Earnings Management: The Continuum from Legitimacy to Fraud

Earnings Management: The Continuum from Legitimacy to Fraud

Introduction

This work aims to address several issues pertaining in the organization regarding fraud. The foremost thing discussed is the prevailing current statistics of fraud and the magnitude of the fraud problem, specifically within the premises of the organization. Further, to have deep-rooted insight of the issue, several real-life examples of various fraud endeavors are analyzed in the literature review. Moreover, a well-documented existing framework is explained to try to detect fraud, which is widely used in practice. A hypothesized scenario is provided for readers to practice their understanding of assessing specific fraud conditions. In the end, recommendations are made that shall enable the existing and potential leaders to know what to expect, as well as methods to insulate themselves and their organizations from this troublesome reality.

Literature Review

One of the important concerned elements of an organization is that the resources of the organization may exploit the opportunity, if given and use it for their personal benefit rather than focusing on the collective growth of an organization. The tendency to use resources for personal benefit does not only reflect unethical behavior but also lack of commitment towards the organization. In this modern era, where scarce resources in an organization have become a norm, any sort of publicized fraud may lead to devastating outcomes. Thus, the management and leaders shall remain vigilant about potential fraud in the premises. Areas that are more susceptible of fraud must be kept under strict surveillance.

The entail insiders are carrying out deceptive fundraising practices as fraud endeavors to benefit the organization. An example is over reporting to potential donors the extent of deductibility of a particular fundraising ticket. Another example involves overstatement of staff resources actually used by the organization so that they can obtain excess grant funds through reimbursement. An attempt of fraud in an organization would be if insiders abused their position of trust to benefit themselves. For instance, higher authorities of the organization may steal the donation, which is intended for the organization's growth and success.

In general, corruption schemes are categorized under four classifications: economic extortion, bribery, illegal gratuities, and conflicts of interest. There is a difference between bribery, which occurs when something of value is offered to influence an official act, and an illegal gratuity, which is where the item of value is given to reward an employee for a decision (Wells, 2011). However, Economic extortion is almost the opposite of bribery, as it typically involves a threat to pay or some kind of negative consequence will ensue. One example of economic extortion is where the grantor solicits personal funds from a grantee, with the implication that if they are not received, the grantee will not be considered for upcoming grant awards. The most common conflicts of interest for organizations pertain to board members or management with hidden financial interests in entities with which the organization is doing business (Zalk, 2010). Purchase schemes may include purchase of excess or ...