Enron and WorldCom Scandal

Enron: The Case of the Crooked E C.

Special Purpose Entities  the highlight of Enron’s “creative accounting”  SPEs reflect a common financing technique for companies.  Moving or selling assets into separate partnerships that can be sold to outside investors --- Enron reported it as earnings.  Required to be isolated from the company who created it. But Enron continued to support this SPEs for leadership and capital  Used by Enron to hide its debt, that’s why it is called as “shell firms”  Disclosed to Enron’s report that SPEs were used to hedge downside risk to its illiquid assets.  Notable examples were JEDI, Chewco, Whitewing, and LJM

D.

Corporate Governance  On paper, Enron had a model board of directors  EXECUTIVE COMPENSATION i. Enron developed a culture that became obsessed with short-term earnings to maximize bonuses. ii. Stock options were used as compensation and bonuses. iii. Extravagant spending was rampant in the company, to satisfy earnings target.  RISK MANAGEMENT i. Like foreign currency energy commodities are also subject to price movements ii. Improper accounting practices by the company were not hidden to the BOD iii. Using SPEs and derivatives, Enron was implementing hedges with itself  FINANCIAL AUDIT i. There is a conflict of interest on Arthur Andersen ii. Enron hired numerous CPAs to find loopholes in the GAAP to maximize earnings iii. Andersen would later shred several tons of relevant documents and delete nearly 30,000 e-mails and computer files, causing accusations of a cover-up.  AUDIT COMMITTEE i. Corporate audit committees usually meet for just a few times during the year ii. Members typically have only modest experience with accounting and finance. iii. Committee was also unable to question the company's management due to pressures on the committee.  MORAL AND POLITICAL ANALYSES i. executive greed and hubris, a lack of corporate social responsibility, situation ethics, and get-it-done business pragmatism ii. Enron’s collapse resulted from the company’s reliance on political lobbying, rentseeking, and the gaming of regulations.

E.

Other Accounting Issues  Habit of booking costs of cancelled projects as assets, with the rationale that no official letter had stated that the project was cancelled.  Habit of fooling analysts by making tricks regarding performance of Enron  Enron issued shares of its stock to several SPEs, executives, and others. Many of the shares were in exchange for notes receivable. US GAAP does not permit recording a receivable in exchange for the issuance of shares of stock.

As an overview of Enron and the scandal it faced that lead to its downfall, here is a trailer of the documentary Enron – The Smartest Guys in the Room. Slide 3 and 4: The Rise of Enron  Enron Corporation is an energy and commodities trading company.  Formed in 1985 by a merger of InterNorth (from Omaha, Nebraska) and Houston Natural Gas (Texas). The two are both gas pipeline companies.  Kenneth Lay became the CEO after the merger (HQ: Houston, Texas); renamed it Enron Corporation in 1986.  It was transformed from a gas pipeline company to a global energy trader: intermediary between the producers of energy products (gas and electricity) and end users of those commodities.  Lay and Skilling: “from an asset-based pipeline and power-generating company to a marketing and logistics company.” Enron’s Four Principal Lines of Business: 1. Energy Wholesale Services (largest revenue producer) – EnronOnline, a B2B electronic marketplace as its greatest contributor. 2. Enron Energy Services – its retail operating unit 3. Enron Transportation Service – its pipeline operations 4. Enron Broadband Services – intermediary between users and suppliers of broadband services   

Also branched in international markets having purchased outright or had a major interest in power plants in all parts of the world. Making energy as a commodity made the rise of Enron more rapid, taking advantage of the energy regulations from the USA. It is hailed as the “America’s Most Innovative Company” from1996 to 2001.

Slides 5 – 8: What and How did they do it? Enron’s downfall was due to its complex business model and unethical practices to misrepresent earnings to their advantage. Here are some of the “techniques” they made: A.

B.

Revenue Recognition:  energy suppliers earn their profits by wholesale trading of energy and risk management in addition to its cost.  “agent model” – used by service providers; reporting trading and brokerage fees as revenue, although not for the full amount  “merchant model” – used by Enron; aggressive type where reporting the entire value of its trades as revenue taking the risk of the cost.  Between 1996 and 2000, Enron’s revenue increased by more than 750% (although energy industry’s considered growth at 2-3% annually) Mark-to-Market Accounting  Skilling said using this treatment would represent “…true economic value”  allowed only to financial companies  requires that once a long-term contract was signed, income is estimated as the present value of net future cash flow, although no cash was received.  allows Enron to recognize profits in any amount they wanted to be.  SEC approved it only for trading of natural gas futures contracts on January 30, 1992 but Enron used it later to its entire operation.  Enron and Blockbuster Video: Enron recognized $110million from the deal. After Blockbuster Video withdrew from the contract, Enron continued to recognize profits.

Slides 9 – 10: Key Players of the Scandal  Kenneth Lay  Jeffrey Skilling – singled out as the “No.1 CEO in the USA”  Andrew Fastow – the architect of Enron’s “creative” accounting. had the reputation of being a money wizard who constructed the complex financial vehicles that drove Enron’s growth.

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Michael Kopper - actively and aggressively involved in creating and managing SPEs, and in the accounting deception, along with Ben Gilsan David Duncan - headed the Enron audit and allegedly orchestrated a document shredding campaign Joseph Berardino - tried to defend its audit of Enron rather than admitting failures and accepting the consequences Sherron Watkins - the so-called “whistle blower” who started the downfall. Former AA accountant but was moved to Enron where he worked for Andrew Fastow Lou Lung Pai - sold contracts to provide natural gas and electricity to companies for long periods. Known for running up large bills on the company expense account at strip clubs

Slides 11 – 21 The Downfall The Timeline of the Downfall I. Emergence of the Fraud Signs a. Bethany McLean wrote an article entitled “Is Enron Overpriced?” (2001) about the "strange transactions", "erratic cash flow", and "huge debt”. She questioned how Enron could maintain its high stock value, which was trading at 55 times its earnings. b. Wall Street analyst Richard Grubman questioned Enron's unusual accounting practice during a recorded conference call. c. Skilling announced he was resigning as the CEO of the company due to personal reasons after only 6 months and sold a minimum of 450,000 shares he own at a price of $33Million. He later announced that the real cause was due to Enron’s faltering price in the stock market d. The New York Times’ Paul Krugman asserted that Enron was an illustration of consequences that occur from the deregulation and commodification of things such as energy. II.

The Defense of Enron a. To Bethany McLean: Skilling called her "unethical" for not properly researching the company. Enron could not reveal earnings details as the company had more than 1,200 trading books for assorted commodities and did "... not want anyone to know what's on those books. We don't want to tell anyone where we're making money." b. To Richard Grubman: Skilling replied: "Well, thank you very much, we appreciate that ... asshole." Skilling's comment was met with dismay and astonishment by press and public, as he had previously disdained criticism of Enron coolly or humorously. c. On Skilling’s Resignation: Enron assured that "no change in the performance or outlook of the company going forward" from Skilling's departure. Lay re-assumed the position as CEO. d. To Paul Krugman: Lay said the attack on Enron appears to be to discredit the free-market system, a system that entrusts people to make choices and enjoy the fruits of their labor, skill, intellect and heart.

III.

CEO Informed of the Potential Crisis a. On August 15, Sherron Watkins, vice president for corporate development, sent an anonymous letter to Lay warning him about the company's accounting practices. b. One statement in the letter said "I am incredibly nervous that we will implode in a wave of accounting scandals. c. Lay engaged its outside law firm Vinson and Elkins to investigate and advise whether Enron needed to take specific actions. d. Vinson and Elkins responded that no action was needed since the accounting was acceptable. Vinson and Elkins consulted with AA. e. After the report, Lay and his wife sold some personal shares of Enron.

IV.

Investors’ Confidence Declines a. August 2001 – company’s stock value are still falling b. Investors need reassurance since the company’s business was difficult to understand

c. d.

Enron admitted to repeatedly using “related-party transactions” which some feared to be used to transfer losses that should appear in Enron’s FS. Media attention shifted away because of the September 11, 2001 attacks. By then Enron started selling its lower-margin assets and retained its core business of gas and electricity trading.

V.

Restructuring Losses and SEC Investigation a. October 16, 2001: To correct accounting violations, Enron announced the restatements of its FS from 1997 – 2000. b. The restatements reduced 23% of profit during the period, increased liabilities of 6%, and reduced equity by 10%. c. Enron management "... lost credibility and have to reprove themselves. They need to convince investors these earnings are real, that the company is for real and that growth will be realized. d. Fastow disclosed to Enron's board of directors on October 22 that he earned $30 million from compensation arrangements when managing the LJM limited partnerships. e. After the announcement by the SEC that it was investigating several suspicious deals struck by Enron, the share price of Enron decreased to $20.65, down $5.40 in one day. f. On October 25, despite his reassurances days earlier, Lay dismissed Fastow from his position to “restore investor confidence.” g. To calm investor’s fear about its supply of cash, the company began buying back all its commercial paper. Bonds were trading at levels slightly less.

VI.

Credit Rating Downgrade a. Main short-term danger of Enron was its credit rating, a possible hindrance for future transactions. b. It is difficult to analyst and observers to assess the true performance of Enron due to its mysterious financial statements. c. In November, SEC began its investigation regarding the RPTs. d. Enron was able to secure an additional $1billion loan from cross-town rival Dynegy.

VII.

Proposed Buyout by Dynegy a. Enron's stock was now trading at around $7, as investors worried that the company would not be able to find a buyer. b. Enron management apparently found a buyer when the board of Dynegy, another energy trader based in Houston, voted late at night on November 7 to acquire Enron at a very low price of about $8 billion in stock. c. Chevron Texaco (owned a quarter of Dynegy) agreed to provide Enron w/ $2.5Billin cash, assume $13Billion of debt plus possibly $10Billion hidden debt by Enron’s management. The deal was confirmed November 8, 2001. d. Commentators remarked on the different corporate cultures between Dynegy and Enron, and on the "straight-talking" personality of the CEO of Dynegy, e. Another restatement happened on November 9, 2001, with a reduction of $591Million of revenue from 1997-2000 (from SPEs JEDI and Chewco). Despite of the restatement, Dynegy still intended to buy Enron f. Watson was praised for attempting to create the largest company on the energy market. g. Still credit issues were becoming more critical. h. Retirement accounts of employees, mainly on Enron’s stock, decimated as price decreased by 90% i. "An adverse outcome with respect to any of these matters would likely have a material adverse impact on Enron's ability to continue as a going concern." – Enron on reducing its scale of business for financial stability j. A few days later SEC announced its filing of civil fraud complaints against AA, sources claimed Enron and Dynegy were renegotiating the terms of their arrangement. Dynegy now demanded Enron agree to be bought for $4 billion rather than the previous $8 billion.

VIII.

The Bankruptcy a. On November 28, 2001, Enron's two worst-possible outcomes came true: Dynegy Inc. unilaterally disengaged from the proposed acquisition of the company, and Enron's credit rating was reduced to junk status. b. Its stock price fell to $0.61 at the end of the day's trading. c. Total exposure of the markets and other traders to Enron's failure were estimated at $187Billion. d. Filed for bankruptcy on November 30, 2001 and sought Chapter 11 protection on December 2 e. It resulted in 4,000 lost jobs. The day that Enron filed for bankruptcy, the employees were told to pack their belongings and were given 30 minutes to vacate the building. f. 62% of 15,000 employees' savings plans relied on Enron stock that was purchased at $83 in early 2001 and was now practically worthless.

Slides 22 – 24 What happened After?  To the Key Players o Andrew Fastow --- pleaded guilty to charges of conspiracy; sentenced to 10 years with no parole o Lea Fastow --- sentenced for one year for helping her husband to hide income from the government o Kenneth Lay --- convicted in six counts of securities and wire fraud, for a maximum total sentence of 45 years in prison (died on July 5, 2006) o Jeffrey Skilling --- convicted in 19 counts of securities fraud and wire fraud for a sentence of 24 years and 4 months in prison o Michael Kopper --- sentenced to seven years in prison o All told, sixteen people pleaded guilty for crimes committed at the company, and five others, including four former Merrill Lynch employees, were found guilty. 

To Employees and Shareholders o Shareholders lost $74Billion in the four years before the company’s bankruptcy ($40 to $45 billion was attributed to fraud). o Enron had nearly $67 billion that it owed creditors, employees and shareholders o Several lawsuits were won by former employees, shareholders, and others regarding lost pensions and investments (2004 and 2008)

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To Arthur Andersen o Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. o The firm was effectively put out of business since the SEC is not allowed to accept audits from convicted felons. o The company surrendered its CPA license on August 31, 2002, and 85,000 employees lost their jobs. o The conviction was later overturned by the U.S. Supreme Court due to the jury not being properly instructed on the charge against Andersen. o The damage to the Andersen name has been so great that it has not returned as a viable business even on a limited scale.

Slides 25 – 27 Audit Issues A. Commercialization and Independence  To be professional and effective, auditors must be independent of management and evaluate the financial representations of management for all users of financial statements.  70% of fees Andersen received came from consulting  Andersen acted as Enron’s external auditor, consultant and as its internal auditor.  AA chose to ignore issues, acquiesced in silence to unsound accounting, or embraced accounting schemes as an advocate for its client.

B.

Internal Control Weaknesses at Enron  Auditors assess the internal controls of a client to determine the extent to which they can rely on a client’s accounting system.  Two serious weaknesses were that the CFO was exempted from a conflicts of interest policy, and internal controls over SPEs were a sham, existing in form but not in substance.  Many financial officials lacked the background for their jobs, and assets, notably foreign assets, were not physically secured. The tracking of daily cash was lax, debt maturities were not scheduled, off balance sheet debt was ignored although the obligation remained, and companywide risk was disregarded. Internal controls were inadequate; contingent liabilities were not disclosed; and, Andersen ignored all of these weaknesses.

C.

Evaluation of Accounting – Materiality  A misrepresentation is material if knowledge of the misrepresentation would change the decisions of the user of financial statements.  Many errors were known, but were dismissed by Andersen as immaterial. Other errors may not have been known, but should have been known if reasonable inquiry would have revealed them.

D.

Related-Party Transactions  Related-party transactions in which Enron’s CFO, in substance, acted as buyer and seller in the same transaction posed special challenges to audit.  The auditor has the unsolvable problem of finding a way to know the intent of the party controlling the transaction.  What evidence did AA have to agree to Enron’s assertion that it is an RPT?

E.

Business Model, Experiences, and Organizational Culture  At Enron and at Andersen, the business model and the organizational culture were changing.  Enron was moving to a new business model dominated by intangible assets (likely to increase volatility), the rights to buy and sell commodities.  As auditors moved to become part of a consulting industry, their business model and organizational culture were changing too.  Into the mix of changing business models and cultures, add people who were not equipped for the changes.

F.

Internal    

Control at Andersen It is essential that both the reporting company and its auditor have strong internal controls. Accounting advice from AA’s national office was disregarded by the audit team. Why did the protections of audit review by a second partner and of peer review not operate? Why were indications of the manipulation of earnings by Andersen’s detection model largely ignored?  Was Enron, in substance, in charge of its own audit?

Slide 28: Enron’s Legacy  REFORMS: Enron started a widespread reform of corporate behavior not only in the United States. One of those is the Sarbanes-Oxley Act of 2002. 

STANDARDS SETTING PROCESSES: Changes in the GAAS had been implemented. Among the changes in auditing standards is a requirement that auditors render separate opinions on internal controls in addition to an opinion on financial statements.

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REMINDER: The Enron scandal reminded not only Americans but all of us that a capitalist economy needs full and fair disclosure.

Summary: Enron was a massive failure, partly because of its size, partly because of its complexity, partly because the controls to protect the integrity of capital markets failed, and especially because of the massive greed and collusion of key participants. Management failed, auditors failed, analysts failed, creditors/bankers failed, and regulators failed. The intersection of multiple failures sent a signal of structural problems. Suddenly, the consequence of deceptive financial data resulting from structural failure in the capital markets was not merely a hypothetical possibility. The speed with which the system responded indicates the importance of fairly presented financial information.

D.

Revenue Inflation  Between 1999 and the third quarter of 2001, WorldCom manufactured sustained and often impressive revenue growth through improper accounting adjustments and entries. Total amount is $2.065 billion. 

Revenue Management Mechanism in WorldCom i. Corporation Unallocated account --- to apparently reflect certain items for which no individual sales channel was entitled to credit: for example, revenues from sale of a corporate asset, or a change of accounting policy for a particularly contract ii. Most improper or unquestionable revenue entries identified were booked into the Corporate Unallocated revenue account. iii. Those entries appeared only in quarter-ending month.

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Specific Revenue and Reserve Accounts i. Minimum Deficiency Reserves - booked approximately $312 million in revenue; arise from customer agreements that permit a telecommunications company to bill customers for usage amounts that fall below contractual minimum. This is rarely collected. ii. Customer Credits – improperly accounted for over $215 million of credits; moved customer credits from contra-revenue account (w/c reduced revenue) to a bad debt expense (w/c did not) iii. Early Termination Charges - recognized $22.8 million in revenue from these charges billed on the last business day of the quarter iv. Other Reserves – established to provide a cushion for predictable events, such as future tax liabilities, but they are not supposed to manipulate them to change reported earnings.

WorldCom: the Big Lie Inside the Rise? Slide 2 –     

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3: The Emergence of a WorldCom Awoke the sleeping giant by leading the telecom industry into profitability in the 90’s. Telecom industry faced low margins and Bernie Ebbers decided that growth = survival. During the 1990’s, WorldCom was deeply involved in acquisitions and completed several “mega-deals” Purchased over 60 firms in 2nd half of the 90’s WorldCom moved into Internet and data traffic o Handled 50% of US Internet traffic o Handled 50% of e-mails worldwide Purchased MCI for $37 billion in 1997 In 1999 revenue growth halted; stock price dropped By 2001 owned a third of the US data cables Was U.S.’ 2nd largest long-distance operator in 1998 and 2002 Had over 20 million customers in 2002

Slides 4 – 11 The Accounting Maneuver A. Reduction of line cost and line cost E/R ratio  Line costs are WorldCom’s largest single expense.  Line costs are what WorldCom pays other companies for using their communications networks; they consist principally of access fees and transport charges for messages for WorldCom customers  Beginning in 2000 WorldCom had been trying to find ways to reduce line cost expenses.  They emphasized one key measure of line costs: the ratio of line cost expense to revenue, called the “line cost E/R ratio.” They had tried to keep the E/R ration at about 42%. B.

C.

Releases of Accruals to Reduce Line Costs  two main forms: releases of accruals in 1999 and 2000 and then, when the accruals had been used up, capitalization of operating line costs in 2001 and early 2002.  WorldCom reduced its reported line costs by approximately $3.3 billion by improperly releasing “accruals”.  WorldCom manipulated the process of adjusting accruals in three ways. i. Released accruals without apparent analysis of the accrual account. ii. It did not release the excess accruals in the period in which they were identified, but to keep them as reserve for bad period. iii. Reduced reported line cost by releasing accruals that had been reserved. Capitalization of Line Costs  WorldCom improperly capitalized approximately $3.5 billion of operating line costs in violation of well-established accounting standards and WorldCom’s own capitalization policy.  The increased line cost lies in the long-term, fixed-rate leases for network capacity WorldCom initiated in order to meet the anticipated increase in customer demand. And as later the demand was not as expected, the Company has to pay for the leases that were substantially underutilized to avoid punitive termination provisions.

Slides 12 – 13 The Key Players in the Scandal 1. Bernard Ebbers – Founder and CEO (1985 to 2002)  Borrowed $366 million to cover losses on stock which was not repaid  Netted $140 million from stock sales 2.

3.

Scott Sullivan – Served as CFO, treasurer and secretary  Directed staff to make false accounting entries  Personally made false and misleading public statements regarding finances  Netted $45 million from stock sales David Myers - controller and senior vice president of WorldCom.  resigned in June 2002, the same day as the firing of Sullivan

4.

John Sidgmore - WorldCom’s new CEO  vice chairman of the board until 2002 when Ebbers resigned  never charged in the accounting scandal  did publicly apologize on behalf of WorldCom for its behavior and vowed to see that those involved are punished.

5.

Arthur Andersen LLP  Kenneth M. Avery and Melvin Dick were the primary auditors representing their firm in the WorldCom scandal

6.

Cynthia Cooper - Chief Internal Auditor of WorldCom  She brought the accounting discrepancies that she and her team found to the attention of Sullivan, Arthur Anderson LLP, Myers and many more throughout the company

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She was told to ignore the issue. She conducted her own audit of the company in comparison to the Arthur Anderson audit.

Slides 14 – 16 How the Fraud was discovered? A. Warning Signs  Increase in revenue ($19.7Billion) while a decrease in COGS ($489Million)  1% increase in gross margin and COGS to sales ration decreased 3% with no evidence that WorldCom improved operation efficiency  Increase in SG&A expenses increased by $6.7Billion and expense to sale ratio increased 7%, an implication that there is a poor operating performance  This should have been observed by its auditor when applying analytical procedures B.

C.

D.

E.

The Doubt of the Internal Auditors  Obscure tips were sent into the Internal audit team  John Stupka complained to Internal audit about $400 million he set aside that Sullivan wanted to use to boost WorldCom’s income.  MCI audit and review of books uncovered accounting irregularities The Request by the SEC  SEC requests information from WorldCom about a range of financial reporting topics  (1) disputed bills and sales commissions, (2) a 2000 charge against earnings related to wholesale customers, (3) accounting policies for mergers, (4) loans to the CEO, (5) integration of WorldCom’s computer systems with those of MCI, and (6) WorldCom’s tracking of Wall Street analysts’ earnings expectations.  “How could WorldCom make so much when AT&T is losing money?” Internal Auditor’s Discovery  Found $2 billion company announced for capital expenditures  Found the undocumented $500 million in computer expenses that were recorded as assets.  Searching WorldCom’s computers, Mr. Morse found $2 billion in questionable entries  Internal auditor, Cindy Cooper, asked for documents supporting numerous capital expenditures (yet no evidence were found)  The controller admits to internal auditors that the accounting treatment is wrong (States no accounting standards support this accounting) Investigation by the Audit Committee  June 14, 2002 - The Internal audit team contacted WorldCom’s audit committee (Max Bobbitt, head of audit committee) i. Asked the company’s outside auditor KPMG to investigate  June 20, 2002 - Internal audit explains irregularities to the Audit committee.  June 25, 2002 - WorldCom announces it inflated profits by $3.8 billion over the previous five quarters; Sullivan dismissed in his position  June 26, 2002 - civil suit filed, stock trading halted  July 15, 2002 - internal WorldCom documents and e-mail messages indicated that the Company’s executives knew as early as the summer of 2000 that the accounting treatment was improper.  July 21, 2002 - WorldCom filed for bankruptcy

Slide 17 – The Auditing Issues  To the INTERNAL AUDITORS: o Internal auditors are an early line of defense against accounting errors and accounting fraud o Why it took more than a year for the company’s internal auditors to discover the misclassification?

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To the EXTERNAL AUDITORS (Arthur Andersen): o the fact that Andersen was not notified that line costs were being capitalized is irrelevant o Andersen should have designed its audit to detect misclassifications of this magnitude (due care and skepticism was not practiced). o Andersen should have taken into account the increasingly precarious financial condition of WorldCom and paid more attention to the possibility of aggressive accounting practices.

Slides 18 – 19 Post-Fraud Effects and Consequences  STOCK: WorldCom stock had fallen from a high of $64.50 a share in mid-1999 to less than $1 a share. 

RETIREMENT: Retirement plans of the employees have fallen from $642.3Million to $18.7Million.

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LAYOFF: 17,000 jobs were cut to save $1 billion.

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BANKRUPTCY: WorldCom filed for Chapter 11 bankruptcy protection on July 21st, 2002.

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NEW ORGANIZATION: WorldCom named a new chief financial officer (John S. Dubel) and a chief restructuring officer (Gregory F. Rayburn). A committee was named to represent the company’s creditors.

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FRAUD CHARGES o Bernard Ebbers - convicted and sentenced to 25 years in prison for his role in the scandal o Scott Sullivan – became the star witness for the prosecution in the trail against Bernard Ebbers. Received 5 years in prison for his own role in the scandal. o David Myers – sentenced to 1 year and 1 day in prison for his role in the scandal o Melvin Dick was barred from practicing accounting for 4 years and Kenneth M. Avery was barred for 3 years

Slide 20 – The WorldCom Now  WorldCom was renamed MCI in 2004 when it emerged from bankruptcy. By changing its name, WorldCom hopes to distance itself from its still-mounting accounting.  Possible court-approved debt reductions  Company could spin off several business units  John Sidgmore, the CEO replacing Ebbers, stated he wants to move forward: “We want the bad guys exposed. We want the bad guys punished. And we want to move on with our lives at WorldCom."

Fraud   

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Corporate entities of all sizes, across the globe, are easily susceptible to frauds at any points of time. According to ACFE Global Fraud Study 2012, “The typical organization loses 5% of its revenues to fraud each year.” This figure translates to a potential projected annual fraud loss of more than $3.5 trillion. According to the Association of Certified Fraud Examiners (ACFE, 2010), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party.” research evidence has shown that growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investors’ confidence regarding the usefulness and reliability of financial statements The increasing rate of white-collar crimes “demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit.”