The article “Will history repeat itself?” analysis the causes of financial fraud and give companies antifraud tips toward top level executives. At the beginning, this article takes examples of frauds at ENRON and WORLDCOM that managers commit frauds more than hundred million through fraudulent deals or personal use. Since that, SARBANES-OXLEY has enacted legislation for the establishment of independent boards and penalty of related frauds. However, because of complex market situation and internal collusion, SARBANES-OXLEY does not work very well in the actual world. Thornburgh, takes the job as WORLDCOM bankruptcy trustee, states that good employees play an essential role in corporation. For example, directors who employed by corporation should initially report the questionable proposals, and corporation should employ managers who could give truly feedbacks to the board of directors, also employs auditors that pay more attention on the aggressive accounting plans.
According to Thornburgh, an imperfect corporation’s governance system leads to business failure. There are four factors lead to the failure of corporation’s governance, which include inaccurate financial statement, inconsistent long-term interest, unethical top executive’s behavior, and undeveloped organization culture. As the good governance practices, the boards of directors and shareholders should undertake the direct and indirect management of corporation. Moreover, as top executives under pressures of good-looking earning statements, they become greedy and ignore the internal control. Thus, they take advantage of their position and collude with other people to achieve personal goals.
Therefore, in order to develop well-established corporation governance, organization should encourage nonexecutive directors like shareholders to engage in corporation management, so that the company can gain more useful advice from them. An effective internal control brings effects to corporation. However, because it is hard for internal control members to track the complete record of important documents, and difficult to find out an adequate support for some transactions, the internal control members could not get a well understanding of corporation’s red flag, and therefore fail to address financial fraud timely.
To solve the financial fraud among top executives, auditors should pay more attention on three areas, which include aggressive accounting techniques, management obsession with revenue and profits, and control overrides. In terms of aggressive accounting techniques, auditors should be cautious about complicated transactions that they get confused. Also they should pay more attention for the large numbers comes in and out of the statements. Toward management obsession with revenue and profits and control override, because top executives could override controls through changing business transactions and reversing accounting balance, this makes auditors hard to understand the purpose of the corporation. Moreover, there are some tips for auditors when they facing difficult investigation. For example, asking questions to appropriate people, taking responsibility for detect financial fraud.
In this article, to some extent I agree with the establishment of independent boards, because independent boards will not take company funds as personal benefits. I also agree that greed is only part of