As Discussed In The Video: Introduction To Accounting Fraud
As Discussed In The Video Introduction Accounting Fraud In Large Publ
As discussed in the video introduction, accounting fraud in large public companies has produced its fair share of major news headlines over the past 20 years. Even though laws like Sarbanes Oxley have been put in place to minimize the opportunity for financial fraud, the threat is still real in today’s corporate environment. Imagine you have been hired to oversee the financial audit of a major company in your city. During the audit, one of the company’s employees has disclosed a potential fraud situation involving an accounting department supervisor. In addition to alerting your own manager about the situation, which one of the following options below would you choose to perform next as you proceed with your investigation?
Only choose one. Option A: Gather additional information by interviewing other company employees. Option B: Meet with other members of the management team to discuss the company’s current internal controls for preventing fraud. Why do you feel your choice would be most effective? Discuss the reasoning for your selection.
Reference Articles Biggest Corporate Scandals 2015 U.S. Charges Penn West Petroleum, Ex-Executives With Accounting Fraud
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Addressing Potential Accounting Fraud: Prioritizing Investigation Steps
Accounting fraud remains a significant concern for stakeholders, regulators, and auditors, especially given the high-profile scandals that have rocked major corporations over the past few decades. When faced with a potential fraud disclosure during an audit, auditors must choose their next steps carefully to gather pertinent evidence while maintaining the integrity of the investigation. Among the options—interviewing employees or consulting management—the decision hinges on the immediate needs of the investigation and the overall effectiveness of each approach.
Opting to gather additional information by interviewing other company employees (Option A) constitutes a proactive approach. Interviews can reveal discrepancies, corroborate initial disclosures, and identify whether the fraudulent activity is isolated or widespread. By speaking with employees across various levels, auditors can build a comprehensive picture of the company's operational environment, employee awareness, and potential gaps in internal controls. For example, if multiple employees indicate irregularities or unawareness of the misconduct, the auditor can better understand the scope of the fraud and target further investigative steps accordingly.
On the other hand, meeting with management regarding internal controls (Option B) addresses systemic issues and may reveal weaknesses that facilitated or failed to prevent the fraud. While discussing controls is essential, it generally is more effective after initial facts have been established through preliminary interviews. Communication with management can lead to insights into control weaknesses but may also carry the risk of managerial bias or suppression of information, especially if there’s suspicion of collusion.
Given these considerations, interviewing other employees (Option A) is often the most immediate and effective first step in an investigation triggered by a fraud disclosure. It allows the auditor to quickly gather firsthand accounts, verify the credibility of the initial report, and identify specific areas requiring deeper examination. This approach provides independent insights that help shape further actions, such as evaluating internal controls or conducting forensic analysis.
Furthermore, selecting employee interviews aligns with fundamental audit procedures, focusing on obtaining sufficient appropriate evidence and maintaining independence from management’s potential biases. It establishes a foundation for informed decision-making and helps the auditor construct a factual basis for subsequent investigative steps.
In conclusion, when confronted with a potential accounting fraud, initiating an investigation through interviews with relevant employees is generally the most effective immediate response. This approach enables the auditor to obtain unbiased information, assess the extent of the issue, and determine the proper course of action to safeguard the organization’s financial integrity.
References
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