What is Corporate Fraud?

Corporate fraud occurs when a business or individuals working for it engage in deceptive or illegal acts that are designed to remove assets from it or falsify its financial statements. These schemes frequently involve people in positions of authority; given their high level of expertise, the types of fraud in which they engage can be quite complicated, and therefore difficult to identify. For that reason, it can take teams of forensic accountants a long time to identify and quantify the effects of corporate fraud.

There are a number of ways in which a corporation can commit fraud. Here are several examples.

Personal Purchases

An employee can divert funds to buy goods or services on his own behalf. This is usually done by approving his own expense reports or supplier invoices. The person must hold a sufficiently senior position to be able to browbeat other employees into participating in this diversion of assets. Usually, the potential amount of funds diverted increases with the seniority of the job title of the individual committing the fraud.

Ghost Employees

The payroll staff can create fake employees and then pay these "ghost employees," directing the funds into their own bank accounts. Weak controls over the payment of employees makes this type of fraud more likely.

Skimming

Incoming funds are intercepted before they can be recorded in a company's accounting records. This is usually caused when a person is allowed to both open the mail and record accounting transactions. This fraud typically occurs in either the mail room or the accounting department.

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Tax Avoidance

A company can alter its tax returns to reveal less taxable corporate income than is really the case, resulting in lower tax remittances. This can only be done with the connivance of senior management, which typically signs off on the tax returns.

Asset Theft

Any employee can steal from an organization by making off with assets, such as cash or fixed assets. Weak controls can encourage employees to engage in this activity.

Unauthorized Use

An employee may use company assets in an unauthorized manner, such as driving a company car for personal use, or using a company condominium for personal use. Though the asset is not stolen, it is being consumed, so its value lessens over time. Also, these assets may be damaged or destroyed as a result of personal use.

Financial Statement Falsification

An organization can falsify its financial statements to reveal excellent financial results. These documents can then be used as the basis for obtaining bank loans or selling stock to investors. Such falsification can be conducted entirely within the accounting department, or be forced upon it by management. Examples of such falsification are as follows:

Extending the depreciation period to delay depreciation recognition
Shifting debt to special purpose entities
Accelerate the recognition of revenues and delay the recognition of expenses
Capitalize expenses
Counting nonexistent inventory, which reduces the cost of goods sold

Corporate fraud can be extremely difficult to contain, and is essentially impossible to stop if senior management is willing to engage in it. In such cases, even the most robust control systems can be breached.