I checked my mail this morning and was greeted with this email from Jude “Good day Mr. Chinweike, What is accounting fraud? Please sir help me “. I initially did not want to respond to the mail as I considered it a cheating if I help provide an answer to this question. But taking a second look at the question prompted me to give the sender the benefit of doubt. He or she might not really be a student seeking answer to homework. Even if it is, the maker or assessor would definitely see this article as I didn’t send this article to (Jude) the person that sent me the question, I only posted it here and then sent the link to Jude (I haven’t violated any privacy right as millions of people have Jude as their first name).
This article is written to provide an answer to the above question. Judging by the nature of the question, it is right to provide a definition or explanation of accounting fraud, followed by types of accounting fraud and the characteristics of accounting fraud. This approach is taken in order to provide a wider and more comprehensive answer.
MEANING | DEFINITION | EXPLANATION
Accounting fraud is the phrase used to describe a situation when an employee of a business entity steals, misappropriates or embezzle money or other resources. Anybody in the position of stealing ranging from unit managers to accounting clerks or chief financial officer can perpetrate this kind of fraud. Factors like enriching oneself, covering for errors, and covering for a loved one can be the motive behind the commission of accounting fraud. The interesting stuff about accounting fraud is that small discovery usually lead to massive exposure of fraud.
CATEGORIES OR TYPES OF ACCOUNTING FRAUD
PAYROLL FRAUD: this is the type of accounting fraud whereby payroll staff create dummy or ghost worker that receives pay regularly. This type of accounting fraud is common in large government owned organizations.
INVOICE FRAUD: here, employees duplicate the invoice of their employer and occasionally issue them in the name of legitimate customers or service provider.
ACCOUNTS PAYABLE FRAUD: this is an extension of the invoice fraud. The difference is that the perpetrator of the accounting fraud connives with fake company or creates a dummy company that never existed, and then make claims for payments for goods and services that were never delivered.
ACCOUNTS RECEIVABLE FRAUD: this is a situation where one or more employees arrange to divert money or cheque that is meant to go into the company account into their personal account. It is important to note that this type of fraud is much more difficult than the others as it is not so easy to perpetrate.
FINANCIAL STATEMENT FRAUD: financial statement fraud is a high level fraud that is mostly perpetrated by top management staff. The main motive behind this type of fraud is to present a failing company as being profitable as this will greatly influence the perk that the managers will receive at the end of the day.
TAX FRAUD: tax fraud is a type of accounting fraud whereby directors of a company misrepresents financial facts in the bid to hide profit. The ultimate aim is to avert paying taxes to the appropriate tax authority. Multinational corporations usually commit this kind of accounting fraud by resorting to transfer pricing in a manner that highly questionable.
CHARACTERISTICS OF ACCOUNTING FRAUD OR HOW TO RECOGNISE ACCOUNTING FRAUD
Con artists working in an organization have a way of circumventing the internal control system when set out to commit financial crime. For this reason, it is good practice to look out for economic fraudulent activities pointers. Some of these pointers to the existence of fraud are briefly discussed below:
LIFESTYLE: wealth intoxicates just like alcohol and other stimulants. It is very difficult to make careless money and not flaunt it. An accounting clerk that earns about £7,000 a year for example is not expected to live a lavish live and when this becomes the case, it could be the much needed pointer of foul play.
WHEN FIGURES HAVE PATTERN: one thing that I leant in the forensic accounting and risk-based auditing classes is that; figure pattern tells us a lot about the underground activities going on around in the organization. Set of figures that are smoothly rounded up should be telling us something.
USE OF SOFTWARE: technology has made discovery of some complex forms of accounting frauds possible. One of the selection criterions for choosing accounting software now is the ability of the software to detect and flag inconsistent activities.
THE KIND OF RELATIONSHIP IN AN ORGANIZATION: eyebrows should be raised when certain responsible officers starts being intimate. In as much as corporate bodies try to promote reasonable friendly work environment, care should be taken to notice when relationships become so intimate.
Remember that one of the importances of accounting is to provide us with information that will help preserve as investment. In order for this to be achieved, accounting fraud should have no place within our business model.