PHASE II -- QUESTION 8
GAAP allows managers flexibility and discretion in reporting the corporation’s financial performance. Why do/did some managers engage in fraud?
posted by Dr. Scott @ 9/20/2005 02:36:00 AM
50 comments
50 Comments:
In my opinion, many managers engage in fraud purely out of selfishness. As we saw on the documentary entitled "Bigger than Enron," the number one reason that managers commit fraud is to "up" their stock options. If they exagerrate their companies performance, they entise others to purchase stock in their company, which ultimately increases the worth of the companies stock. Many employees in the Enron scandal made millions of dollars when they cashed in their stock options, this money was a great deal larger than they would have ever seen on their regular paychecks. I think that when this is the case, it is very difficult for a manager of a business to remain honest when fudging the truth a tiny bit may make them into a multimillionaire and telling the truth would make them a measly paycheck.
Despite GAAP allowing managers flexibility and discretion in reporting the corporation’s financial performance, I believe that managers engage in fraud, both in the past and present, because they think they will be able to get away with it. With the SEC protecting the rights of investors, and the Sarbanes-Oxley Act encouraging and enforcing reliable and truthful financial reports, it is very difficult for managers to get away with fraudulent activity. According to The CPA Journal, “the pressure to meet revenue expectations is particularly intense and may be the primary catalyst leading managers to engage in earnings management practices that result in questionable, improper, or fraudulent revenue-recognition practices.” A company’s inability to meet revenue expectations often results in a decline in stock price, a loss in reputation capital, and investors beginning to doubt that company’s success. It also results in the managers losing money. Therefore, these managers inflate some numbers on their financial statements in an attempt to avoid these issues by covering up their companies’ losses. Not informing the public of a company’s financial progress, or lack thereof, is fraud. It causes many people to lose money as a result of it, as they continue to invest in a company that is withholding very significant information from them. Fraud will only result in a net loss in the long run.
References:
http://www.nysscpa.org/cpajournal/2004/1004/essentials/p44.htm
In addition to the previous two comments, managers commit fraud out of greed and with the belief that they can indeed get away with this fraud. However, I do believe the GAAP allowing for some potential flexibility and discretion is ok to an extent. If a manager were to slightly expand some numbers or show an increase in their finances even though they have a loss, this at first in my opinion is ok. The reason for my belief is that the manager will do his best to turn around their losses and earn enough finances and earnings so that the previous financial statements mean nothing. If the managers were to do everything in their power to correct their financial losses immediately, so that when the next auditors report is due, with their new financial statements, and to not just continue to commit fraud and manipulate the statements over and over again, then this practice performed by managers is acceptable.
I completely disagree with rickwood's previous post. It is untrustworthy for a company to release to the public that they had a profit in the previous year when infact the company generated a loss. The potential stockholder is risking their money under false pretenses when the managers can not completely guarantee that their situation will improve at all.
Another reason managers engage in fraud is due to materiality. 5% has been the standard cut off point for materiality. (<5% is immaterial). If something is immaterial it does not have to be disclosed. GAAP instilled the 5% so that SEC readings would not be very long. Recently the line has blurred so that anything expected to move the market must be disclosed, but that cannot be determined until afterwards. Large companies can easily fudge numbers and still be with in GAAP's standards, but its a pretty blurry line. Managers want to meet consensus earnings estimates, whether they're selfish or trying to fulfill their duties is another gray area.
http://www.investopedia.com/articles/analyst/03/041603.asp
Senior managers, as internal users, face a lot of pressure from expectations of their company and reputation. In such a high position they have the power to override associates' ethical methods. If the managers hold a lot of stock in the company, have large stock options, and their bank loan contracts are in jeopardy they become quite tempted to 'look the other way' while financially reporting. Sometimes managers are desparate and see numbers as merely 'numbers' and nothing more, something you can manipulate and it won't change much.
Previous blog by me, citing: 7:09pm http://www.ftmastering.com/mmo/mmo13_3.htm
I tend to see the reason why managers engage in fraud in a diffrent way. I belive that if managers were not in charge of a publicly traded company, he/she would not feel the pressure from investors and in turn feel presure from the company to make the company look good on paper. We must remeber that the company wants more money from investors and it knows that for example, overstating net icome by slightly less than 5 percent would be advantagous to get more investors money. On the other side of the equation, managers are aware that if they report poor earning, and the company reports poor earning, people will sell their stock, giving them less common stock with witch to invest. Managers fear that investors will demand, as often occurs, a shakeup in the leadership in the company if it is not performing well so mangagers may in engage in fraud to protect their own job.
Though I don't agree with this opinion, I found another reason some people believe managers commit fraud that I thought would be interesting to bring up. In a SEC speech it was said that "Some argue that insider trading is a legitimate form of compensation for corporate employees, permitting lower salaries that, in turn, benefits shareholders." I doubt many managers committing fraud honestly think they will benefit shareholders, but it is an interesting thought to consider when discussing reasons for fraud.
http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm#FOOTBODY_8
In disagreement with Rickwood's comment, I believe that giving managers more flexibility in their reporting is a mistake because it creates even more gray area. The goal should be to have as much truthfull and accurate accounting as possible, so should managers, main of whom have proven themselves to be completely consumed by greed, be given more of an opportunity to be inaccurate?
I agree with Emily regarding fraud. Shifting numbers is not OK. That's the whole point. The latitude we have within GAAP has to do with such things as the definition of "materiality" (the 5% rule is not a rule and there are as many ways to measure materiality as there are auditors) and the way we develop all of the estimates that go into financial statements. The tough ones are not the clear frauds. The tough ones are those where management pushes right to the edge and we auditors must determine whether or not they have actually crossed the line or not. Does SOX help with that?
One more thing. Sam stated that the problem may not be as severe at companies that are not publically traded. Most of you will end up in such companies. The temptation to misstate the financial statements is just as strong in even sole proprietorships as it is in publically companies. The means and reasons differ and they don't injure as many people but they frequently happen. Management worries about banks, regulators, partners, holders of closely held stock, and the IRS among others. What's worse, the smaller companies tend to have weaker controls and less expertise so that fraud and errors are a bit easier.
I agree with Dave Conrad in that the smaller the business, the easier it is for the company to commit a fraudulent statement, as they may be less educated and inexperienced in regards to the GAAP, thus it is easier for them to engage in fraudulent actions and not even know or mean to commit these frauds. Also, I can see how no matter how big or how small the company, there is always a strong desire to submit false statements, as greed and the bigheadedness some managers have in regards to their positions and well being make them think, as I previously stated, “they can get away” with these untruthful and fraudulent statements. I personally don’t know if managers will ever cease to engage or commit fraud, as they incentives for managers in the short-run may be to great for the managers to realize what they are doing is wrong, or is going to be the ruin of their position, even their company. We can only hope that some managers will wise up, and think more about the company than their own financial well being.
To answer Dave Conrad’s question, I believe that SOX does make an effort to help with distinguishing the line between fraudulent and non-fraudulent behavior. With the many components of the legal document, SOX outlines many rules that the board must follow. It explains who, what, when, where, why, and how an audit should take place. With such strict guidelines put into effect, auditors, as well as managers, should know what is considered “crossing the line.” Also, I agree with both Dave Conrad and Brandon about how much easier it is for managers of smaller companies to commit fraud. With less of a public spotlight, management of small companies can take advantage without it making headline news. When it comes to smaller businesses, I agree that managers have different motives, and I believe that they do have more personal reasons for committing fraud. In larger companies, managers might commit fraud because their company is not meeting expectations or deadlines; but in smaller companies, managers most-likely do it to get more money or obtain better stock options.
I have actually had personal experience in watching the small company that I work for, An Aquarium store, push the limit on its financial statements and I do not think it is a matter that will ever be resolved. The fact of the matter is that there are so many companies for auditors to watch over that even if they did get to audit each one, they would not have the time to comb through each and every business completely, especially smaller ones. Likewise I have my own sole proprietorship and it is very tempting to skew numbers in my favor. The fact of the matter is that everyone watches out for themselves, and with that trait always present, we will always have problems controling financial reporting fraud.
Why do managers engage in fraud? My personal opinion is that managers want to find the loophole of the GAAP that they can make a lot more money {thus more profit}, reducing costs and expenses. When their company has calculated its Earnings-per-Share and Debt-to-Total-Assets ratio and discovers that they have lost business, managers attempt to make the data show that the company is growing rapidly. The reason why managers did engage in fraud is because GAAP (Generally Accepted Accounting Principles) are only a set of STANDARDS that they are expected to follow. They are not specific rules that the managers and the company have to obey.
“There is plenty of room within GAAP for unscrupulous accountants to distort figures.” (http://www.investopedia.com/terms/g/gaap.asp)
As Julia said earlier, I agree with her that managers still engage in fraud because fraud in financial reports is not a publicly stated issue. The investors are well protected by the SEC so they won’t bring their problems to the Press. They are certain that their investments are in good hands. As the investors invest more money into their corporations, the companies overcomes the standards and do all sorts of tricks with their cash flow.
http://www.findarticles.com/p/articles/mi_m4153/is_n3_v54/ai_19717294
This article talks about the prevention of frauds. A security director and an audit director created a series of short programs. Each program suggested preventions in wrongdoings and detection and proper handling. A CEO agreed to this and put together 4 fraud management conferences. They don't quite have control of fraud cases but they are certain that the number of cases has not been skyrocketing. These programs attracted more than 500 managers. It was the first step to prevent and destroy frauds.
After reading "Why Management Fraud is Unstoppable" by Manuel A. Tipgos, I believe that ethiics need to play a larger role for a maneger. In other job fields where ethics are also important, ethics training is tought to employees and manegers every year (see Raytheon). Perhaps the problem isn't with the structure of the system but rather those who are in it.
Refrences: http://www.raytheon.com/about/ethics/overview/index.html
http://www.nysscpa.org/cpajournal/2002/1202/features/f123402.htm
As Coffee states on page 303 in the Cornell Review; "Althought the increasingly competitive business environment makes managements survival less vertain, the instant wealth promised by stock options also gives rise to an incentive to cheat, even when managements survival is not in question. Together, the fear of ouster and the temptation of instant wealth increase the likelihood of fraud."
I personally disagree with this statement because if the business is already high in instant wealth then why bother to cheat and gain more money, thus creating more profit? This is just plain stupid. Unless some kind of manager is very greedy, I can't seem to find a good reason why they would want to cheat their way to greater profits and a increase in business.
Just to clarify something, I don't want you to think all of that those who commit fraud are scheming pirates out to get rich at others' expense. All too many times they are small business owners putting 12-hour days trying to keep a failing business alive. They don't understand GAAP and they think if they can just accelerate a little income, the bank will approve the loan and they will be able to continue. They are concerned about the wellbeing of their families, their employees and their customers.
This is the reality and we are the ogres that have to come in and tell them they committed a fraud and they got the bank loan under false pretenses. That is what makes it tough.
I have a mixed opinion on Dave Conrad's most recent post. Yes, it must be tough on small business owners who are trying to feed their families and please their customers. They work hard and deserve to make income and be successful, but they have a certain responsibility to learn the laws and abide by them. Look at CEO's and CFO's. They have families too,as well as customers, stockholders, and many employees. Those employees also have families, etc. There are many harsh penalties towards them, such as jail time and fines for not complying with law. But are they that much different than the small business owner? Are they "scheming pirates out to get rich at others' expense?" If one is to feel apathy towards a small business owner, I feel as though they must do the same for a manager in big business.
I think we are looking at the big business as just an economic entity. However, we know that it is not. Big business is both an econimc force and a political one. If you look at the campain contributions of Lockheed Martin ( http://www.corpwatch.org/article.php?list=type&type=9) , the totalcontribution to all canidate was 1.9 million dollars. Simply accepting the money creates an unethical situaton where the canidates are no longer able to make unobscured decisions concerning this company. Especailly in legilaton, big business has tended to be helped by recent acts (Sox-Oxley). With all the help to the larger comanies, the smaller companies are faced with comparitivly higher costs and therefore have problems being profitable. This may explain why it seems that small business tend to not know the accounting rules or simply break them.
refrence:http://www.corpwatch.org/article.php?list=type&type=9
Dave's comment on small business owners is a very vaild point. He didn't say ALL small business owners he said some. And, its the same for large companies who commit fraud. Not ALL owners/managers commit fraud. Those that do feel they have a good reason, some just do it for no reason. In my opinion I feel that the larger compaines who commit these fraudulent acts are because they can get away with it plain and simple. There are so many people in the company how could it get pinned on them. Whereas small business owners feel they will gain something from it, they know they could get caught but they feel their decision is right because they are furthering their company. Neither company is right, fraud is wrong and most likely you will get caught whether you are from a big company or a small company.
The main reason managers will engage in fraudulent financial activities is for their own personal gains. Nearly all major corporations give high level managers stock options. If the company fails to meet it's expected quota, the market responds negatively and the stock price will fall. Since an increasingly large porion of manager salary has become their stock option, it becomes tremendously tempting to comit fraud in order to preserve the income that supports a managers livelyhood.
In my opinion, a prime case of fraudulant activity going unnoticed is that of Richard Grasso. After recieving a $139.5 million dollar retirement payout and an entitlement to another $48 million, people were both outraged and suspicious. After all he is just the director of the NYSE and his pay is more than 76.4 times larger than that of the president of the United States. In an age post Sarbanes-Oxley and SEC, people are challenging this "overcompensation." In fact, the state of New York has filed a lawsuit against Richard Grasso claiming that he hid elements of his pay package from the NYSE board of directors and bullying the members of the board into agreeing to such a large pay package. In this particular case, it is very unclear as to why Richard Grasso would even begin to believe that he deserves such an extraordinary amount of money. However, he is fighting back very adhemently and says he is owed every bit of the money. I believe the reason that this manager was offered so much money was out of bribery. I think he was bribed by his own company with a high retirement plan to overlook some of the worst stock-frauds of the 1990's that his company took part in. In short, the money was "hush" money and in return Grasso and his fellow workers agreed to say nothing about the stock-fraud that was taking place inside their company. Perhaps bribery plays a big role in why managers engage in fraud.
Sources: www.tnr.com/easterbrook.mhtml?pid=849
www.mutualfunds.about.com/cs/investmentfraud/blgrasso.htm
I agree with the expert Dave Conrad when he refers to small businesses and says, "They don't understand GAAP". I don't believe that either large companies or small businesses should be able to alter their financial records at all even if it is a minor bit, they should being showing the public their true incomes. However, corporate businesses employ hundreds of employees, including lawyers and auditors who are very familiar with GAAP, the SEC, and all the accounting rules. Whereas, many small businesses are dependent upon their own knowledge and lack of expertise in accounting specifically, causing an oversight in complying with the GAAP.
In response to what Nicholas wrote, I also agree that managers do things for their own personal gain, but can you actually say that you wouldn't do the same thing? I mean, as much as one person wants to help other people you have to look out for yourself first. Also, regarding Sophia Pappis' entry, it may seem like it is out of selfishness but still it's also to protect themselves and if having to be selfish makes you more protective and aware of your corporation's financial performance than I think it's necessary. I believe this question relates to our learning about sole proprietorship and corporations and their disadvantages and advantages of handling both because like Dave Conrad said, some smaller companies do it to get by.
In response to cynthia's last blog when she said, "it may seem like it is out of selfishness but still it's also to protect themselves and if having to be selfish makes you more protective and aware of your corporation's financial performance than I think it's necessary," I have to disagree. Suppose a small business alters their financial reports to make them look like they have a better position, what is to happen when the following year their company does even worse. Now, instead of just the owner being in a horrific financial position(possibly bankruptcy), he/she has brought down others with him/her, as they had decided to invest in the company under false pretenses...how is that ethical?
I am in partial disagreement with Emily about fraud hurting others. Specifically in a sole proprietorship, the only person who is hurt is the sole proprietor. All of the weight from their financial statements bear down under the sole proprietors social security number, which is their tax identification number. They have no shareholders to be hurt from their dishonesty. I personally have been tempted to skew my numbers upward in my sole proprietorship, becuase although I have to pay more taxes on this income, it also allows me to have a better chance of receiving loans from banks to finance my business. If my business does fail in the future, the only person who is hurt is me. The bank could possibly be hurt if I defaulted on a loan they approved me for, but they will eventually get their money in some form, from my assets.
In addition to the reasons that have been stated, I feel there is another reason that influences many managers to commit fraud. It is simpler then reasons that have been discussed and it has nothing to do with money problems or accounting and finance. It is the simple fact that managers are told NOT to do this act. When someone is told not to do something, it is much more likely that they will try it. Take for example when you were a young child and you were told not to run across the street. How tempted then were you to just take off right across that road? It's almost human nature, and many of us feel this way, managers included. The rules and regulations of GAAP prohibited these fraudulent activities so obviously some managers will be tempted to pursue these wrongdoings.
I would like to respond to Emily's comment that "many small businesses are dependent upon their own knowledge and lack of expertise in accounting specifically, causing an oversight in complying with the GAAP. "
While this may be true, it is the responsibility of the small business owner to either learn and abide by the laws or hire someone who can do it for them. If they take the time to learn about starting a small business, they will not only learn the laws but most likely also learn enough about running a small business that they dont need to bend the laws. I grew up watching my father start his own business, and because he took classes after work, talked to people who knew what they were doing, and hired people to do things he wasnt trained to do, he was able to create a thriving business and do so legally, without risking his finances or others.
www.solsticecorp.com
Unfortunately, many small business owners are lucky if they understand their specialization let alone accounting. They depend on CPAs or non-CPA accountants to guide them. Many times this is done from the outside and is expected to take only a few hours a month. Sometimes the records one receives are not well organized. We must keep them on the straight and narrow. This is what the "small business" section of a CPA firm does.
Over the years, I've had a number of clients that had exceptionally good years and wanted to overstate expenses (perhaps by overestimating the allowance for losses) that year to reduce income. Disregarding the IRS implications, is there anything wrong with that and would SOX care?
In response to Dave Conrad, I find it odd that clients of his would want to overstate their expenses because according to the concept of conservatism, 'a company should choose the accounting method that will be least likely to overstate assets and income'. I believe that SOX would care because it's an unethical thing to be overstating their expenses to hide the amount of losses the company may have had.
In response to Dave Conrad's question, I do believe SOX would care if managers wanted to overstate expenses to reduce income that year because that is still falsifying their financial information. The Act would put in place in order to enforce truthfulness and reliability in financial statements. Any kind of intentional mistake is still breaking the Act, whether or not it increases or descreases income.
In responce to the expert, Dave Conrad, I belive that intentional and unintential mistating of financial information is an offense punsishable by the codes contained within SOX. I would also like to mention that in some situations both public and private companies would like to overstate expenses or understate revenue. As we saw in the case of Sunbeam, the company intetionally overestimated expenses right before Albert J. Dunlap became executive. This was done so that the company could later stop overstating expeneses and create increased profits. However, Overestimating expences may be more beneificail to a small business potential buyers of the business that profit is increasing and will continue to increase.
Refrence:http://www.citizenworks.org/enron/corp-scandal.php
I completely agree with sam. SOX should punish those who understate and overstate income. Either way is used to benefit the company. I found a website which describes accelerating expenses (http://www.usagold.com/gildedopinion/ puplava/20020322.html). The website discusses how some companies load expenses into one quarter, so that the next quarter a large increase in earnings occurs. This is much like Sunbeam, as sam described. It is known as "The Set Up" or "The Big Bath". Companies normally write off expenses all at once on items that are normally paid off over multiple asccounting periods. Investors can be hurt by these accounting practices and the practices should be punishable by SOX. The site describes Cisco and Tyco as two companies that are known for doing this.
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Managers engage in fraud for many reasons but at the heart of every reason you can be sure that the manager is always thinking about himself. Managers go about fraud by practicing earnings management. Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stockholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers. GAAP allows managers flexibility and discretion in reporting financial performance which opens up the window of earnings management when they abuse GAAP’s flexibility. A manager’s discretion is needed for estimating future economic events such as salvage value of long term assets. Discretion is also used to manage working capital which affects cost allocations and revenues. A manager’s discretion is used for a variety of reasons and is beneficial to the corporation. Although discretion can be costly when a greedy manager abuses GAAP’s flexibility and engages in earnings management to misallocate resources and make fraudulent claims, such acts that have been seen on the news in Enron, Adelphia, Worldcom and others.
www.multexinvestor.com
www.wsj.com
www.lucent.com
Indeed, many of the potential reasons for engaging in fraud that have been listed previously including temptation, selfishness, and greed, are all quite valid, however one issue that is significant to this issue has yet to be mentioned. It deals primarily with the size of the corporations actively partaking in illegal activities.
Upon completing a major study of occupational crime, the Association of Certified Fraud Examiners (ACFE) in Austin, Texas reported that businesses employing less than 100 persons "were the most vulnerable to fraud and abuse" by employees. Emerging companies were the victims of fraud more often than large corporations, and the resulting losses were much larger commensurate with their resources.
http://www.businessforum.com/fraud01.html
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Commenting further on my previous blog, there appears to be two general characteristics of emerging businesses that make them especially vulnerable to employee fraud. First, because of the closer relationship between the owner/managers and their employees, "you generally have a higher degree of trust, that facilitates the fraud of the dishonest employee," says Joseph Wells, Chairman of the Board of Association of Certified Fraud Examiners (ACFE). Secondly, "the financial controls in the emerging business are generally casual and unsophisticated." The refined security and more advanced audit procedures found in large corporations do reduce the level of fraud substantially.
http://www.businessforum.com/fraud01.html
I think it is easier to ascertain why a manager would engage in fraud before the implication of the Sarbanes-Oxley Act. Before the Act was put into place, it was far easier for managers to practice dishonest accounting. There was obviously less of a threat of being caught, and definately less awareness throughout corporations as to the reprocussions of fraudulence. Managers would probably be more likely to follow their selfish impulses and engage in fraud to make themselves richer, and would be less likely to think about the serious consequences.
In further response to expert Dave Conrads most recent comment, I absolutely do believe that a timed understatement of revenues or overstatement of expenses does violate the Sarbanes Oxley Act of 2002. Actually, there are many ways in which a company can do this in order to make it seem as though their company is at the top of its game or in accounting terms...displaying an increase in net income or increase-expenses. One interesting way to do this is by setting up fraudulate "cookie-cutter reserves." Reserves are often set up for a wide variety of future estimated costs such as reconstruction or environmental cleanup. However, a company must only set up a reserve where a liability exsists...in other words, you cannot just put aside money for a reserve if you have no future expenses in which to spend the money. Often, it is found that dishonest companies set up excess reserves for one accounting period and then lessen these reserves in another accounting period. This results in an apparent increase in net income and is completely illegal under SOX. In fact, out of 101 cases involving false revenues, 17 had to do with the misuse of reserves. Companies who have used this method include Xerox, Sunbeam and WR Grace&Co.
Sources:
http://www.sec.gov/news/studies/sox704report.pdf
I agree with Sophia Pappis that "many managers engage in fraud purely out of selfishness." When reporting financial records, managers may inflate/deflate numbers to cover expenses/assets, and launder money to themselves. This is why I believe no flexibility should be allowed. Numbers are numbers. Finances are too important to allow flexibility. Any explanations of costs or inventory, should be found in the footnotes of reports, not explained through artificial numbers that the manager produces. Flexibility only tempts managers to cheat the system and its investors.
I agree with what Kristen earlier posted that "There was obviously less of a threat of being caught." The strict rules and severe penalties amplify the threat. SOX is a monumental stepping stone in the process of stopping fraud from taking companies under. There will always be the temptation of managers to take money from their companies, and though I don't think SOX will eliminate every unethical manager, I think managers will rethink what they are doing as they see the window of opportunity for fraud closing.
As stated in the question, GAAP allows managers flexibility and discretion in reporting financial performance. I believe in part that GAAP’s flexibility gives way to scandalous acts such as earnings management. Earnings management is a very serious violation and is given incentive not only by GAAP’s flexibility but also by Capital Market Motivations (trying to influence short term stock performance), Contracting Motivations (raising a company’s numbers to look good for contractual benefits), ad Regulatory Motivations (may want to appear less profitable to gain government subsidies). Levitt stated that earnings management is not new and has evolved over the years. Conclusively, GAAP’s flexibility with the combination of massive market pressure to meet Wall Street’s expectations seems to have overridden business ethics.
Info from “Earnings Management: The Case of Lucent Technologies”
I agree with Cris Krallis's comment on 10/4 when he wrote, "If one is to feel apathy towards a small business owner,...they must do the same for a manager in a big business.
As Chris pointed out, big corporations have families, employees and customers too.
If net income in a big corporation plummets, they may have too cut wages and/or lay off employees as well. Many workers in even big companies aren't wealthy, and for them to have to take pay cuts or be laid off is a major blow.
Also, people who earn larger incomes tend to commit themselves to paying larger bills. They buy big houses, fancy cars and send their children to expensve private schools. Major purchases such as houses and cars ae long-term commitments. People often make payments on them for years, and they require mantainance. No matter who you are, shopping for a house and moving (especially into a smaller space) is time-consuming and stressful. Also, moving can be taxing for children. Think of having to change schools. This is also hard on children. Changing schools could also apply to college. Can you imagine having to transfer out of New York University, Brown or Princeton, because your family could no longer afford it? Although losing income when your income is high isn't quite as bad as as when you are middle class, it can still be a major hardship.
I conclusion, I would say that even big corporations have motivation to commit fruad, even though doing so is never acceptable.
In response to Dave Conrad's question about overstating expenses, I would say that doing so is wrong. The whole concept behind financial reports is to get a picture of the company's financial standing that is as accurate as possible. SOX was written with that concept in mind. Simply Books, an accounting software company that caters to small businesses, actually writes in their online tips, "...don't overstate your expenses or understate your income."
http://www.simplybooks.net/tips/level2.htm
In response to Dave Conrad's latest question, I agree with everyone who believed that it was wrong for anyone to misrepresent the corrent income and figures. The only reason someone would overstate their expenses is ultimately to gain something. I believe it is wrong to want to gain from false actions.
There was obviously a reason for the Sox Act. It was created to reduce eliminate fraud, or at least reduce it because it is wrong.
Nearly all of you said the overstatement of expenses to reduce current income was wrong. I agree. I have seen CEOs (with Board approval) do this a number of times and nearly always the intent was to give them a base to manipulate future income.
Just one man's opinion, but on a scale of 1 to 10 with 5 being a perfect financial statement, I think the flexibility in GAAP gives us a range from about 4 to 6. Anything outside that range starts to enter the land of fraud.
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