Accounting fraud is the purposeful manipulation of financial statements to make a false appearance of corporate financial health. Moreover, it includes an employee, accountant, or the organization itself misdirecting financial specialists and shareholders. An organization can misrepresent its financial statements by exaggerating its income, not recording expenses, and misquoting resources and liabilities.
Understanding Accounting Fraud
In order for an accounting fraud to happen, a firm should purposely falsify financial records. Consider a firm that makes a gauge that must be reconsidered later. No accounting fraud has occurred in light of the fact that the mistakes were not deliberate. Presently assume the CEO of a publicly-traded organization intentionally offers bogus expressions about the organization’s possibilities. The Securities and Exchange Commission (SEC) may well accuse that CEO of extortion. However, it isn’t accounting fraud on the grounds that no financial records were distorted.
An organization can submit accounting fraud in the event that it exaggerates its income. Assume that organization ABC is really working at a loss and not creating enough income. In order to conceal this circumstance, the firm may claim to be producing more income on financial statements than it does in reality. On its statements, the organization’s income would be inflated. On the off chance that the organization exaggerates its incomes, it would drive up the organization’s share price and make a bogus picture of financial health.
Another kind of accounting fraud happens when an organization doesn’t record its expenses. The organization’s overall income is exaggerated, and its expenses are downplayed on the income statement. This sort of accounting fraud makes a bogus impression of how much net income an organization is getting. However, in reality, it might be losing money.
Misquoting Assets and Liabilities
Another type of accounting fraud happens when an organization exaggerates its assets or downplays its liabilities. For instance, an organization may exaggerate its present resources and downplay its present liabilities. This sort of fraud misrepresents an organization’s short-term liquidity.
Assume that an organization has current resources of $1 million, and its present liabilities are $5 million. In the event that the organization exaggerates its present resources and downplays its present liabilities, it is distorting its liquidity. The organization could express that it has $5 million in current resources and $500,000 in current liabilities. At that point, potential financial specialists will believe that the organization has enough liquid assets to cover all of its liabilities.
A Real-World Example of Accounting Fraud
The Enron scandal is one of the most popular instances of accounting fraud ever. Enron used off-balance-sheet entities to hide the organization’s debts from investors and creditors. Although using such entities was not illegal in itself, Enron’s failure to disclose the necessary details of its dealings constituted accounting fraud. As the true extent of Enron’s debts became known to the public, its share price collapsed. By the end of 2001, Enron declared bankruptcy.
The results of accounting fraud were extreme in the Enron case. Criminal accusations were brought against a considerable lot of the organization’s top executives, and some of them were sent to jail. The scandal in the long run devastated accounting giant Arthur Andersen LLP, which took care of Enron’s books.