Question

In April 2010, a gold mining company, Cahaya Emas was formed. Cahaya Emas had convinced numerous mining experts that they had rights to one of the largest gold deposits ever discovered. The gold mine, located on a remote island in the East Coast of Peninsula Malaysia, supposedly had so much gold that the actual price of gold on the open market dropped significantly due to the anticipation of an increased gold supply. Within a few months, thousands of Malaysian – big-time investors, pension and mutual fund, managers and many small investors, including factory workers – got caught up in “Gold fever”. The company’s stock price shot from pennies to more than $250 per share before a 10-for-1 stock split was announced. Thousands of investors believed they were on the verge of becoming millionaires.
Two years later, the president and CFO, who are also the founder of the company were found committing financial statement fraud which went on for about two years. The president and the CFO were the fraud perpetrators. Kate, the accountant was aware of the financial statement fraud being committed by the management of her company, but she never reported it.
As is the case with many frauds of this type, numerous class-action lawsuits were filed against Cahaya Emas management, alleging that they misled the shareholders.

REQUIRED:
A.   Discuss some of the possible reasons for Kate’s hesitance to come forward to report the financial statement fraud.
B.   What were some of the perpetrators’ motivations to commit financial statement fraud?

Answer 1

A.   Discuss some of the possible reasons for Kate’s hesitance to come forward to report the financial statement fraud.Numerous late financial statement filings

1. Frequent restatements of financial statements
2. Disputes between auditors and managers
3. Lack of adequate internal controls
4. Unusual related-party transactions
5. Significant decisions being made by a few individuals or a select group
6. Inexperienced board – few financial experts
7. More inside vs. outside board members
8. Footnotes appearing to alter the accounting methods, estimates and assumptions
9. Compensation agreements indicating bonuses and stock options are awarded based on key financial targets or ratios

Sudden increase in revenues with only a vague explanation provided the president and CFO, who are also the founder of the company were found committing financial statement fraud which went on for about two years. The president and the CFO were the fraud perpetrators.

the financial statement fraud being committed by the management of her company.   

B.   What were some of the perpetrators’ motivations to commit financial statement fraud?

Short-Term Profit

Some shareholders aim to quickly increase the value of the firm. These types of investors focus on short-term gain and target firms that seem likely to rise quickly in value. Although investment appreciation is a target of all investors, these short-term investors typically maintain their ownership interest for less than a year. Long-term company objectives are not considered when such investments are made, as the shareholder's focus is to influence a rise in the firm's value

Long-Term Profit

Although all shareholders aim for a return on their investment, many focus on long-term growth rather than quick returns. Shareholders with a long-term perspective also want the firm to increase in value, as this will increase the value of their stake in the business, but they intend to maintain their investment for the long haul. Such shareholders will advocate company policies that promote long-term growth and sustainability. Many are also motivated by regular dividend payments that compensate them for maintaining their investment in the firm.

Strategic Influence

The objective of many shareholders is to influence the governance of the firm to meet their individual objectives and goals. Depending on the percentage of ownership she holds, a shareholder can significantly influence the business's strategic decisions. In privately held firms, shareholders have greater influence than stockholders do in public corporations. Majority shareholders can make major decisions without input from other parties, although minority shareholders have a right to be notified and consulted about such moves. When making an investment, a shareholder is often able to negotiate his level of influence in the firm.

Minimize Risk

All shareholders share the objective of minimizing the risk of their investment. Shareholders seek out investments that have the lowest potential for financial loss and do what's necessary to prevent the loss of their principal. If shareholders lose confidence in a firm's ability to lower risk and ensure shareholder profits, they will quickly divest themselves from the firm.

these type of the perpetrators’ motivations to commit financial statement fraud.