Activity Based Costing

Abstract

Corporate financial fraud in the U.S. is about 556 times more costly ($258 million) than employee fraud ($464 thousand). Financial fraud is deliberate, requires planning, organization, trickery, false representation, and continues to occur despite anti-fraud legislation. This qualitative study explored the perceptions of a purposive sample of 20 accountants, examiners, and investigators in the Denver, Colorado area on how to mitigate corporate financial fraud. Findings revealed that mitigating corporate financial fraud requires improvements to (a) education, (b) training, (c) detection, (d) prevention, and (e) internal controls. A new fraud mitigation model© emerged that integrates differential association theory, agency theory, endogenous and exogenous fraud factors that might help explain and predict the patterns of behavior exhibited by perpetrators of financial fraud.

Table of Contents

Chapter One: Introduction5

Introduction5

Background of the Problem6

Statement of the Problem9

Significance of the Study12

Significance of the Study to the Field of Leadership13

Nature of the Study13

Research Question18

Agency Theory20

Differential Association Theory21

Chapter Two: Literature Review25

Case Study of a Firm Implementing ABC25

Purpose of the Case Study26

Figure 1: Operations Hexagon27

Activity-Based Costing and Management27

Figure 2: Activity-Based Costing/Management Information System33

ABC/M Systems and its Impact on Operations Function34

Product Planning and Design35

Quality Management and Control37

Process Design and Improvement40

Inventory and Procurement Management42

Capacity and Investment Management44

Work Force Management47

Empowerment and Accountability47

Roles and Responsibilities48

Performance Measures48

Theories of Activity Based Costing and Maximisation of Profits51

Accounting Standards51

Current Findings55

Corporate Fraud57

Detection Methods64

Prevention Techniques69

Fraudulent Financial Reporting71

Chapter Three: Methodology and Research Design76

Research Design77

Research Questions82

Population83

Sampling Frame85

Chapter Four: Results and Findings88

Chapter Five: Conclusion92

References97

Chapter One: Introduction

Introduction

Corporate fraud is the number one financial crime out of the eight categories of fraud investigated by the Financial Crimes Section of the Federal Bureau of Investigation (FBI) (U.S. Department of Justice, 2005). As defined by the FBI, "Fraud-the art of deliberate deception for unlawful gain-is as old as history" (Federal Bureau of Investigation, 2005, ¶ 1). In 2002, several high-profile financial frauds involving Enron, WorldCom, Adelphia, Tyco, and Global Crossings started debates within academia on the conceptual framework of financial transparency (Kuizick, 2004).

The purpose of this qualitative phenomenological study using a modified van Kaam method by Moustakas (1994) with semi-structured, recorded, transcribed interviews was to explore the perceptions of a purposive sample of 20 certified public accountants, forensic accountants, and criminal fraud investigators in the Denver, Colorado area on how to mitigate corporate financial fraud. This introduction contains background information on the phenomenon of financial fraud as a growing economic concern in the United States. The findings of this study might uncover changes needed to mitigate corporate fraud with new knowledge for leadership to adopt relative to criminal fraud, and may help restore investor confidence in the financial markets. Background of the problem and how the design and methodology selected best responds to the research questions, a discussion on the theoretical framework, key definitions used, assumptions made, limitations inherent in the study, and delimitations of the data are provided in chapter 1.

Background of the Problem

The phenomenon of fraud is not new. The founder of the Association of Certified

Fraud Examiners and former FBI investigator explained that fraud is a social phenomenon (Wells, ...