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Financial fraud can be defined as a deliberate act of financial deception in order to gain some personal interests. Thus, fraud is a crime and a civil law violation. This research paper is addressed to discover financial illegal acts concerning the publicly traded company “Aztec Oil & Gas Inc.” The research covers the following developments:

-  the basic information about the company, its working area, management structure, financial position;

-  the investigation of the illegal practices applied by “Aztec” and the analysis of the fraudulent acts in consistency with International Standards on Auditing and the Code of Ethics for Professional Accountants;

-   the information on internal and external auditors and attorneys connected to defraud of the “Aztec” employees;

-   the appropriate recommendations for preventing, detection and reaction to fraudulent schemes in the company.

“Aztec Oil & Gas Inc.” Business Strategy

“Aztec Oil & Gas Inc.” is one of the leading companies in the USA that specializes in oil and gas exploration, its development and production. The company is based in Texas, but has many US areas involved. “Aztec” entered the oil business in 2004 and in 2006 joined the sponsored drilling program industry. The long-term business strategy of the company consists of three phases:

1)  Participate in reliable manufacturing properties with underexploited drill areas (Phase I)

2) Buy interests in highly-researched, well-funded and well-managed investigatory drilling projects in historically successful resource output (Phase II)

3) Originate, develop and manage balanced, low risk, highly focused developmental drilling projects for "private" investors. (Phase III)

Currently, “Aztec” focuses primarily on Texas shallow, lower risk development and step out oil wells. The primary target for business is oil, whereas gas is the secondary aim. “Aztec” has been in the oil/gas business since 2004, and since 2008, “Aztec” concentrated on oil wells in Texas. Besides, they sponsored numerous drilling partnerships and sometimes took part in low-risk development drilling projects gaining great tax benefits from that. All of the programs and contracts are initiated through the FINRA and Registered Investment Advisors to Accredited Investors.

The “Aztec” company structure includes the departments for management, business development, consultancy, geology, land and engineering. The management department consists of the following key figures: the President of the company (Waylan R. Johnson), VP, Secretary and Treasurer (Ariane E. Cox), Chief Financial Officer (Larry A. Hornbrook), Assistant to Chief Financial Officer (Cindy S. Jones), Sr. Economist (Kenneth E. Lehrer), Manager of Field Operations (Mark L. Baize). The development department consists of the Director of Marketing and Investment Coordinator. The Senior Consultant of the company is Franklin C. Fisher, former CEO and Chairman of “Aztec”, who actually was the person involved in fraudulent acts.

According to press releases of the company, “Aztec” is showing steady growth during the past years. The quarterly report of the three-month period ending February 29, 2012 states that for the past six months, “Aztec” increased total current assets (by 29.3%), total assets (by 32.9%), total equity (by 40.2%), oil and gas sales (by 57.3%) whereas total liabilities decreased by 1%. Nevertheless, “Aztec” continued to show a net loss for the past quarter, which could be explained by intensive production and continuous drilling investments supporting the Phase’s III strategy of their business plan. The company draws investor’s attention emphasizing on the continuously growing oil and gas prices what makes the investments in “Aztec’s” a riskless project. Moreover, “Aztec” strives for the protection of the domestic producers and decreasing the dependency on OPEC and foreign oil. Surely, “Aztec’s” evidences are logical and attractive for the investors. Still, as we may research later on, the demand for the company’s stock passed through some questionable practices.

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According to the press release of the U.S. Department of Justice dated Tuesday, February 22, 2011, the former CEO of publicly traded company “Aztec”, an attorney licensed to practice law in Texas, Franklin C. Fisher, pleads guilty to the obstruction of justice. Franklin C. Fisher is accused of paying for newsletters recommending buying Aztec oil and gas shares during the period from September 2004 to May 2005. With his accomplice, Shelly S. Singhal, a securities broker, who was an investment advisor to “Aztec Oil & Gas”, Fisher assisted the distribution of the newsletters to the investing audience, which artificially created a demand for “Aztec” shares and helped to sell “Aztec’s” securities to investing public. The fraudulent scheme included conduit companies, such as Bedford Proprietary Trading. This “third party” company was used to pay for the disclaiming newsletters and received the money from Fisher, Singhal and others. There is no need to explain that such newsletters did not follow the rules of the applicable securities regulations and were qualified by the attorney in this case as a questionable and illegal practice. Still, the press release of the U.S. Department of Justice does not address any concrete law, standard or code that was violated by Franklin C. Fisher when sponsoring the promotional campaign of stocks.

Giving the interviews at the United States Attorney’s Office, Fisher stated false things denying the connection among him, Bedford Proprietary Trading and Singhal’s company. The consequences of detection the misjudgment are very serious. The sentencing for Fisher has not yet been scheduled, but as it is stated in press release, Fisher is going to be sentenced for maximum of ten years in prison. Moreover, he agreed on confiscation of his wealth in amount of $390,000.

The U.S. Attorney Okun and Assistant Director McJunkin, who announced the guilty plea for Fisher, named people who combined their effort on investigating the ongoing financial fraud. Among these people were special agents of the FBI’s Washington Field Office, the U.S. Attorney’s Office Paralegal Specialists, Forensic Accountant, Legal Assistants and a few more people. The information about the specialists who are in charge of ongoing investigation can be found in press release. When conducting this piece of research, the questions concerning the internal and external auditing practices in “Aztec” were addressed to “Aztec’s” department for public relations. Unfortunately, they did not respond to the requests, and we may only assume that this information for some reason is hidden from the publicity. Nonetheless, even if we knew that some external auditors indeed were working for “Aztec” during 2004-2005 years and did not react to the “newsletters story”, they were not responsible for the detection of illegal acts of such type. The objective of an external audit is not to detect fraud but to express an opinion whether the financial statements are prepared in all material respects, in accordance with a financial reporting framework (e.g. IFRS, US GAAP). Therefore, the subsequent discovery of a fraud incidence does not indicate a failure to comply with International Auditing Standards. Moreover, the external auditor is not responsible for detection the immaterial fraud but has to report his findings to appropriate level of management of the company. 

“Aztec”s Financial Fraud

According to International Standard on Auditing (240), fraud is identified as an intentional misstatement of financial statements. In our case, we do not face the problem of fraud detected by the external or internal auditors in the financial statements. Rather we have a kind of “dark competition” in securities market. We have to admit that the scheme neglected the rules of pure market competition and business ethics, yet there was no fraud from the auditing point of view. This kind of fraud is called business or financial fraud. The main characteristics of business fraud are the following:

  1. Financial fraud does not relate directly to the theft of assets;
  2. Often the main goal is to reach higher stock price;
  3. It is usually difficult to detect until irreparable harm is recorded;
  4. Usually, the perpetrator is an executive management of the company.

The case of “Aztec” ideally fits the above descriptions and compels to think over the nature of fraud, the potential threats that may cause fraud and the ideas of how to withstand it. Recently, one of the “Big four” auditing companies, KPMG, published their report “Who is the typical fraudster?” The research is based on 348 actual fraud investigations developed by KPMG researcher from 69 countries. The studies revealed that a typical fraudster is 36 to 45-year-old male who works in finance or related sphere, holds a senior management position, employed at the company for more than 10 years, works in collusion with another perpetrator and commits fraud against his employer. Taking into consideration the abovementioned characteristics, it is essential that the Board of Directors of the organization follow the simple advice:

1) Strengthen the internal auditing system;

2) Hire the external auditors from the reliable companies who praise their reputation, for instance, “Big Four” companies;

3) Try to put more control on the actions of employees who work for the company for a quite long period. On the one hand, these people may have already deserved honorable and pure reputation, but on the other hand, they know the company from the inside, and some day one of them may use his opportunity to quench his money thirst. The greater is the position, the greater is the trust and exposure to unprotected assets.

In the case of “Aztec”, we may also interpret the illegal act of the CEO as the neglecting the IESBA Code of Ethics for Professional Accountants. Working for “Aztec” Franklin C. Fisher was required to act in accordance with the code of ethics. While paying for the promotional campaign Fisher violated the principle of Professional Behavior (Section 150 COE). According to the 150.2 COE, “In marketing and promoting themselves and their work, professional accountants shall not bring the profession into disrepute. Professional accountants shall be honest and truthful, and not:

(a) Make exaggerated claims for the services they are able to offer, the qualifications they possess or experience they have gained; or

(b) Make disparaging references or unsubstantiated comparisons to the work of others.”

Therefore, Franklin C. Fisher broke the principle of professional ethic code and disreputed his employer when the case with newsletters was revealed. Of course, the guilty plea is the result that clearly shows how tricky illegal actions could be. The past great results and increased demand for the promoted stocks that were reached in unlawful way ended up in conviction. The years in prison and lost money show such trivial thing as the notion that fraud does not pay.

Anti-fraud Program

As far as the law misconduct and fraud instances create challenging financial and intangible losses, it is important for the firm to build efficient anti-fraud program that helps not only to detect but also to prevent fraud. Building the anti-fraud approach requires substantial effort due to the challenges in choosing the comprehensive control criteria that would adequately address the prevention, detection and response to fraud. Here we propose our recommendations on how to create an anti-fraud project within a company. First of all, in order to prevent misconduct, it is significant that a company assess the possible risks of fraud, establish the code of conduct and relevant standards, initiate the principles of due diligence for employees and third parties, initiate the effective communication system putting an emphasis on fraud risk controls. The principle of due diligence is one of the most important on corporate level. Just as in the case of “Aztec”, many employees confess that they would be rewarded based on results, not the means used to achieve the goal. Therefore, the implementation of due diligence principle should not be a claim, but the complex approach uniting the norms of the code of ethics with the tight-knit comprehensive motivation scheme for employees.

The detection mechanism should include whistle-blowing and hotline tools, continuous auditing, monitoring and judicial analysis of the financial data. In case of detection the fraud, the relevant actions should be taken in order to cope with the problem. The response should involve internal investigation protocols, enforcement and accountability protocols, disclosure and remedial actions protocols.

The abovementioned suggestions were mostly addressed to avoid fraud within a company and run the business safe. However, as it may well be observed, the victims of fraud are usually the investors who believed in fantastic profit investment opportunities with low risk. In case of “Aztec”, although the newsletters exaggerated the profitability of shares, the company was real and operating, so investors did not lose. Nevertheless, according to the official website of U.S. Postal Inspection Service, many investors become victims of fraudulent schemes with non-existent companies. These “bubbles” attract inexperienced investors mailing the promising letters and well-designed color brochures. Moreover, they invite to visit their offices often situated in the business quarter and creating the image of successful company. The U.S. Postal Inspection Service warns against such fraud and suggests verifying the firm standing with the appropriate official government body, for instance, in the United States via Better Business Bureau, the U.S. Postal Inspection Service, or State Attorney General's Consumer Protection Unit, before closing the deal.

As one may see from the structural tree of “Aztec”, even though Franklin C. Fisher was involved in fraudulent activities, he is still working for “Aztec”. In my view, the explanation of this lies in the personality of Fisher. It is hard to overestimate his talent in financial consultancy and the benefit that Aztec gained through his management. Possessing strong economic and business background, he is one of the most respected legal lawyers and advisors in oil and gas industry. Using his advice, the developing enterprise has achieved substantial number of successful mines in Texas and Appalachian region. Over the last few decades, Franklin Fisher achieved solid experience and knowledge in different areas of expertise. The most important fields, for what he is so notably praised in “Aztec” are oil and gas exploration and development, investments, mediation, business strategy, mergers and acquisitions, legal strategy, finance, operational management, etc. Moreover, all Fisher’s baggage of knowledge is not scholastic; Franklin Fisher learned the skills in practice.

Currently, Fisher holds the position of a Senior Consultant in Aztec, he is not a Chairman anymore. However, certainly, there is no clear link between his involvement in the securities fraud actions and retiring from the position of CEO. Of course, the version of his retirement due to the misconduct has a right to be proposed, but as this piece of information is kept private, any assuring statements cannot be made.

In conclusion, it is important to reaffirm the statement that fraud does not pay. The research on the case of “Aztec Oil and Gas Inc.”, the company that works in oil and gas exploration and production industry, showed that earning money in illegal way may result in public disgrace of the company and subsequent financial losses. Therefore, it is extremely essential that the company work out an effective anti-fraud program and put additional emphasis on placing the internal controls. 

Code: Sample20

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