What is Accounting Fraud?

Whether you’re earning your accounting degree or already a practicing accountant, it’s essential that you know about accounting fraud due to its growing prevalence in finance. Accounting fraud is defined as the intentional manipulation of financial records or statements. Companies usually commit accounting fraud to make it appear that their business’s financial health is better than it really is. Bribery, corruption, and cyber attacks all play a prominent role in how accounting fraud comes about in organizations. According to the 2014 Global Economic Crime Survey, 45 percent of U.S. companies have experienced a type of accounting fraud in the last two years. In this article, we’ll sharpen your knowledge on accounting fraud and put you on the lookout for these illegal financial acts.

Types of Accounting Fraud

There have been numerous high-profile corporate accounting scandals in U.S. history that have involved four prominently different types of fraud. First, companies may commit accounting fraud by merging their short and long-term debt into a sign dollar amount. This makes it appear that there is more liquidity available in the organization when there isn’t. Another form of accounting fraud is depreciating expenses. Company officials might knowingly fudge the numbers on their expenditures to make profits seem higher. Along the same lines, over-recording sales revenue growth is accounting fraud that makes the bottom line look higher. Last, but certainly not least, failing to divulge risky accounting practices to shareholders and investors is a common form of accounting fraud.

How Accounting Fraud Impacts Business

Accounting fraud is perhaps the most costly kind of fraud and has pervasive negative affects across the business world. When there are falsified financial records, it’s virtually impossible to accurately determine the stability of a company. According to the Association of Certified Fraud Examiners (ACFE), accounting fraud causes a median loss of $2 million per scheme! The manipulation of financial statements will cause grief for the company’s shareholders, partnering businesses entering contracts, and banks extending credit. Investors may overpay on their investment and reap less value for their money than believed. Accounting fraud also can affect the organization’s workforce if the scandal leads to company layoffs or total collapse.

Ways to Avoid Accounting Fraud

With accounting fraud running rampant in our society, many organizations are going to extra lengths to curb its risks. Prevention is the best way for companies to avoid the negative hassles and costly losses of accounting fraud. It’s advised that businesses establish anonymous reporting systems where honest employees can give tips on red flags. Implementing internal auditing controls is important to quickly detect fraud and keep financial records accurate. Hiring a team of Certified Internal Auditors (CIAs) or Certified Fraud Examiners (CFEs) can help with creating an anti-fraud work environment. Other great practices used to stop accounting fraud include using a system of checks and balances, reconciling bank accounts monthly, restricting use of business credit cards, and conducting unannounced cash counts.

Related Resource: Specialize a Law Degree in Accounting

Overall, all small businesses, mid-sized companies, and large corporations are at risk for falling victim to accounting fraud. Most often, upper management or executives are the perpetrators of accounting fraud to alter figures on sales, revenues, expenses, stock values, debt, and other critical company data, according to Investopedia. If you’re interested in building a career uncovering accounting fraud, you could be the perfect fit for working in auditing, forensic accounting, or fraud examination.