the employees alert about any illegal acts that they map a plan to execute. It is also advisable to keep the employees aware of the fraud detection techniques and alter the executive in case of any illegal practice that may be planned from an external source.

CONCLUSION

In conclusion, financial fraud in any company or country affects the financial strength of the business and the chances of attaining a competitive advantage over their competitors. Based on the various research questions applied in the research paper, financial fraud is a significant determinant in the downfall of many companies in Mexico. For instance, the major factor that leads to the execution of the scam is the poor management techniques that are being applied in the company. It leaves the employees dissatisfied and seek alternative means of attaining money and being rich. Secondly, a sensitisation program that will help reduce illegal activities is updating the employees about the detection methods applied to the firm. It will act as a scare to the workers as they will have no interest in serving a jail term if implicated of committing any crime. Financial crime is a common problem in the business world with limited changes observed around the globe. The majority of the claims about financial crimes is based on the use of the internet and the complex accounting systems used in making commercial statements. A limited number of the employees have an idea of the ways of applying these procedures using the sophisticated accounting programs and software. These employees are then left with an opportunity of executing illegal activities in the company. Lastly, incidences of constant execution of fraud in business will affect the prices of commodities that are being produced by the firm (Balakrishnan, 2010).

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