Fraud in Business: Understanding accounting fraud
Accounting fraud is the deliberate manipulation of financial statements and records to present a false picture of a company’s financial position.
It is a criminal offense which can lead to large fines or prison sentences for those involved.
There is also the impact on the business and its stakeholders for example reputational damage or loss of money to fund day to day trading.
The forms accounting fraud can take
Accounting fraud can take many forms, from manipulating financial records to stealing company assets. Some of the most common examples include:
- Falsifying financial statements
- Theft of an entity’s assets such as stock
- Employee fraud
- Expenses fraud
- Collusion with suppliers
- Theft of money for personal use
Real examples of accounting fraud
Several high-profile cases have shown how accounting fraud can remain hidden for years, causing substantial financial losses and damaging the confidence of customers, investors and employees. These examples also demonstrate the serious consequences for the organisations and individuals involved:
- The Enron Scandal where extensive accounting fraud, using off balance sheet entities hid debt and inflated profits. The company ceased to trade.
- The founder of the FTS was found to have misused customer funds for personal expense leading to a loss of billions and a 25-year prison sentence.
- The Worldcom scandal that inflated its assts by $11 billion through accounting fraud leading to bankruptcy.
- Wirecard, a German payment processing company, had €1.9billion missing from its accounts
Although the examples are based on large entities it is worthwhile remembering that accounting fraud can happen to any size business.
How to spot possible accounting fraud
Accounting fraud is not always obvious, but certain warning signs may indicate that something is wrong. Regularly reviewing your financial information and internal processes can help you identify unusual activity at an early stage. Areas to look out for include:
- Unexplained differences between actual results, budgets and previous years, particularly where the figures do not reflect what you know about the business
- Unusual or unauthorised transactions, such as unexpected bank transfers, large payments or credit notes raised without approval
- Missing invoices, receipts or other documents that should support transactions recorded in the accounts
- Staff accessing accounting systems at unusual times, bypassing approval processes or failing to follow established controls
- Differences between recorded stock levels and the quantities you would expect based on purchases and sales
How to prevent accounting fraud in your business
Nobody wants to be the victim of fraud and so for any business owner it is important to put in place controls to prevent accounting fraud. The below list is not exhaustive but gives some ideas on what you could implement.
1. Have strong controls in place
Controls should focus on the key areas of the business and should be designed to reduce the chance of any one person being responsible for one activity.
We suggest segregating systems so that one person is not responsible for a whole task or if this is not possible their work is reviewed.
2. Limit access to the bank accounts
Ideally the person responsible for the bookkeeping should not have access to the bank as this provides opportunity for theft which could be easily hidden.
Payment limits could be set with any large payments requiring more than one person to approve it.
3. Review accounts and finances
Regular review of your accounts and finances to ensure they look reasonable based on your knowledge of your business, such as budgeting and preparing management accounts.
4. Reconciliations
Regular reconciliations of key account areas such as bank accounts, debtors and creditors which should be checked by a separate person who undertook the reconciliation.
5. Systems reviews
Regular review of your systems to ensure they are still appropriate and take into account any change in your business.
6. Auditing
Have an audit which could look at your accounts as a whole or at one specific are such as your systems and controls.
7. Company culture
Create a culture of honesty which also encourages whistleblowing. Sometimes it is the people on the ground that are more likely to identify any wrong doing than management.
Concerned about fraud in your business?
If something in your accounts does not look right, do not ignore it. Acting early can help you establish what has happened, limit further losses and strengthen the controls that protect your business.
Contact Gravita to discuss your concerns and find out how we can help you review your financial records, systems and internal controls.
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