Transformation of Illegal Online Activities, and Financial Statement Fraud

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Transformation of illegal online activities

Decker et al. (2015) contend that despite the fact that most technological innovation has played a vital role in variety of criminal activities, none has been more influential in facilitating crime than the internet as it has transformed illegal online activities in several ways. To start with, cybercrime continues to grow daily as individuals, businesses and governments increasingly become connected to the internet. In addition, the possibility of one attacker to target many victims has increased and as such has resulted to increased cybercrimes such as distribution of malware (ACCA, 2020).

Further on, cybercrime has fostered two types of crimes, cyber-dependent crimes and cyber facilitated crimes (Decker et al., 2015). Cyber-dependent crimes include crimes that are only possible using computer networks or other form of ICT. In other words, without internet, these crimes cannot be committed. These crimes include hacking sensitive individual or business data and spreading malware. Comparatively, cyber-facilitated crimes are those criminal activities that can be carried out online and offline, with the internet playing a vital task to increase geographical reach and speed of the crimes. Example of these crimes includes non-cash payments crimes which are classified into card-present fraud which occur offline mostly on retail outlets, and card-not-present fraud which is carried mostly online (Europol, 2017).

Moreover, technology has been instrumental in facilitating trade of illicit goods online as criminals continue to expand their illegal businesses. According to Europol (2017) the drug market is the largest criminal market of illicit goods on the internet. Similarly, facilitated by online markets, intellectual property infringements have been on the rise. A case in point in the E.U, pirated products and counterfeits account 5% of the union’s exports (Europol, 2017).

Further on, ACCA (2020) pin point that improvements in communication technology has made criminals to rely on all communication channels not just to communicate within their networks but to contact huge numbers of potential victims. For example, email has been used to spread malware and recent unprecedented growth of social media has been used to target victims for human trafficking and child abuse. Additionally, innovation in technology has made financing of criminal activities and money laundering easier. This view is in consonance with Decker et al. (2015) assertion that new methods of payment which are often hard to regulate have aided criminals with new, better and safer ways to finance and thus expand their activities.

Costs linked with financial statement fraud

Firstly, Burnside and Morgan (2014) explicate that the effects of financial statement fraud on a firm’s morale and culture can be devastating. This is due to the fact that employees working for a firm that has committed fraud are embarrassed and being associated with the firm is often troubling. Moreover, even when employees quit and are employed elsewhere, they may still carry the effects of the fraud into their new jobs. For employees who are involved in the fraud and are not lucky enough, once the fraud is realised they may lose their jobs or at worst face jail terms. Secondly, when the management at Ikeoz misappropriates its assets, the loss is often easy to quantify and as such the company may experience financial loss Furthermore, fines as a result of misleading shareholders, unwillingness of financial institutions to offer credit and countless civil suits, may all lead to huge financial loss for Ikeoz. Thirdly, a company involved in fraud will suffer increased audit costs since auditors will spend more time scrutinising financial statements. This result to increased audit costs which affect the bottom line of the company involved in fraud (Ioraver and Upaa, 2015).

Factors motivating Ikeoz’s management to commit fraud

Lokanan (2015) elucidates that when the management team have some motives to commit financial fraud it will always have some justification for its actions and when they feel they have the right conditions, they often commit fraud. Against this background, three factors will be used to explain Ikeoz’s management motives to commit fraud. To start with, Rakutko and Selezneva (2015) assert that the management of a company are often motivated to commit financial fraud when an opportunity such as weak or lack of internal control, absence of auditors, and board of directors negligence to oversee the actions of managements presents itself. Secondly, Lokanan (2015) sustains that often times employees involved in financial fraud always find ways to justify their actions. For example, Ikeoz’s management may rationalise their behaviour by arguing that they were trying to protect shareholders by manipulating financial statements to increase the share price. Thirdly, Rakutko and Selezneva (2015) explain that due to pressure related to habit, prestige and economic, a firm’s management may be motivated to commit fraud. As such, it can be maintained with certainty that Ikeoz’s management committed fraud so as to benefit from £ 320 million compensation.

Ways of committing financial statement fraud

To start with, Burnside and Morgan (2014) posit that one way to commit financial statement fraud involves phantom revenue posting. This act involves the management recording sales before they are made, like in the case of Ikeoz, or before payments are made, or prebilling future sales. Similarly, a firm’s revenue can be easily manipulated by inflating sales and thus overstating its revenue. This was the second way used by Ikeoz’s management to commit fraud. Furthermore, a firm can manipulate its own assets by posting that certain equipment are leased as operating lease when in reality they are capital lease. Moreover, a firm’s assets may be overstated, or a firm may post assets that do not exist (Rakutko and Denishevich, 2015). Further on, by not logging a firm’s accounts receivables or by not recording assets with impaired values, the management may overstate a firm’s assets.  Lastly, the management may decide to misrepresent or omit various types of financial information in order to report a more positive appearance of a firm (Iorover and Upaa, 2015).most of the times, companies reported to have committed financial fraud have been discovered to have omitted various items from their reports.

References

ACCA (2020): Economic crime in a digital age [Online] Available at: https://www.accaglobal.com/content/dam/ACCA_Global/professional-insights/EconomicCrime/JasonPiper.EconomicCrime.pdf (Accessed on 7th May 2020).

Burnside, C. and Morgan, A. (2014). ‘Olympus Corporation Financial Statement Fraud Case Study: The Role That National Culture Plays on Detecting and Deterring Fraud.’ Journal of Business Case Studies, 10(2), 175-184.

Decker, S., Moule, R. and Pyrooz, D. (2015). ‘Criminal and routine activities in online settings: Gangs, offenders, and the Internet.’ Justice Quarterly32(3), 471–499

Eoropol (2017): Crime in the age of technology [Online] Available at: https://www.cepol.europa.eu/sites/default/files/924156-v7 Crime_in_the_age_of_technology_.pdf (Accessed on 7th May 2020).

Ioraver, N. and Upaa, J (2015). ‘Consequences of Financial Statement Fraud: A Developing Country Perspective.’  International Journal of Business and Management; Vol. 10, No. 8; 2015

Lokanan, M., (2015). ‘Challenges to the fraud triangle: Questions on its usefulness.’ Accounting Forum, 39(3), pp. 201-224.

Rakutko. S. and Denishevich, E. (2015). ‘Study of Regulatory and Methodological Basis of Estimating Credibility of Accounting (Financial) Statements.’ Economics and entrepreneurship, 6, 623-627.

Rakutko, S. and Selezneva, E.(2015). ‘Falsifying Financial Statements in Terms of Global Market.’ Economics and entrepreneurship, 4, 581-584.