Fraud in the digital age of accounting (Dissertation Sample)

Fraud in the digital age of accounting in Kenya
Peter Mutuku
Introduction
The recent development in computing and communication has changed how businesses transact and economic life. Individuals can do shopping and banking from home, work, and receive payments electronically, and organization managers can do business while at home. The government services and benefits can also be done and received electronically; thus, digitalization has helped reduce congestion and queues in accessing services. Digitalization refers to integrating digital technologies into day-to-day individual, organization, and government ways of doing business and providing services. It also refers to enabling functions through leveraging digital technologies and digitized data. Digitalization has helped enhance globalization by helping spread information faster and reduce business costs enormously. Like other forms of crime, a leakage in digitalization resulting in corruption increases the crime rate.
Although cases related to the collapse of companies do not trend among many individuals, it is the investors who lose their money. These scandals are short-lived, and the link to the data slips away as the media focuses on more recent events. The investors become outranged, and over some time majority lose the ability to relate, especially when the market picks, and other firms replace the fraudulent firms (Enriques & Volpin 2007 pp. 117-140).
Fraud in the financial statements where the statements do not show an accurate and fair view of the firm has dominated the spotlight. Some of the top accounting scandals involve companies like Enron, which dominated the world's spotlight in 2001 since it was perceived to be the biggest company operating as a going concern was accused of corporate malpractices and then bankruptcy. The scandal led to shareholders losing over $74 billion as the stock price declined from $90 to $1. Another accounting scandal involved WorldCom in 2002, which was found to have inflated its assets by $11 billion. Others involve TYCO in 2002, the HealthSouth scandal in 2003, FreddieMac scandal in 2003, America Insurer Group in 2005, and Satyam. Therefore, it is evident that when accounting crimes arise, other accounting malpractices involving big companies are also exposed.
The organization's shareholders should find means to address the challenge of window dressing, which will deteriorate the company's financial records and corporate image. Moreover, the auditing professionals should be thoroughly trained to detect any possibility that the financial statements do not show an accurate and fair view of the company practices. All the accounting malpractices attempt to offer an excellent public picture of the company, which is not the case. In addition, the external auditors should employ the IMA ethical standards to reduce the risk of colliding with the perpetrators of the firm's financial records. The study aims to help expose the means the firms involved in accounting malpractice use and provide the solution to these challenges posed by the creative accounting approach.
The remainder of the study is divided into five parts. The next part presents a theoretical review of the study. Section. The third part provides a literature review. The fourth and the fifth part presents the research methodology and describes the research approach adopted and the results, followed by the conclusion.
Research problem
The study sought to examine the fraud in the digital age of accounting in JPMORGAN financial institutions. Specifically, the study sought to:
* To examine the effect of the market value of equity on fraud in the digital age of accounting.
* To examine the effect of assets on fraud in the digital age of accounting.
* To determine the influence of debt on fraud in the digital accounting age.
* To find out the influence of profit on fraud in the digital age of accounting.
* To find out the effect of working capital o fraud in the digital age of accounting.
* To establish the effect of retained earnings on fraud in the digital age of accounting.
The genesis of the corporate malpractices hinges on the agency theory, which states that there is a direct relationship between the agents and the principal (Jensen & Meckling, 1976). Specifically, this relationship involves the firm's management, the agents, and the firm's owners. They have employed the administration to act in the firm's best interest and contribute capital towards its operations. The study notes that there are higher chances of information asymmetry between the management and the shareholders since the administration may use creative accounting to show good performance, which is not the case.
The digital accounting frauds manifest themselves in different forms such as change in software and behaviors as well as inadequate internal control processes. The most effect tools for detection of digital accounting frauds involve whistle blowing, internal and external audit, and specific investigation towards the top management as well as the accounting personnel’s. These frauds are done by employees or the management of an organization thus they might be difficult to trace (Seetharaman, 2004).
Recent studies suggest that the main traits of the perpetrators of the digital accounting frauds are; they are established management or employees and mostly hold a senior role in the organization. The recent growth in the digital technology has created loopholes of executing fraud and has provided additional risks to embezzlement and has promoted opportunity to brew illicit activities in future. The internet today can be used to communicate as well in committing criminal and fraudulent activities
The study explores the current frauds in the digital age of accounting.
Empirical studies reveal that the recent corporate accounting malpractices involve manipulating the assets, liquidity, earnings before interest and tax, profitability, the market value of equity, debt, and retained earnings. The studies suggest that CEOs and other firms' top management play a direct role in accounting fraud (Troy et al., 2011). The survey of Troy focuses on determining the part of the top management is committing corporate accounting fraud than other firms' employees. The study suggests a positive and significant relationship between stocks and accounting fraud. Thus, manipulating a firm's market value has recently been used in the scam in the digital age of accounting. Moreover, a different study suggests that the provision of more equity incentives to the top management helps align the interests of the management and shareholders (Armstrong et al., 2010).
Theoretical review
Market efficiency suggests that accounting information is instantly useless. Market efficiency theory indicates that the market price overreacts to organizational policies and decisions and not to the effects of the reported earnings per share. It suggests that companies should not depend on earnings per share when making decisions as investors see-through CITATION Don03 \l 1033 (Langevoort, 2003). In other words, market efficiency theory postulates that the market price reflects all the information concerning a firm. Therefore it is an essential measure of effective performance since it indicates both past and future information about a firm. This theory has led to fraudulent accounting activities where companies engage in creative accounting to bolster their market price index. Companies use modern technologies to massage the balance sheet, income statements, and trial balance. They deliberately transpose figures in the books of original entry to indicate a high market price index. The theory influences modern companies to have separate digitalized statements of cash flows joined to the income statement and statement of financial position as an essential part of the general-purpose financial statements, which has false implications on the market price presented to investors. Company fraud is a topic that has received significant attention from regulators and the public CITATION Ras17 \l 1033 (Kassem, 2017).
The new fraud triangle theory explains why fraud occurs in this digital age by suggesting that companies engage in fraud for personal, employment, or even due to external pressures resulting from both financial and non-financial pressures faced by the various companies. The theory also links fraudulent activities to the rapid growth in the technological world, which is brought by innovations in the different ways to massage the books of the account without being detected by external auditors. The theory is an excellent proposition to the external auditors who try to catch fraudulent activities in the digitalized world since it allows them to study and find out why and what drives fraudulent activities in the digital world. The theory emphasizes why fraud occurs in the digital world rather than the fraudulent activities themselves, which is a more efficient way to prevent fraud in accounting.
Literature review
There is a positive and significant relationship between ownership control and agency conflicts since the management will likely find other means, not in the shareholders' best interest (Jensen & Meckling, 1976). Specifically, the management altitudes towards risk also play a crucial role in dictating the firm's capital structure. Thus they may maintain higher or lower leverage at the expense of the financial risk. Risk-averse reduce the financial risk while the risk-takers rise the financial risk. Raising the financial risk can increase the management's desire to engage in fraudulent activities due to increased profita...