Executive Power and Financial Statement Fraud Based on Fraud Theories

Fraud Examination: Financial Statement Fraud - A Display of Executive Power
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Fraud Examination: Financial Statement Fraud - A Display of Executive Power
Introduction
Media reports emerging from government agencies, insurance companies, researchers, and victims of fraud reveal shocking magnitudes of fraud in the modern world. In the United States, it is estimated that corporations lose at least 5 percent of revenues each year, which translates to $3.5 trillion in losses based on the 2015 Gross World Product estimates (Albrecht et al., 2018). While these losses directly affect the victim organizations, fraud impacts the ordinary citizen in terms of the cost of buying goods and services. Consumers not only pay for the fraud bill but also the investments towards fraud detection, investigation, and prevention. Losses from fraud potentially reduce an organization’s income on a dollar-for-dollar basis, meaning that for each $1 lost through fraud, the net income for that organization declines by $1. This assumption shows that it will take more revenues for an organization to fully recover the impacts of fraud due to the net income losses. Fraud often involves deception or an intentional/reckless representation of a false material point acted upon by a victim who is made to believe its authenticity but ends up in damages. According to Albrecht et al. (2018), this definition draws a line between unintentional errors and fraud. One of the popular examples of fraud was the Ponzi Scheme crafted by Carlo “Charles” Ponzi. The Ponzi scheme involved currency exchanges and postal coupons, where the infamous Ponzi bragged about success and promised investors that their investments would be doubled in 90 days. A recent example of a similar fraud artist is Trevor Milton. He laid an audacious scheme to defraud investors by misleading investors in an attempt to inflate and maintain Nikola’s stock price (Winter & Schapiro, 2021). Based on historical cases of fraud such as Enron, WorldCom, and Sunbeam, this paper argues that most fraud cases are a display of executive power where top management engages in financial statement fraud based on the classical Fraud Theory.
Classical Fraud Triangle Theory and Fraud Diamond Theory
The involvement of executives in fraud scandals in large corporations is a topic that has received growing attention from auditors, regulators, and the public. While fraud detection is a complex task that demands knowledge about the nature of fraud, how it can be executed and concealed, external auditors are often tasked with the mandate of helping organizations to detect and prevent fraud (Malimage, 2019). The classical Fraud Triangle Theory (FTT), first proposed by the criminologist Donald Cressey in 1953, attempts to account for the motivations behind fraud activities among the perpetrators (Van Akkeren, 2018). However, research has consistently shown that anyone can commit fraud offenses, and discerning a fraud perpetrator from an innocent person is often a challenge based on their psychological or demographic features. In an organization, it is often impossible to identify the kinds of employees or customers that are likely to become dishonest as the busines...