Accounting fraud is a type of white collar crime, or business crime, wherein a company falsifies information that is recorded in their company accounting books. The false information is then used for a variety of purposes resulting in profits or other financial gains for the company. For example, a company may inflate the worth of their profits or assets when, in fact, they are actually experiencing financial losses. This fraudulent information is then used to attract investors who might purchase some of the company’s stocks.
This type of fraud is a major problem affecting both small and large companies. Accounting fraud can cover a single isolated instance of misrepresentation, or it could involve a lengthy, complicated operation.  These kinds of actions are punishable under state and federal laws. Liability for accounting fraud is usually traceable to the company’s accountant, although other persons could be found guilty as well, such as a supervisor or an executive.

What Are Some Examples of Accounting Fraud?

Fraudulent information can be manipulated in numerous ways within the company’s books. Accounting fraud is often called “cooking the books” or “financial reporting fraud." Again, the main intent is to create chances for the company to increase its profits. Some common examples of accounting fraud include such methods as:
  • Over-inflating income and revenue figures
  • Overstating the value of company assets
  • Hiding or concealing assets so as not to pay taxes
  • Understating expenses or losses
  • Understating company liabilities
  • Falsely stating information regarding business transactions

A particularly common form of accounting fraud involves sales reports. Frequently, the crime is committed by reporting completed sales when in fact the sales are still in progress or the deal is not complete yet. This is done in order to boost the sales figures for a particular report, such as an annual or quarterly statement.

Other types of accounting fraud include not reporting gifts or bonuses to executives, and purposely failing to record vacation time and other benefits. 

What Are the Legal Consequences of Accounting Fraud?

Accountants must follow accounting rules that are stated in the Generally Accepted Accounting Principles (GAAP). Failure to operate according to GAAP may result in sanctions for the accountant as well as liability in a civil lawsuit. Usually, it must be proven that the accountant has violated GAAP standards before an accounting malpractice lawsuit can be filed.

A company accountant can also be liable if they falsify information regarding securities such as company stocks and bonds. Securities violations are usually punishable under federal laws and some of them are classified as felonies.

If the accountant or the company is found guilty of accounting fraud, penalties can include monetary fines and jail or prison time. As the seriousness of the violations increase, the fines and jail sentences will also become more severe. Repeated violations can also result in heavier consequences. 

How Can Accounting Fraud be prevented?

There is always going to be a risk that accounting fraud will occur. However, the chances of fraud occurring can be greatly reduced by properly supervising all stages of reporting. All transactions should be reviewed and properly documented. Accountability will increase if the documents and books are reviewed by several people rather than only one person. 

Company policies should inform employees of the consequences involved in accounting fraud. The policies also need to provide mechanisms for reporting accounting fraud within the company. Any abnormalities in the records or suspicious behavior by employees may be signs that accounting fraud is happening.

Do I Need a Lawyer for an Accounting Fraud Claim?

If you suspect that accounting fraud is happening in your company, you have every right to report it to your supervisors and to the proper legal authorities. You should contact a criminal lawyer who can help you prepare a report that might be used in case a lawsuit arises, as well as represent you in legal proceedings if you are required to be a part of the lawsuit. If you have experienced losses due to the fraud, you may be able to recover damages in a court of law.