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Financial fraud is a situation in which the legal and ethical management of financial resources does not take place. In most countries around the world, this type of fraud occurs due to deliberate decisions and actions made by people who handle money and other assets on behalf of employers or clients. However, there are a few places around the world where the unintentional mishandling of funds is also classified as fraud and is subject to the same legal censure as any deliberate action.
In most cases, the fraudulent handling of financial resources will lead to substantial losses for an investor or a corporation. The financial loss is sometimes carefully hidden in the accounting records that are used to track activity involving the resources, allowing it to continue until a great deal of money and other assets are siphoned off and no longer in the control of the owner. Business fraud of this type may be conducted by any company officer or employee who has access to corporate resources, and may continue for an extended length of time before becoming apparent.
There are several different ways that financial fraud can take place. The most common approach is to misappropriate funds or other resources. For example, submitting an expense report containing line items for legitimate expenses that never took place could be considered fraudulent activity. In like manner, inventory theft or the deliberate padding of payroll disbursements would also be considered unethical and usually illegal activity.
Falsifying financial statements and records would also be considered an example of financial fraud. Known in some countries as “cooking the books,” the Accounts Receivables and Payables are deliberately altered to hide the fact that funds taken in by the company are diverted for the personal use of someone involved in the accounting process. In some cases, two sets of accounting records may be maintained. One set is a true and accurate accounting, while the other is the altered accounting that can be used to divert suspicion of illegal activity when and as necessary.
Financial fraud also takes place when bribes or kickbacks are accepted in order to manipulate a business decision. In situations where an employee is found to be involved with a competitor, a conflict of interest usually exists and could involve the sale of proprietary information for personal gain. With both situations, the reception of monetary gains by the individual are likely to hurt the company financially and result in a loss that would not have occurred otherwise.
Depending on the nature of the financial fraud, a corporation may choose to pursue legal action to recover the lost assets, or handle the situation internally. The course of action often depends on the amount of the fraud, and how much damage the company believes would be done to consumer’s confidence in the company if the fraud were made public. In some cases, the employee guilty of the fraud may be offered the opportunity to make partial restitution and resign from his or her position, and the matter is considered closed. At other times, the company may choose to prosecute the fraud using any and all means provided by current laws.