How to Define Fraud in Financial Terms
Fraud is an intentional act by one or more individual in management, those charged with governance, employees of third parties, involving the use of deception to obtain an unjust or illegal disadvantage. Fraud should be contrasted with error. While fraud is an intentional act, error is unintentional.
As far as financial statements are concerned, fraud comprises both the use of deception to obtain an unjust or illegal financial advantage. It is ultimately up to courts to decide in each instance whether fraud ha occurred; for example:
• Deliberate falsification of documents or records
• Deliberate ignoring of error requiring correction
• Deliberate suppression of relevant information
Fraud can be carried out by management, employees or third partied for example
Managers may deliberately select inappropriate accounting policies
Employees may steal the proceeds of cash sales and omit to enter the sales into the accounting records
Third parties may send bogus invoices to the company hoping that they will be paid in error
In a false billing fraud your company is sent an invoice from an individual or firm to whom you have no liabilities. Sometimes large companies are targeted, that their systems will be too weak to check invoice properly before they are paid. Some time large companies are targeted, in the expectation that their payment system will automatically pay smaller invoices without proper check being carried out.
Typical invoiced bogus services are:
Renewal notices for registration of internet domain names.
Placing an advertisement in a non-existent publication.
Factor that might increase the risk of fraud:
• Management domination by one person, or a small group of peoples.
• Unnecessary complex corporate structure
• High turnover rate of key accounting personnel
• Personnel who do not take leave/ holidays
• Understaffed accounting department
• Volatile business environment
• Inadequate working capital
• Deteriorating quality of earnings
• Inadequate segregation of duties
• Lack of monitoring of control systems
• Unusual transactions
• Inadequate it systems
Example of frauds:
Example of frauds by management
• Financial statement fraud e.g. ‘window dressing’ an ‘cooking the books’,
• Misappropriation of assets
• False insurance claim
• Using company asset for personal use
Frauds by employees:
• Sale ledger fraud - ‘teaming and lading’ stealing cash sales and cheques.
• Purchase ledger fraud
• Skimming schemes
• Payroll fraud
Example fraud by third parties
• False billing fraud
• Bank farud
• Advance fee farud
• Ponzi scheme
Misappropriation of assets
Although all employees of a company may steal assets to a minor degree e.g. taking pads of papers blank CDs home with them, management are able to conceal more major thefts by amending the accounting records. Example
They may steal physical asset and adjust accounts to show these items were written off
They may sell intellectual property to a competitor of cash
Such frauds are usually hard to detect, because accounting record look to be in order.
False insurance claim
A manager might steal a high value asset and claim it was stolen from him while on company business. The company then lodges an insurance claim to remedy its loss.
Using company assets for personal use is a type of fraud socially accepted by all.
A ponzi scheme is a fraudulent investment offer that involves paying abnormal high returns to early investors rather than from any genuine underlying business. Charlz Ponzi emigrated to America in 1903 and set up his saving scheme in Boston offering 50% interest in 45 days or double your money In 90 days . About 40 000 people sent him 15 m for scheme. When it collapsed 5m were returned to investors. Modren Ponzi scheme use financial jargon to confuse future trading or global currency arbitrage or similar.
• Frank Abagnale Jr., US impostor who wrote bad checks and falsely represented himself as a qualified member of professions such as airline pilot, doctor, and attorney. The film Catch Me If You Can is based on his life.
• Eddie Antar, founder of Crazy Eddie, who has about $1 billion worth of judgements against him stemming from fraudulent accounting practices at that company.
• Ramón Báez Figueroa, banker from the Dominican Republic and former president of Banco Intercontinental. Sentenced on October 21, 2007 to ten years in prison for a US$2.2 billion fraud case that drove the Caribbean nation into an economic crisis in 2003.
• Cassie Chadwick, who pretended to be Andrew Carnegie's daughter to get loans.
• Charles Dawson, an amateur British archeologist who claimed to have found the Piltdown man.
• Richard Eaton, an English businessman who was business partners with mobster Paul Vario and Jimmy Burke and was involved in the Lufthansa heist.
• Bernard Ebbers, founder of WorldCom, which inflated its asset statements by about $11 billion.
• Martin Frankel is a former U.S. financier, convicted in 2002 of insurance fraud worth $208 million, racketeering and money laundering.
• Konrad Kujau, German fraudster and forger responsible for the "Hitler Diaries".
• Kenneth Lay, the American businessman who built energy company Enron. He was one of the highest paid CEOs in America until he was ousted as Chairman and was convicted of fraud and conspiracy, although as a result of his death, his conviction was vacated
• Nick Leeson, English trader whose unsupervised speculative trading caused the collapse of Barings Bank.
• James Paul Lewis, Jr., ran one of the biggest ($311 million) and longest running Ponzi Schemes (20 years) in US history.
• Gregor MacGregor, Scottish conman who tried to attract investment and settlers for the non-existent country of Poyais.
• Colleen McCabe, British headmistress who stole £½ million from her school.
• Gaston Means, a professional conman during U.S. President Warren G. Harding's administration.
• Michael Milken, "The Junk Bond King".
• Michael Monus, founder of Phar-Mor, which ultimately cost its investors more than $1 billion.
• Lou Pearlman, former boy-band manager indicted by a federal grand jury in Orlando on charges that he schemed to bilk banks out of more than $100 million.
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