Harvard Case - Moss & Associates: Accounting for Financial Fraud
"Moss & Associates: Accounting for Financial Fraud" Harvard business case study is written by Swapna Gottipati, Venky Shankararaman. It deals with the challenges in the field of Accounting. The case study is 17 page(s) long and it was first published on : Jan 10, 2019
At Fern Fort University, we recommend a comprehensive approach to address the financial fraud at Moss & Associates. This includes immediate steps to rectify the current situation, implement robust internal controls, and establish a culture of ethical behavior within the organization. This solution aims to restore investor confidence, ensure compliance with accounting standards, and prevent future occurrences of fraud.
2. Background
Moss & Associates is a privately held manufacturing company experiencing rapid growth. The company's success has been driven by aggressive expansion strategies, including mergers and acquisitions. However, this growth has come at a cost, as evidenced by the recent discovery of financial fraud orchestrated by the company's CFO, Mark Moss. The fraud involved manipulating financial statements to inflate earnings and conceal liabilities, ultimately impacting the company's true financial performance. The situation has raised serious concerns about the company's corporate governance, internal controls, and ethical culture.
The main protagonists in this case are:
- Mark Moss: The CFO of Moss & Associates and the perpetrator of the financial fraud.
- John Moss: The CEO of Moss & Associates, responsible for overseeing the company's overall operations and financial performance.
- The Board of Directors: Responsible for overseeing the company's strategic direction and ensuring ethical and compliant business practices.
- The Auditors: Responsible for reviewing the company's financial statements and providing an independent opinion on their accuracy and fairness.
3. Analysis of the Case Study
This case study highlights several critical issues:
- Weak Internal Controls: The absence of robust internal controls allowed Mark Moss to manipulate financial statements undetected for an extended period. This lack of control underscores the importance of segregation of duties, regular audits, and a strong internal control environment.
- Ethical Lapses: Mark Moss's actions demonstrate a significant ethical lapse, highlighting the need for a strong ethical culture within the organization. This includes clear ethical guidelines, employee training, and a system for reporting unethical behavior.
- Corporate Governance Failures: The Board of Directors' failure to detect the fraud suggests a lack of oversight and accountability. This underscores the importance of an active and independent board, with strong financial expertise and a commitment to ethical practices.
- Impact on Financial Reporting: The fraudulent activities have distorted the company's financial statements, impacting investor confidence and potentially leading to legal repercussions. This highlights the importance of accurate and transparent financial reporting, adhering to GAAP and IFRS.
4. Recommendations
Immediate Actions:
- Terminate Mark Moss: Immediately terminate Mark Moss's employment due to his fraudulent activities.
- Engage Forensic Accountants: Hire a reputable forensic accounting firm to conduct a thorough investigation of the fraud, identify the extent of the manipulation, and recover any misappropriated funds.
- Re-audit Financial Statements: Re-audit the company's financial statements for the past several years to correct any inaccuracies and ensure accurate financial reporting.
- Inform Stakeholders: Communicate the situation transparently to investors, creditors, and other stakeholders, outlining the steps being taken to address the fraud and restore confidence.
Long-Term Solutions:
- Strengthen Internal Controls: Implement a comprehensive internal control system, including:
- Segregation of Duties: Ensure that no single individual has complete control over financial transactions.
- Regular Audits: Conduct regular internal and external audits to detect any discrepancies and ensure compliance.
- Strong Internal Control Environment: Establish a culture of compliance and accountability, with clear policies and procedures for financial reporting.
- Enhance Corporate Governance: Strengthen the Board of Directors' oversight and accountability by:
- Independent Board Members: Ensure a majority of independent directors with strong financial expertise.
- Audit Committee: Establish a dedicated audit committee with independent members responsible for overseeing financial reporting and internal controls.
- Financial Expertise: Ensure the Board has sufficient financial expertise to effectively oversee the company's financial performance.
- Cultivate Ethical Culture: Promote ethical behavior within the organization by:
- Code of Ethics: Develop and implement a clear code of ethics that outlines expected behavior and consequences for violations.
- Ethics Training: Provide regular ethics training to all employees to reinforce ethical values and encourage reporting of unethical behavior.
- Whistleblower Protection: Establish a confidential whistleblower program to encourage employees to report concerns without fear of retaliation.
- Improve Financial Reporting: Enhance the company's financial reporting practices by:
- Compliance with GAAP/IFRS: Ensure strict adherence to GAAP or IFRS, depending on the company's reporting jurisdiction.
- Transparency and Disclosure: Provide clear and transparent financial information to stakeholders, including details about the fraud and the steps taken to address it.
- Financial Performance Measurement: Implement robust financial performance measurement systems to track key metrics and ensure accurate reporting.
5. Basis of Recommendations
These recommendations address the core competencies of Moss & Associates by focusing on restoring financial integrity and ensuring compliance with accounting standards. They are consistent with the company's mission by promoting ethical behavior, transparency, and accountability. The recommendations also consider external customers and internal clients by restoring investor confidence and ensuring accurate financial information. Furthermore, they address the competitive landscape by ensuring the company maintains a strong reputation and ethical standing.
The basis for these recommendations is grounded in the need to restore trust, ensure compliance, and prevent future occurrences of fraud. The recommendations are also supported by best practices in corporate governance, internal control, and ethical behavior.
6. Conclusion
The financial fraud at Moss & Associates represents a significant setback for the company. However, by taking decisive action to address the situation and implement robust safeguards, the company can restore its reputation, ensure compliance with accounting standards, and create a more ethical and sustainable business environment.
7. Discussion
Alternative solutions could include simply replacing Mark Moss without a thorough investigation or implementing only a few of the recommended internal controls. However, these options carry significant risks. Failing to investigate the fraud thoroughly could leave the company vulnerable to further manipulation and legal repercussions. Implementing only a few internal controls could leave the company exposed to future fraud.
Key assumptions underlying these recommendations include the willingness of the Board of Directors to implement the changes, the availability of qualified professionals to conduct the necessary investigations and audits, and the commitment of employees to embrace ethical behavior.
8. Next Steps
The following timeline outlines key milestones for implementing the recommendations:
- Week 1: Terminate Mark Moss, engage forensic accountants, and inform stakeholders.
- Week 2: Begin the forensic investigation and re-audit of financial statements.
- Week 4: Develop a comprehensive internal control system and implement initial changes.
- Month 1: Establish an audit committee and appoint independent directors to the Board.
- Month 2: Develop and implement a code of ethics and begin ethics training for employees.
- Month 3: Complete the forensic investigation and re-audit, and release a revised financial statement.
- Month 6: Complete the implementation of the new internal control system and review the effectiveness of the changes.
By taking these steps, Moss & Associates can overcome this challenging situation and emerge as a stronger, more ethical, and sustainable company.
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Case Description
In May 2019, Cheryl Leong, Head of Fraud Analytics and Data Management at Moss & Associates, a mid-sized New York accounting firm, was tasked with fraud detection in annual reports. Besides helping clients present financial information to stakeholders, accounting firms had to ensure there were no misrepresentations. The incidence in companies reporting material falsehoods had risen in recent years and regulators were pushing accounting firms to detect those instances earlier. Companies had been using qualitative text to mislead stakeholders of their financial wellbeing. Leong was working on a data analytics platform that would replace the time consuming task of manually going over executive statements and management discussion & answers (MD&A) sections. Several text mining techniques were available within the system to break text down for classification. With the fraud detection tool ready for launch, she wondered whether she had adequately addressed the challenges of analysing text in annual reports. What steps should she programme the tool to take? How successful it would be?
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