What is Fraud? 

Fraud in accounting is the planned manipulation of financial documents to make a false appearance of corporate financial health. Moreover, it includes an employee, accountant, or the company itself misleading investors and shareholders. 

Accounting fraud manifests in diverse ways and refers to the intentional actions of misrepresenting or altering accounting documents or records concerning expenses, sales, and revenues among others, intending to gain monetarily from it. 

Factors to Ascertain Fraud 

To ascertain that fraud is committed certain factors need to be identified: 

  • There must be a victim. 
  • The action has to have a detailed claim of it being deceptive or fraudulent. 
  • The loss incurred by the victim must be identified and quantified. 
  • There must be evidence of fraud been committed 
  • The intention of the suspect to commit the crime must be evident. 
  • There must be evidence to support that the suspect has profited by the acts committed. 

It is important to be able to identify if the accounting mistakes are genuine or if it a deliberate indicator of actual fraud. There are certain indicators and symptoms of a scam that give a “red flag” clue and need a thorough investigation by auditors into a specific business area or activity. 

Methods for Creating Fraudulent Financial Statements: 

1. Over-padding the assets: The assets of a business can be overstated by not revealing the accounts receivables or by not reporting the assets with any depreciated or impaired values, or the items in the inventory that are considered to be obsolete or of no significant value. 

2. Under quoting the liabilities: The liabilities of the business are incorrectly short recorded as equity or it is moving as liabilities between short- and long-term credit classifications 

3. Overstated revenue: Using inflated sales the revenues for a business are overstated. This is done either by entering sales value into the report of the claim even before the actual sales revenue is earned or by entering fake sales. Expenses are understated- Expenses can be understated by transferring the expenses the business incurred in one accounting period over to the next. When the expenses are not immediate but rather are improperly capitalized over multiple accounting periods leads to this kind of scam. 

4. Misrepresentation of one-time expenses:  When the one-time expenses are not shown by the management of the organization from the accounting records, thus giving investors and other people the false impression regarding the results from operations for the business to the participants in the capital markets. 

5. False presentation of Information: To present a healthier overall appearance for the business the management team or person either omits or misrepresent certain financial information. Many times, people who are trying to commit financial scams will just omit certain items from their reports. 

6.  Misuse of Reserve Accounts: Some of the reserve accounts are accounts receivable, obsolete inventory accounts, returned sales accounts, and warranties. These accounts are commonly very tough to discern due to a substantial proportion of judgment and knowledge of the business is needed to know the correct balances at the end of the accounting year. 

7.  GAAP Rules are misapplied: Organizations avail the services of clever accountants and management teams who are well versed with the loopholes in various rules and regulations for the FASB and GAAP. These are often exploited for people who are looking to commit a scam in the financial statement intentionally. 

8.  Embezzlement: Embezzlement is perhaps the foremost common, also referred to as larceny about the illegal utilization of finances by the person given the mandate of controlling them like an accountant, using a company’s funds for personal needs. Embezzlement is large around the world but doesn't make it into the media largely because companies and governments want to keep the embarrassing details to themselves. In most cases, the embezzler and therefore the business usually settle the matter privately to avoid negative public reactions. 

9.  Internal theft: Another sort of accounting scam is internal theft, involving the theft of assets belonging to an entity by employees. It is often as simple as leaving with office supplies or removing company products without permission or maybe paying for the products. The result of internal theft is the shrinking of inventory. 

10.  Kickbacks and payoffs: A situation where the employees go ahead and receive diverse benefits and cash to permit entities access to the business of the corporation, with the organization where the individual gets overpaid for services or goods than the case should be. All the additional funds go to the employee facilitating access to the business. 

Causes of Accounting Fraud 

Following are the causes of accounting fraud: 

  • Excessive greed for generating quick money 
  • Lack of transparency in financial reporting 
  • Poor regulation of management knowledge (for example incorrect and irrelevant information) 
  • Very lavish performance-linked bonus program 
  • Non-independence of the internal audit team 
  • Low moral grounds established by the company’s a leadership/ senior management (such as corrupt behavior) 
  • The extremely convoluted organizational structure 
  • Lack of proper control on financial reporting/ accounting 
  • Complacency on the part of the managers 

Each of these accounting crimes could happen anywhere, from large to medium and little business. Forensic accounting and fraud examination help to identify fraud crimes and ensure there is a clear way of reporting any suspicion. Internal controls help ensure all financial crimes are acknowledged and culprits identified through fraud examination in forensic accounting practices. Internal audits help in fraud examination and forensic accounting as happened to spot the accounting fraud 

Preventing & Detecting Accounting Fraud 

To prevent and detect accounting fraud: 

  • Implement tight internal controls on accounting functions. 
  • Separate the functions of account setup and approval. 
  • Conduct random audits of account payable and accounts receivable records. 
  • Given roles of employees in both departments (accounts payable and accounts receivable). 
  • Make it compulsory for employees to have some off time. 
  • Set up an automated positive pay system to detect scams. 

Forensic Accounting in Fraud Investigation

A forensic accountant is a bit like a financial detective, going beyond the numbers to carry out a thorough investigation into a company’s finances to look for irregularities and anomalies. 

When forensic auditors investigate a suspected fraudulent activity, they consider certain basic elements. 

Whether the act constitutes fraud or not is determined by the law of the land. There would be test cases referred to and set as examples by the regional or national court of law. This would be taking into consideration the type of business operation and action taken case-by-case 

This is the legal definition that the forensic accounting team would use to determine if there has been fraud committed or not. To determine if fraud is committed would not fall under the forensic auditor’s jurisdiction.  Their role is to present the evidence and investigate the facts. The ultimate evidence that is presented to the court would determine the outcome 

The state or region’s law will determine whether the act constitutes fraud. This is the majority of the time determined on a case-by-case basis and the available definitions and test cases will be set out by the regional or national court under which the business operations would fall. 

Forensic accounting would always use this legal definition of fraud as the basis for determining whether there has been fraud or not as fraud cannot take place unless there is intention. There has to be clear intent and mismanagement of the accounts and part of the forensic accounting team’s job is to find if there is enough evidence to show there has been an intentional effort to misrepresent the information. 

Context and Application 

  • B.A in Accounting 
  • Post Graduate in Accounting 
  • CPA 
  • Forensic accounting 


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