Types of Accounting Fraud

Posted by: Jannike Post Date: 23rd July 2015

While organisations can be victims of fraud from external sources, it can also originate within the business, and this has been true of some of the most high profile cases, from Enron to Tesco.

As well as false accounting fraud in large firms, smaller organisations can face threats from internal fraud such as embezzlement. Let’s take a look at these common types of accounting fraud.

Embezzlement

Types of Accounting Fraud

The main type of financial fraud in small to medium businesses is due to a lack of internal controls, resulting in staff being able to take money out of the business without anyone noticing. This can be done in a number of ways:

  • The person who makes the payment is the person who authorises payments. This can result in personal items being paid by the business.
  • The person who makes the payment completes the payroll. This person can create ghost employees, receiving the wages of fictitious members of staff.
  • Staff claim expenses for items that are not business related.

This is more likely to happen in close-knit working environments where there are limited internal controls, and staff are trusted to have much more overall responsibility than in larger organisations.

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False accounting

In large organisations, cases of fraud often involve more people, and tend to involve falsifying accounts by overstating revenue or assets, so that the business is worth more money, which in turn makes the share price increase.

This type of fraud is normally sustained over a longer period, and involves significant amounts of money. Cases typically go on for over two years, and could be worth millions of pounds.

This type of fraud is less common since the Enron scandal, when stricter rules and governance came into place to protect the stakeholders of organisations. All Public Limited Companies, and those with a turnover greater than £6.5 million, must now be audited to protect shareholders. There are also International Accounting Standards, strict guidelines on how a business can report its accounts.

When in an accounting or senior management role, you need to be able to help put effective internal controls in place to ensure that these types of fraud are carefully avoided. You will need to be able to spot signs of fraud and be aware of the procedures for reporting your suspicions. You may also wish to go into a forensic accounting role, where you will investigate these types of cases within other organisations. In all of these contexts, it’s advisable to gain a qualification such as AAT, which covers internal controls, or CIMA, where risk management methods are covered in depth.

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