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Bus 5910 Discussion Assignment Unit 6-14

Financial statement fraud occurs when individuals manipulate a company's financial reports, potentially leading to serious consequences like bankruptcy. There are several ways to commit this fraud, such as exaggerating assets, understating liabilities, inflating revenues or reducing expenses. Employees can also falsify earnings by misrepresenting the timing of revenue or expenses. This document discusses financial statement fraud at Olympus Corporation, where power was too concentrated in the president and employees felt too loyal to report issues. To prevent future fraud, companies need to separate decision-making powers, protect whistleblowers, and incentivize ethical behavior and reporting of misconduct.

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81 views

Bus 5910 Discussion Assignment Unit 6-14

Financial statement fraud occurs when individuals manipulate a company's financial reports, potentially leading to serious consequences like bankruptcy. There are several ways to commit this fraud, such as exaggerating assets, understating liabilities, inflating revenues or reducing expenses. Employees can also falsify earnings by misrepresenting the timing of revenue or expenses. This document discusses financial statement fraud at Olympus Corporation, where power was too concentrated in the president and employees felt too loyal to report issues. To prevent future fraud, companies need to separate decision-making powers, protect whistleblowers, and incentivize ethical behavior and reporting of misconduct.

Uploaded by

Sheu Basharu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Financial statement fraud can occur when individuals try to influence the accuracy of a

company's financial reports. Financial statement fraud has serious consequences for an
organization and its stakeholders. Financial statement fraud can even lead to an
organization becoming bankrupt. (Morgan & Burnside, 2014). There are several ways
that financial statement fraud can occur, including exaggerating assets, selling the
organization, and understating liabilities.
The management and shareholders of an organization depend on its financial
statements to evaluate its performance. There are two main ways to affect a company's
financial statements either by improving performance or by altering the reported
amounts. One way to make earnings figures on an organization's income statement
inaccurate is by inflating current expenses or deflating profits. (Morgan & Burnside,
2014)
Employees can use two different strategies to make their organization's financial
situation look better than it really is in order to achieve their goals. The first approach is
to reduce the earnings on the organization's existing assets by reducing revenues or
increasing expenses. The second approach is to create false earnings by exaggerating
the organization's status. Employees can manipulate an organization's financial
statement in a variety of ways, including providing revenue that is questionable in
quality, recording revenue at an earlier or later date, and moving expenses to a more
favorable period. This paper discusses the financial fraud committed by Olympus
Corporation. (Morgan & Burnside, 2014)

The case demonstrates two major problems that the organization must address:

1. the consolidation of power into a single individual, and


2. the feverous loyalty of subordinate employees.

The concentration into a strong president or CEO is part of the corporate governance
culture of Japanese companies and changing this parameter means to adapt the whole
company culture which is based on following a strong leader. This lack of independence
and higher moral values among employees strengthens such a position further more.
(Klimza, 2014)

Possible alternatives to fix these causes target the power balance in an organization
separating the power between the board and the executives so that those controlling
the numbers either don’t profit from them directly or can’t alter them. (Sarma, 2012)
Also the incentives to maximize profitability should be reinforced and on the other
side reporting misconduct should be empowered which means to protect
whistleblowers and even compensate them.
The plan of action is probably very simple to present regarding those alternatives steps
to prevent financial statement fraud, but will need a long time to get profoundly
adopted by all members of the company and build a new network of trust and
sustainability. (Klimza, 2014)
Currently, Japan does not provide much protection for whistleblowers, and has done
little to prevent employers from retaliating against employees. (Shiozaki & Coney, 2015)
The current law for whistleblower protection does not penalize or punish companies for
retaliation against employees, and any fine levied is minimal.
From the inside there is a need for a clear code of conduct penalizing misconduct of any
kind and the obligation to report such behavior.
The adherence to those ethical standards will be rewarded and employees won’t
have the chance to gain their rewards by numbers they delivered themselves. (Sarna,
2012) The accounting can even be dissociated and outsourced to another, external
company providing a possibility to double check spendings and revenues.
In conclusion we see the detrimental effects of ethical misconduct for the company and
its partners which can corrupt the whole system and destroy not only the reputation but
also lead to bankruptcy and a high level of debt.

References:

Klimza, L. (2014). Business ethics. (bookboon.com) Retrieved


from https://my.uopeople.edu/
pluginfile.php/1600672/mod_page/content/7/TEXT%20business-ethics.pdf

Morgan, A. R. & Burnside, C. (2014). Olympus corporation financial statement fraud case
study:
The role that national culture plays on detecting and deterring fraud. (Journal of
Business Case Studies) Retrived
from https://my.uopeople.edu/pluginfile.php/1600694/mod_book/chapter/359505/U6
Olympus Financial Fraud.pdf

Sarna, L. (2012). Law for business students. (bookboon.com) Retrieved from https://
my.uopeople.edu/pluginfile.php/1600672/mod_page/content/7/TEXT%20law-for-
business-students.pdf

Shiozaki, A. & Coney, P. (2015) The Olympus Effect? Recent Changes to Whistleblower
Law
Regime (INT’L LAW OFF). Retrieved
from http://www.internationallawoffice.com/Newsletters/White-Collar- Crime/Japan/
Nagashima-Ohno-Tsunematsu/The-Olympus-effect-Recent-changes-to-whistleblower-
law- regime.

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