Accounting Fraud

What is accounting fraud?

Accounting fraud is an iteration of financial fraud and an exercise of intent where an individual or a group creatively manipulate financial statements in the pursuit of making a business appear financially stronger than it actually is.

They may be motivated by a number of reasons which can include but is not limited to:

• Personal financial gain (this can range from achieving a higher performance-related bonus to embezzlement)
• Obtain additional funding from banks or individuals
• Inflate share prices
• Hide losses
• Cover up theft
• Attract partners and customers by appearing to be more successful

Accounting fraud often comes in one or a combination of the following forms:

• Misusing funds or misappropriation of assets
• Payroll fraud
• Overstating revenues or assets
• Misrepresenting expenses or liabilities
• Bribery and corruption

Types of accounting fraud

Asset misappropriation

This is what the average person imagines when they come upon the phrase ‘accounting fraud’, whereby an insider (typically a direct employee of a company or corporation) steals company funds or assets. The degree of complexity varies between the many ways that asset misappropriation can be implemented, and many notable forms include: cheque forgery, cheque tampering, physical theft of cash and physical theft of assets. It can also take on more mature iterations with expense reimbursement and expense account fraud commonly occurring offences – whereby an employee may claim money for a business expense with a forged receipt, or by using a business account to pay for personal expenses.

Payroll fraud is also part of asset misappropriation. Estimated to cost companies £12 billion each year in the UK, payroll fraud entails the theft of company assets through the payroll system, where an individual may institute a ‘ghost’ employee – a fake employee that is paid as a normal employee with their income going directly to the fraudster, or by payroll advances and timesheet forgery.

Accounting manipulation

Most commonly attributed to directors and board members or individuals who are higher up in a company and who intentionally overstate revenues/assets or understate expenses/liabilities to improve financial statements. The aim is often to secure further funding, justify huge bonuses, increase salaries, meet expectations of shareholders and satisfy personal greed. Common methods include transferring of funds to dummy corporations and generating fictitious sales and payments.

Bribery & corruption

Receiving kickbacks and paying bribes to influence decision-making is more common than most people think and they are prevalent in governments as well as private companies. The most common form of kickback involves a supplier submitting an inflated invoice and sharing the extra amount with the person authorising the payment.

The landscape of accounting fraud is ever-evolving with more complex and intricate methodologies constantly being developed and disseminated. Thankfully, at Blackhawk Intelligence, our specialist forensic accounting team and expert due diligence team can work together to safeguard and protect your business.

How to prevent accounting fraud?

There is a number of effective means by which you can prevent accounting fraud and mitigate the likelihood of its occurrence within your business. From comprehensive due diligence to implementing a chain of command and a structural system that involves a number of individuals being responsible for the company’s finances and accounts, instituting these measures is not only good practice for businesses of all sizes, but is a necessity when it comes to protecting your company and its financial and fiscal health.

The following measures are generally considered the most effective methods for businesses looking to prevent and detect accounting fraud in its various iterations:

Proper due diligence

Conducting extensive and thorough background checks on new employees is vital to understanding who your employee is and whether they pose a risk to your company’s financial health. Not only will this ensure that you are finding the right individual for the job, but it can be implemented retroactively to audit and assess your current employees and discover any anomalies that might reveal themselves. As circumstances change and individuals can be subject to unforeseen external pressure, it may be worth considering annual background checks on key employees too.

Impose financial structures and processes

When it comes to good business, implementing checks and balances goes without saying. It’s important to establish a chain of command that will protect your business’s finances from any malpractice or misappropriation. Methods which you can undertake include:

• Separating the functions of a payroll administrator and a signatory is one example of how this can be instituted.
• Rotating the duties of employees in accounts. When different individuals can assess the books at any one time, they may spot irregularity and make it easier to identify an occurrence of fraud.
• Restrict access to sensitive information and monitor how they are shared.

Regular, routine checks

Reconcile bank accounts regularly and conduct random audits of company accounts so everyone responsible for the accounts is aware that their work will be checked by a specialist third-party.

Establish a hotline

Encouraging employees to speak up if they suspect something dubious or wrong is going on will boost the chances of you detecting fraud and thereby will mitigate the impact that fraud might have. It’s important to uncover fraud early on so as to ensure that the least amount of damage is being done to your company’s financial positioning.

While these few measures may seem like just the tip of the iceberg when it comes to comprehensively protect your business from accounting fraud, they do represent an excellent starting point for businesses hoping to better safeguard their company from financial ruin. When it comes to the finer details and more developed strategies for protecting your company’s interests and assets, contact our teams at Blackhawk Intelligence on +44 (0)20 8108 9317 today.

Blackhawk Intelligence can help with accounting fraud

At Blackhawk Intelligence, we have a history of success when it comes to combating financial fraud, with a comprehensive arsenal that ranges from forensic accounting investigation to comprehensive due diligence and all things in between. Though we respect client privileges and won’t disclose specifics, we do have a range of case studies that elucidates the ways in which we can operate in order to effectively and discretely counter fraud and bring individuals to justice.

Whether it’s a payroll fraud or fraudulent kickback scheme, we have the knowledge, tools and manpower to uncover the accounting fraud you’re facing and gain the maximum restorative amount for your losses – through legal exercises or otherwise.

Our forensic accounting team consists of expert investigators who are leading figures in the UK with a proven track record of supplying our clients with comprehensive, successful fraud prevention methods. We take responsibility for conducting a holistic investigation of your business’s current financial structure from the ground up, and we also endeavour to implement the most effective and efficient measures that are catered specifically to your business, its size and its structure.