Over the past decades, numerous high-profile scandals have sent shockwaves through the global economy, eroding investor trust, and exposing vulnerabilities within regulatory frameworks. While big accounting frauds are widely talked about, accounting frauds and corporate deceits of small degree often go unchecked.
That’s why Finsmart Accounting – one of the leading accounting outsourcing companies in India – decided to shed light on the seven common accounting and financial frauds that have dominated the past decades and are propagated through manipulation of books.
Let’s get started:
Accounting, Financial, and Corporate Frauds
Through an exploration of common financial and corporate frauds, we aim to provide insight into the ever-evolving nature of financial malfeasance, the warning signs and the critical importance of robust oversight to safeguard against future occurrences.
Fictitious sales scheme
In a fictitious sales scheme, individuals within the company might generate fake invoices, purchase orders, and related documentation to support the fabricated transactions. They may also manipulate inventory records or accounts receivable balances to make it appear as if goods or services were delivered to non-existent customers. Perpetrators of this fraud create the illusion of legitimate business activity by inventing sales that never actually occurred.
Fictitious sales can lead to severe consequences, including financial losses for the company when it becomes evident that the reported revenue cannot be realized. Additionally, the company’s reputation and credibility can be significantly damaged, eroding investor trust and potentially leading to legal and regulatory repercussions.
Embezzlement is a deceitful act where a person who holds a position of trust within an organization, such as an employee, manager, or executive, wrongfully takes funds that belong to the company for their personal benefit. This is typically done by manipulating financial records, diverting money to their own accounts, or creating fake transactions. Since the perpetrator has access to financial systems, they exploit this access to cover up their actions and make it appear as if the funds were used legitimately.
Embezzlement can have serious repercussions, leading to financial losses for the company and legal consequences for the individual involved.
Expense Reimbursement Fraud
Expense reimbursement fraud occurs when an individual, often an employee, submits false or inflated expense claims to receive unauthorized reimbursements. This deceitful practice involves fabricating receipts, exaggerating costs, or seeking reimbursement for personal expenses. By exploiting lax oversight, perpetrators siphon funds from the company, leading to financial losses and eroded trust.
Preventing this fraud entails robust expense verification procedures, ethical employee behavior, and vigilant monitoring of reimbursement requests.
Management Override of Controls
Management override of controls refers to a type of financial fraud where individuals in positions of authority, such as company executives or managers, misuse their power to manipulate or bypass established internal controls. These controls are designed to ensure accuracy, reliability, and transparency in financial reporting and operations. Because some managers are given the authority to override controls and access sensitive financial systems, their actions can be challenging to detect.
This type of fraud poses a significant risk to the accuracy and integrity of financial information, potentially impacting investor trust and decision-making.
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A lapping scheme is a deceptive financial fraud that involves the manipulation of accounts receivable to cover up the misappropriation of funds. In a lapping scheme, an employee who has access to incoming payments diverts money from one customer’s payment to cover up a previous theft from another customer. This creates a cycle of shifting funds to hide the initial embezzlement.
Lapping schemes can have severe consequences for a company’s financial health and credibility. Over time, the company’s accounts receivable balances become increasingly distorted, and discrepancies emerge when customers’ statements don’t match the company’s records. As a result, the company’s financial statements become inaccurate, potentially leading to financial losses and damaging the company’s reputation.
Misuse of Company Assets
Misuse of company assets is a form of internal fraud where employees or individuals misuse or misappropriate the resources, funds, or property owned by the company for personal gain or unauthorized purposes. This can encompass a range of actions, such as using company funds for personal expenses, diverting assets for personal use, or misusing company equipment and facilities outside of their intended purpose.
Preventing misuse of company assets involves establishing and enforcing clear policies and guidelines for asset usage, conducting regular audits and checks, implementing proper authorization processes, and promoting an ethical corporate culture. Encouraging employees to report any suspicious activities and fostering an environment of transparency and accountability are key to mitigating the risk of asset misuse and maintaining the company’s financial integrity.
Accounting and financial frauds: Conclusion
As technology evolves, so do the methods used by fraudsters to deceive and manipulate the financial system. Only through sustained efforts to dismantle fraudulent networks, we can mitigate the impact of these deceitful practices and foster a more secure financial landscape for the future.
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Mrs. Dipali Phadke is the Chief Executive Officer of Finsmart Solutions & is the back bone of the company’s operations. A qualified Chartered Accountant with more than 12 years of experience in the field of Accounting, Taxation and Audit.