What is Accounting Fraud? A Guide for Safe Accounting & Compliance

fraud

Overview

The world of business is not foreign to accounting scandals and fraud. From entrepreneurs to employees, from managers to maids, it is not uncommon that people try to scam the system every once in a while for a massive short-term hike. 

Most small accounting frauds are usually dealt with by authorities and are not something that people choose to bat an eye on. However, as history is the witness, there are times when some accounting frauds leave the world shook – flooding headlines as media outlets rush to cover such stories. 

In this article, we are going to be talking about what accounting fraud is, its effects on the economy, how to detect it, and the measures you can take to avoid being caught in the crossfire.

What is Accounting Fraud?

Accounting fraud, by definition, is the deliberate manipulation and alteration of financial records and statements. It is committed to disguise the true financial position of a company and is done with the aim of:

  • pleasing shareholders and investors by displaying the financial performance of the firm to be better than what it really is
  • attempting unlawful tax evasions by misstating assets and liabilities & revenues and expenses
  • gaining competitive advantage in the market
  • obtainment of monetary benefit by personnel
  • manipulating the stock price of the company
  • giving leverage to other crimes

Being one the biggest global problems, accounting fraud is not something to take lightly. Its effects prove destructive on financial systems and industries worldwide. Not to mention how it can leave a company’s image shattered in case it happens to be caught in a scandal.

Types of Accounting Fraud

Accounting Frauds are executed in a number of manners. Let’s take a look and try to understand each one.

  • Embezzlement

Probably the most common type of financial fraud in the list. Embezzlement refers to the illegal act of theft, misappropriation, or misuse of financial assets or funds of a company that were mandated to and placed in an employee’s trust.

Even though embezzlement is very common, it rarely ever makes it to our screens as companies like to keep their internal matters to themselves in the attempt to avoid ruining their image and spoiling their PR.

The dispute between the embezzler and the company is usually settled privately without the involvement of the local authorities.

  • Kickback

Kickback is essentially a form of bribery where the bribe-taker receives payment in the form of compensation in exchange for preferential treatment or for providing inappropriate services.

In business, kickback happens when an employee or any other entity inside the company allows access to the business or reveals classified information to an external entity in exchange for a personal benefit – either monetary or kind.

This may result in sabotage of the company’s competitive position in the market due to the revelation of confidential documents and reports.

Kickback is not a matter that is generally resolved within the company and requires thorough auditing to detect the source of the information leak.

  • Misstating expenses and revenue

An employee may try to extract benefit out of the sales generated without accounting for the profits incurred by the company and just pocket the difference.

In this case, the employee is exploiting the goodwill of the company to make the sale of the product, but is not recording the same for personal gain.

In the same manner, employees may also try to overstate or exaggerate their expenses that they are to be reimbursed for by the employer to lie their way into making money off of their expenses.

How Accounting Fraud Affects Business

Accounting fraud damages a lot more than just the accounts. Most small accounting frauds often end up circling within the premises of the company and settle without external interference after having decreased employee morale as people are altered, discouraged, and on their guards out of fear.

This affects productivity and job satisfaction, wastes company resources and time, makes management more difficult and ruins the overall work culture in the organization which takes a lot of effort to recover.

If controversial enough, the ripple effect caused by an accounting fraud can spread beyond the boundaries of the company, turn into a scandal, and cause immense levels of damage to the company’s public image and ruin years of worth of PR progress.

To summarize, accounting fraud impacts business by:

  • Destabilizing business’s financial position and incurring unwanted loss
  • Harming company goodwill and incurring bad PR
  • Discouraging employees and reducing morale
  • Ruin business connections like suppliers
  • Reducing market share by affecting customer sentiments

Ways to Prevent Accounting Fraud

Since accounting frauds vary in scale and intensity of the crime, the way to prevent and handle them is also scalable. For instance, if the accounting scandal is massive in size, say, a general manager was caught involved in money laundering practices, then there will undoubtedly be interference and auditing.

For crimes this big, regulatory bodies like the Financial Action Task Force or the FATF assume responsibility for the same and act as an international watchdog to try to prevent and rectify money laundering and terrorist financing practices.

For accounting frauds under manageable scale, the company can devise some methods using which it can make sure that the business and the trust it holds is not compromised. Some of the methods to do so are stated below:

  • Consolidate recruitment processes by training HR to eliminate candidates with an unfit background and poor references.
  • Incentivize honesty and reward model behavior to motivate existing employees and forward their attitude in a positive direction.
  • Plan and discuss employee career growth strategies so they do not feel the need to resort to unfair practices to advance in their work life.
  • Scan for loopholes in business operations to detect and eliminate opportunities that employees might try to abuse and exploit for personal benefit.

Thank you for reading this article. We wish you a journey of safe accounting.

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