Fraud definition
/What is Fraud?
Fraud is a false representation of the facts, resulting in the object of the fraud receiving an injury by acting upon the misrepresented facts. Fraud results in a person giving up something of value or giving up a legal right. It is proven in court by showing that the actions of a person committing fraud involved the following elements:
A false statement of a material fact;
Knowledge that the statement was untrue;
Intent by the individual to deceive the victim;
Reliance by the victim on the statement; and
Injury sustained by the victim as a result of the preceding actions.
The key element in the preceding definition is intent. A company could make false representations in its financial statements simply because the accounting staff made a mistake in compiling certain financial information. This is not fraud (though it may be incompetence), since there was no intent to misstate the financial statements. Conversely, if a controller intentionally reduces the bad debt reserve in order to increase profits and thereby triggers a bonus for the management team, this is fraud, because a false statement was intentionally made.
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Internal Fraud vs. External Fraud
Fraud may be perpetrated within an organization, by its employees, or externally, by outside parties. Internal fraud involves the use of an employee’s position to misuse assets for personal enrichment. For example, a manager could hire a contractor to build a swimming pool at his house, and then bills the work through to his employer. External fraud occurs when an outside party, such as a supplier, engages in deceptive practices in order to illegally take assets from the organization. For example, a supplier double-bills for a shipment of goods.
Consequences of Fraud
Fraud can have a serious impact both on a company and the investing public. The direct impact on a company is a loss of assets, which can put it in a major financial bind, possibly leading to bankruptcy or its takeover by another firm. As a result, the company may need to pare back on its expenditures, possibly leading to employee terminations. When fraud is made public, this usually causes a sharp decline in a firm’s share price, which lowers the net worth of its investors - sometimes by massive amounts.