HAS THE ADOPTION OF SOPHISTICATED ACCOUNTING SYSTEMS REDUCED THE LEVEL OF FRAUD AND CORRUPTION?

Posted: August 26th, 2021

HAS THE ADOPTION OF SOPHISTICATED ACCOUNTING SYSTEMS REDUCED THE LEVEL OF FRAUD AND CORRUPTION?

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Has the Adoption of Sophisticated Accounting Systems Reduced the Level of Fraud and Corruption?

Chapter 2. Literature Review

The chapter expounds on previous applicable literature from other scholars on a similar topic. It contains a discussion on the research results, attributes, opinions, and conclusions.

Introduction

Organizations ensure that they portray their financial statements as accurate and fair to meet their stakeholders’ expectations on audited accounting information. According to Burke and Clark (2016), the information of financial reports is meant to ensure stakeholders are aware of the organization’s current financial status. As such, companies and government entities are continuously investing in the latest accounting systems to minimize instances of fraud or corruption from happening (Rensburg and Botha, 2014). Occasionally, employees are considered significant perpetrators of fraud or corruption in an organization. Hence, organizations accounting systems become prone to manipulation when they are weakly audited and less secured. As stipulated by Fung (2014) and Ababnehet al. (2019), having weak auditing and accounting standards is a recipe for fraud penetration as it also complicates the ability of stakeholders to scrutinize the use of resources in an organization. Therefore, inadequate accountability mechanisms create loopholes of fraudulent activities as perpetrators quickly take advantage of the existing gaps to execute their illegal under dealings.

The focus of this section is to present an overview of the study area. The section further looks at various works done to enhance an understanding of different views about the adoption of sophisticated accounting systems in reducing fraud. This is discussed under the contemporary review of previous studies addressing the relationship between company performance and fraud, as well as profitability. The section further highlights the existing research gap about the subject before proposing future areas of consideration and, hence, a recap on the chapter.

Background of the Study

Accounting fraud is an intentional wrongful act carried out by persons in an organization or government entity like employees, which could lead to misrepresentation of the accounting statements (Spremic & Jakovic, 2012; Malagueño, et al. 2010). Munteanu et al. (2016) and Vasilev et al. (2019) noted that the wrongful actions are done through misleading and deliberately reporting an entity’s financial statements by falsifying accounting or manipulating records, which is usually referred to as cooking the books of accounts.  A study conducted by Dauda (2018) noted that accounting fraud could also be done through asset misappropriation, erroneously applying the generally accepted accounting principles (GAAP) or even causing an entity to pay for goods or services that have not been received. Equally, the vice can be conducted by changing accounting principles such as depreciation from one accounting period to another and altering accounting methods such as reporting inventory from either last in first out (LIFO), first in first out (FIFO), or weighted average. Hence, it is expected that companies should be consistent with their accounting principles. It also includes using appropriate methods from one accounting period to another to combat accounting frauds.

There is a need to adopt sophisticated accounting systems in a company. The traditional accounting systems have failed or lagging in dealing with the growing management complexity requirements as they are unable to check frauds in organizations sufficiently. As such, there are increasing cases of corrupt instances in many organizations across the globe. According to Nur-tegin & Jakee (2020), corruption is the abuse of trusted power for personal gain to which one owes a duty. Often, the results of a corrupt deal are detrimental and harmful effects on the overall economy and society. At the same time, Torsello & Venard (2016) and Ameen et al. (2018) notes that corruption is a significant human concern. It is a problem that is found in all societies and civilizations throughout history, irrespective of their level of prosperity or size. Historically, each civilization has contributed differently to developing corruption concepts (Dimant & Schulte, 2016). Other factors, such as ethical, political, and management systems, have also contributed to its occurrences, thus expanding fraud and corrupt instances since the advent of civilizations.

It is hence essential to embrace modern and sophisticated accounting systems when executing managerial roles, particularly controlling and planning, given that they can lower instances of fraud. The sophisticated accounting system used in the planning function for companies helps provide data that relates to the study and analyses of organizational goals (Kanellou & Spathis, 2013). It also provides the business leaders with information that concerns the relationship between profits, volume, and cost, which is critical in determining the amount of interaction and interdependence between the three variables (Okour, 2016). It is, therefore, an essential tool for enhancing the preparation of lists of financial flows, budget plans, and building a forecast on the organization’s needs. In this case, sophisticated systems go a long way towards enhancing the implementation of quantitative measures of accounting, thereby lowering instances of fraudulent activities (Frezatti et al., 2011). Equally, the preparation lists about budgeting and forecasting are later converted into financial statements that are crucial in reflecting the various facets of an organization’s activities. Hence, this is crucial in the coordination of detailed plans and policies that the various departments adopt to meet their deadlines as well, accomplish targets.

Similarly, Alferjany et al. (2018) explain that sophisticated accounting systems serve to facilitate the working of companies’ control function towards achieving collective organizational goals. Notably, the systems ensure that management can exercise control by having their desired inputs in the financial results and final reporting. They need to assess and evaluate the overall performance besides correcting any possible anomalies that could be an incentive for corruption and fraud (Ernest, 2015; Bartsiotas & Achamkulangare 2016). The control function also ensures that the management follows up the real implementation of its plans according to the guidelines and procedures established. In this way, it is easy for the organization to monitor and discover the deviations in records and make timely adjustments whenever necessary (Alferjany et al., 2018). Thus, this lowers the instances of corruption and fraud in an organization, ultimately ensuring the shareholders’ property is protected, and their interests are preserved. 

Subsequently, the relevance of sophisticated accounting systems is that it assigns quantitative values of the past, current, and upcoming activities and events. In this way, instances of committing fraudulent activities through data manipulation are lowered because of an already scheduled framework (Belfo & Trigo, (2013). Adeniyi & Olaoye (2020) observed that the accounting system is crucial in providing information to business leaders in the form of specialized analysis or periodic reports that are often sources of information used for making financial decisions. The decision leaders include inventory policy makes, pricing manager, outsourcing, and production supervisors (Nielsen et al. 2015). The information is also crucial when negotiating with the labor force, customer servicing, and implementing capital investment decisions that are imperative for accomplishing the overall vision and mission of the company. Besides, proper and appropriately structured accounting information and systems can protect the interests of the shareholders, which are crucial to the company’s progress. Therefore, coupled with the proper implementation of information nondisclosure to unauthorized personnel guidelines, an organization can lower fraud and corruption levels through ensuring a precise and timely data recording as well as information monitoring.

A Contemporary Review of Previous Studies

Several researchers have studied the effects of corruption on government and private companies, and the perceptions it creates. For instance, studies by Brusca et al. (2018) observes that organizations need to have robust accounting systems that will ensure strengthened audit departments. The researchers based their work on a panel data from seventy-five nations globally, with their work testing the relationship that exists between the accountability and transparency of a nation. It was established that the enhancement ensured that organizations have robust internal control mechanisms that generate adequate transparency and allows stakeholders to access all the financial and non-financial information about the company.  The study also observed that organizations with reliable accounting systems have a better quality of budgetary management systems that those that have weak systems. The most significant benefit of a robust accounting system is that it reduces instances of corruption and fraud in the companies. Therefore, in their view, most researchers acknowledge that quality budgetary management, transparency, and security audit systems have a positive contribution to the institutional perception of corruption.

Effects of Implementing Transparency Measures

According to Peysakhova & Anyushenkova (2018), when organizations use the latest accounting systems, it is possible to embrace adequate, transparent, and accurate disclosure of information. Modern accounting systems improve the way accounting processes are done besides eliminating errors in the accounting information. Consequently, this mitigates the risk of an organization’s influential parties conniving to execute illegal or unethical activities that could harm the business committing (Kloviene and Gimzauskiene, 2014; Alabdullah et al., 2013). The systems also limit the exercise of power beyond the employees’ area of control. Equally, Kelley & Evans, (2017) contend that it is paramount to ensure that stakeholders access the financial and non-financial information about an organization’s performance for either public or private entities to reduce instances of misappropriation. Moreover, accounting systems assist in the socio-economic development of societies by providing non-financial information crucial in the development of society, such as social values, comprehensive national income, and environmental considerations (Maciuca & Socoliuc, 2014). Hence, organizations that commit accounting fraud are aware of its negative ramifications on users, both internal and in the external environment, since they cannot decipher the actual financial position of the organization.

Studies On A Company’s Performance and Fraud Reduction

Researchers have studied the effects of organizations using modern and sophisticated accounting systems in their processes, with most of the studies done on the company’s general performance and fraud reduction. A study by Trabulsi (2018) evaluated the result of applying the latest accounting systems on the overall performance of businesses in Saudi Arabia. The study used primary collected from the country’s small and medium scale enterprises. The tools of the collection were mainly questionnaires distributed to a sample size of one hundred and thirty-seven (137) participants that voluntarily gave information regarding the topical issues of the study. The analysis was done using study the smart partial least squares to test study hypotheses. From the findings, the study showed that using the accounting information system had significant positive effects on organizational performance. Some of these include improving decision making, cost reduction, and advanced financial reporting. Once the crucial outcome was the aspect of providing quality information, which is imperative in preventing the occurrence of fraudulent activities. The reasons given include the fact that the system offers complete transactions with the procedure followed. Also, the study by Spremic & Jakovic (2012), which examined the effects of using modern accounting systems, established that modern accounting systems increased the company’s e-business effectiveness. The study relied on primary data collected from a sample size of two hundred and fifty-two (252) e-business Croatian companies.  More so, Ironkwe & Nwaiwu (2018) studied the impact of accounting information systems on Nigerian companies’ financial and non-financial measures. The investigation by the scholars utilized primary data from sixteen (16) companies, using both qualitative and quantitative methods. The study data were obtained from the Nigerian stock exchange within five years between 2011 and 2014. The data was then analyzed using multiple linear regression techniques with the help of the statistical package for social sciences. The experimental study results indicated that accounting information systems exert substantially beneficial impacts on financial and non-financial parameters of Nigerian companies. Therefore, it was demonstrated that utilizing sophisticated systems ensured stakeholders were supplied with adequate information, thus reducing corruption levels of the companies besides enhancing accountability purposes.

Studies on an Organization’s Profitability and Fraud Levels

A review by Ganyam & Ivungu (2019) investigated the effect of applying sophisticated accounting systems on an organization’s profitability and fraud implications. The research used an exploratory approach and relied exclusively on secondary data. The study concluded that there was a significant relationship between profitability and accounting systems that the companies were using. In this case, it was noted that the effectiveness of an accounting system helps in improving the quality of the financial reports, thus resulting in inappropriate decision making among the management of the organization. Thus, it is necessary to note that companies advanced accounting systems enhance a company’s performance measures, effective internal control systems, and facilitating financial transaction systems as well as processes.

Moreover, the analysis by Saied (2014) examined the effects of modern accounting systems on an organization’s financial performance. The researcher used a research design consisting of a survey being carried from forty (40) top managers from Tata consultancy services based in India. The study relied on primary data collected using questionnaires supplied to the respondents.  The findings of the study noted that the utilization of accounting systems had a significant relationship with the knowledge of accountants and managers. This implies that having knowledgeable staff who are provided with sophisticated accounting systems works for the benefit of the organization. It also goes a long way to supportin decision making and the efficient use of organization resources. Equally, a study by Hla & Teru (2015) examined the efficiency of applying the latest and modern accounting systems on performance measures in organizations. Their work used an exploratory method that solely depended on the application of secondary data. The research findings indicated that the significant effect of the use of information technology is that it has led to the modernization of accounting methods. The impact of this is felt majorly in recording and tracking financial transactions. Thus, such developments have led to improved management and strengthened internal controls, which are crucial in curtailing corrupt practices in any organization. 

Research Gap

As illustrated in previous studies, most researches applied qualitative methods both in collection and analysis. A few have used quantitative to implement their studies. Also, interview-based research would facilitate a better examination of the perceptions of preparers and users of a company’s financial statements about fraud and corruption, as well as their ultimate view on the application of sophisticated accounting systems. In this case, therefore, it will offer a piece of incisive information on addressing the main issues of the study.

Future Research

Accordingly, there is a need for further investigation to examine the potential of fraud and corruption on market performance in different countries when sophisticated accounting systems are adopted.

Summary of Key Points

 Sophisticated accounting systems ensure that the company’s financial information is timely, precise, reliable, and available to the stakeholders on a need basis. The financial information should be free from any manipulation and indicate a real, authentic, and correct view of the company. Accounting fraud disadvantages the users of financial information since the reports do not accurately depict the organization’s financial position. Also, contemporary issues in ethical, political, and management have contributed significantly to the occurrences and increase in fraud. Thus, adopting sophisticated accounting systems in the company ensures that the managers are accountable, improves performance, and reduces fraud instances, leading to better management of internal business transactions. Consequently, sophisticated accounting systems improve financial performance and decision making in the business. It also enhances the application of organizational resources, thereby reducing fraudulent instances. Hence, an improvement in financial reporting helps prevent intentional manipulation and anomalies in financial statements besides limiting the potential of engaging in fraud amongst its employees.

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