And the Fraud Continues
1. ) Discuss the Internal control weaknesses that existed at MCI that contributed to the commission of this fraud: MCI biggest internal control weaknesses at was Pavlo. Pavlo was able to manipulate MCI account receivable system which he helped to create and develop. When the same employee is able to receive and update payments, the chance of manipulation and embezzlement of funds is very high. By one person being able to record accounts receivable, or even reconcile the company’s bank account, he/she may be able to embezzle money from the company. This is what happens to MCI with Pavlo, through the following: a. By writing off a companies account receivables and converting them into notes receivable, Asset are created on the balance sheet. When customers are unable or may not pay their debts, companies may be able to write-off bad debts on their income tax returns. Companies’ accounts receivable can present a problem when only a few employees are available to manage company finances. By allowing the same employee to receive payments, update accounts receivable records, and reconcile the company’s bank account, he/she may be able to embezzle money from the company. b. Unapplied cash was used for the bad debt and slow payments.
By allocations of delinquent or bad receivables, made the expenses related to the write off of the receivables will not be entered on the income statement. c. Credit Holds was used. MCI called customers in regards to their past due account receivables. MCI were told by the customer that they were sending a payment immediately, MCI credited their receivables before receiving the cash. By Pavlo’s manipulating the account receivable it helped him delayed the inevitable. The recognition of bad debt and uncollected receivables that have to be expensed on the income statement. . Identify and justify the approach you would take if you suspected fraudulent activity within an organization where you work: Should I suspect fraudulent activity within an organization. I would investigate the suspected activity and reporting the suspected activity to the correct personnel. The Internal Auditor’s Office should coordinate investigations of fraud, waste, or abuse. Employees shall not destroy any document or record of any kind that may be relevant to a past, present, or future investigation of fraud, waste, or abuse.
The application of professional skepticism is essential any audit investigation. Professional skepticism in auditing implies an attitude that includes a questioning mind and a critical assessment of audit evidence without being obsessively suspicious or skeptical. Don’t make matters worse by getting into legal liability by the way you handle the matter. Do not speak to anyone about the person that’s suspected of committing the fraud before reporting it to management. By speaking to someone other than management you could be sued for slander.
Consult an attorney who specializes in employment-related matters. When an employee has knowledge of fraud, waste, or abuse has good reason to suspect that such conduct has occurred should adhere to the procedures in the Organization’s Policy. When suspected fraudulent activity, waste, or abuse is observed by, or made known to an employee. The employee should immediately report the activity to his/her direct supervisor. If an employee believes that their supervisor are involved in the activity, he/she should immediately report the activity to the supervisor’s manager as well as the CFO and CEO.
If an employee believes that the supervisor’s, management and/or the CEO may be involved with the activity, the employee should either contact the Internal Auditor directly or file a report via the Fraud, Waste, and Abuse Referral System also known as the Fraud, Waste, and Abuse Hotline, (McMullen, A. (2012). When an employee is suspected of any activity, he or she should not make any attempt to investigate the suspected activity prior to reporting it. The Internal Auditor’s Office will coordinate investigations of fraud, waste, or abuse.
The employee should not destroy any document or record that he or she knows may be relevant to a past, present, or future investigation of fraud, waste or abuse. Employees that suspect violation or who have questions, complaints or suggestions, should share their concerns with someone who can address them properly. Thus, it’s a myth that fraud is a big scheme that should be uncovered sooner and easy to detect. Most all fraud starts small and then gets bigger and bigger, until something becomes noticeably different or unusual.
Once fraudulent activity has been noted, someone should take action to investigate the situation and determine if a fraud has been committed. Being aware of these activity are only step one and is usually not enough for the organization. Once these activity are identified, you must take action to determine its effect. Evaluating the fraudulent activity may be accomplished by financial analysis, observation or by any other technique that tests an apparent weakness. Once the analysis is complete it’s time to move on to correct the situation (Wells, 2012). . Critique the ethical nature of Pavlo’s actions in this case: Walt Pavlo, the Credit Collections Manager at MCI Telecommunications, Inc. Falsified MCI accounts receivables and stole $6 million from MCI, spoke of greed, opportunity, and culture. His testimony and facts, however, provides a far different view. This was a willful, active fraud involving a very small group of customers, executed by a very small group of people. As a Fraudsters and white-collar, he acted deliberately, out of greed, power and perhaps even stupidity and ultimately got caught.
These perpetrators exhibited many typical fraud behaviors. White-collar criminal that involves embezzlement and breach of trust being the prevalent modes involved. Pavlo had to collect on debts owed to MCI by large corporate clients. Pavlo’s job was not easy. MCI extended large amount of credit to high-risk customers and refused to write-off receivables as bad debt. By doing this, MCI was in violation of accounting principles. Pavol was desperate to keep his job, he began to employ suspect accounting techniques to hide the unpaid debt.
By falsification of accounting record in contravention of Pavlo, also found a way to siphon off $6 million for personal aggrandizement (Pavlo Jr. and Weinberg, 121). Pavlo claim of trying unsuccessfully to get MCI to take a $180 million charge blatantly conflicts with the facts. In a 2002 article, Pavlo had claimed the number was $88 million. Either inflation has increased his number or he didn’t review his earlier stories! Pavlo’s actions was illegal which would be characterized by deceit, concealment, or violation of trust.
Which are not dependent upon the application or threat of force or violence. Pavlo action was a self-centered and motivated by his own greed, without regard for ethics or fiduciary duty to co-workers, and stakeholder (Pavlo Jr. and Weinberg 121). When it comes to Walter Pavlo Jr. and the choices he made. The phrase “power tends to corrupt and absolute power corrupts absolutely” is false. Having power alone does not have the ability to corrupt, but it does provides one of the three elements necessary for a person to commit a fraudulent act. Trusted persons sometimes become trust violators.
When they conceive themselves as having a financial problem which is non-sharable, are aware these problem can be secretly resolved by violation of the position of financial trust and are able to apply to their own conduct which enable them to adjust their conceptions of themselves as trusted (Coenen 2009). Regardless of what moral code may be in place. Corruption occurs when a person breaks the moral code or principle that pertains to him or her. Which is what Pavlo did. According to the fraud triangle, in every instance of fraud three elements are present: motivation, opportunity, and rationalization (Coenen 2009).
This theory was developed to help identify possible fraud, a name given to corruption within a business, it also applies to corruption in general. In order for corruption to happen, an individual or group of individuals, must have motivation, opportunity, and significant rationale to justify committing a fraudulent act. Because three elements must harmoniously combine to create an environment in which one may act corruptly, only one of the three elements needs thwarting to break the triangle and prevent corruption (Wells, 2012). All element of the fraud triangle must be present to break a moral code.
The first element necessary where corruption may occur is motivation. Motivation can include a financial need, such as the need to take care of an ill parent who is quickly accumulating medical expenses far beyond what his or her family can pay. But motivation to commit a corrupt act can include perceived need also. When a person may be earning enough money to cover all of his or her needs, but he or she may feel driven to commit a corrupt act by a strong desire for a higher standard of living than he or she can not afford. A person may also come motivated by non-financial pressure to commit a corrupt act.
A person can also be motivated by non-financial pressure to commit a corrupt act (Pavlo Jr. and Weinberg 121). The second element which must be in place to commit a corrupt act is rationalization. Humans have the complex ability to think deductively, inductively, and process large amounts of information to make rational decisions. Unfortunately, one’s ability to “employ reason” (rationalize) may or may not lead him or her down the right path. Pavlo’s story provides an excellent example of poor reasoning. Pavlo rationalized stealing from MCI by telling himself that MCI was committing much more heinous crimes than he was.
He believed that MCI was so crooked that it could not come after him for doing the much lesser crime of stealing a few accounts receivables (Pavlo Jr. and Weinberg 257). Pavlo’s opportunity to pilfer accounts receivables was granted to him by MCI’s poor control environment. Pavlo often engaged the accounts receivable department in a practice known as accounts receivable lapping, posting payments received from one customer to another’s account to make overdue accounts appear current, in order to meet corporate bad debt expense goals (Pavlo Jr. and Weinberg 101).
MCI’s management encouraged and rewarded Pavlo for accounts receivable lapping and many other inventive and extremely illegal acts that helped MCI reach its projected financial numbers. MCI’s flagrant desire to illegally hide its bad debt gave Pavlo the opportunity to conceal the accounts receivable he was thieving within the constant myriad of lies that constituted MCI’s financial department (Wells, 2012). He was involved in asset Misappropriation: Asset misappropriation schemes are frauds in which the perpetrator steals or misuses an organization’s resources.
Common examples of asset misappropriation include false invoicing, payroll fraud, and skimming (Kranacher, Riley, and Wells, 2010). Corruption: In the context of occupational fraud, corruption refers to schemes in which fraudsters use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else. For example, employees might receive or offer bribes, extort funds from third parties, or engage in conflicts of interest.
Financial Statement Fraud: The third category of occupational fraud, financial statement fraud, involves the intentional misstatement or omission of material information from the organization’s financial reports; these are the cases of “cooking the books” that often make front page headlines. Financial statement fraud cases often involve the reporting of fictitious revenues or the concealment of expenses or liabilities in order to make an organization appear more profitable than it really is (Kranacher, Riley and Wells, 2010).
It is fact that during 1996, MCI wrote off $120 million of carrier receivables and recognized even more exposure by adding to bad debt reserves. So, his claim that MCI “hid” bad debt expense is just bogus. He further claims “his bosses” said the maximum that could be written down would be $15 million, and that is also senseless (Pavlo Jr. and Weinberg 257). 4. Apply one (1) theory related to crime causation to this case: No one theory of crime explains all criminal activity and most theories are complementary to one another.
You should approach crime causation with a multidimensional view because of the vast complexities involved in human actions and interactions. With that in mind, let’s take a look at one of the prominent theories that appears to relate to Pavlo’s fraud case. Social engineering/Social learning theory causation: They learn to engage in crime, primarily through their association with others. They are reinforced for crime, they learn beliefs that are favorable to crime, and they are exposed to criminal models.
As a consequence, they come to view crime as something that is desirable or at least justifiable in certain situations. The primary version of social learning theory in criminology is that of Ronald Akers and the[pic] description that follows draws heavily on his work. Akers’s theory, in turn, represents an elaboration of Edwin Sutherland’s differential association theory. The Sociological school of crime causation defines that social disorganization is a major factor in criminal behaviors.
Specifically the Sociological Theories theorize that the impact of individuals with the surroundings, groups, and social environment can dictate criminal behavior. Under this school of crime causation crime can be the growth of subgroup relationships (McMullen, 2012). According to Weinberg’s research, white-collar criminals are not just ordinary people; they are smart, well-educated and ambitious. They often start as wide-eye fresh graduate’s at large corporations of which profit-driven culture infiltrates all levels within. Why do they turn out to be the thieves stealing from the economy $2. trillion per year? Weinberg argues that these people like Pavlo, do not just wake up one day and decide to commit in a greed-inspired fraud. In fact, only 7% of perpetrators have prior conviction. They operate business under the performance pressure from investors, and stockholders, which present opportunities for companies to hide flaws and falsify earnings at multiple levels. Weinberg presents a triangle of Need/Incentives, Opportunity, and Rationalization as a combined force triggering ordinary people to commit extraordinary crimes.
In his book, he suggests that by pushing ethics education at school and setting the right tone at the top, we can reduce the damages caused by corporate frauds (Kranacher, Riley, and Wells, 2010). The connection between fraud and the “tone at the top” of an organization has received international attention over the last few years. Tone at the top refers to the ethical atmosphere that is created in the workplace by the organization’s leadership. Whatever tone management sets will have a trickle-down effect on employees of the company.
If the tone set by managers upholds ethics and integrity, employees will be more inclined to uphold those same values. However, if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel that ethical conduct is not a focus or priority within the organization. Employees pay close attention to the behavior and actions of their bosses, and they follow their lead. In short, employees will do what they witness their bosses doing (McMullen, 2012).