Accounting Fraud: What Is It And How Does It Happen?
Accounting plays an integral role in operating a business because it helps you keep track of your income and expenditures, and it provides management and investors with accurate financial information that can be utilised in making business decisions. Moreover, reliable accounting services also ensure that your business is compliant with the statutory requirements and regulations.
When it comes to the accounting functions of your business, it is highly advised that you hire an in-house accountant or outsource accounting services in Singapore. This is to ensure that your company will not run the risk of committing accounting fraud. If you are unfamiliar with the term ‘accounting fraud’, this article is especially for you. Read on to learn what accounting fraud means and the most common ways to commit it.
What is accounting fraud?
Accounting fraud refers to the act of intentionally manipulating financial documents to create an untrue appearance of corporate financial health. In other words, it is the unlawful alteration of the financial statements of a company in order to manipulate its apparent health or to conceal profits or losses.
Accounting fraud usually involves an employee or the whole organisation itself, misleading shareholders, investors, or money lenders. Most of the time, their primary purpose for intentionally altering or misrepresenting accounting records or financial documents is to gain monetarily. If caught, the employees carrying out accounting fraud could be subjected to personal criminal charges.
How can accounting fraud be committed?
Accounting fraud manifests in different ways. This means that there are various types of frauds in accounting that employees or companies may commit. However, most often than not, accounting fraud is committed by either not recording expenses, overstating revenues, or misstating assets and liabilities.
1. Unrecorded expenses
Unrecorded expenses is one of the most common forms of accounting fraud. It happens when a company fails or refuses to record its expenses. Here, the company’s net income may be overstated, or its costs may be understated on the income statement. In essence, this type of accounting fraud brings about a false impression that the company is receiving great net income even though it is losing money in reality.
2. Overstating revenues
Accounting fraud may also be committed when a company overstates its revenue. For instance, company A is actually running at a loss and not generating adequate revenue. To hide this situation, the company might claim on its financial statements that it is generating more income than it does in reality.
In other words, the company would be inflating its profits on its financial statements. By overstating its revenues, the company would drive up its share price and create a false appearance of financial health.
3. Misstating assets and liabilities
Another common type of accounting fraud occurs when a company misstates its assets or liabilities. What typically happens here is that the company overstates its present assets and understates its present liabilities. To put it simply, this form of accounting fraud misrepresents the short-term liquidity of a company.
For instance, company A has assets of $2 million at present, and its liabilities are $6 million at present. By committing accounting fraud, the company could state that it has present assets of $3 million and present liabilities of $1 million. Then, potential investors and money lenders will believe that the company has sufficient liquid assets to cover all of its liabilities.
Overall, accounting fraud is illegal, and it could significantly damage your company’s operation and reputation if one of your employees or your whole organisation is caught committing it. Hence, it is imperative to implement measures to prevent the commission of accounting fraud in your business. This includes hiring trustworthy accountants and internal auditors, among others.
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