What is Corporate Fraud?
The term "corporate fraud" has two possible meanings. It can be the fraudulent offence either conducted by a company or a fraudulent offence committed against a company. A corporation can conduct fraud through various means to protect itself against audits and to enhance its reputation in the industry. Alternatively, a corporation can fall victim to the fraudulent activity of its employees in the form of asset misappropriation, corruption and financial statement fraud. Therefore, an organisation needs to be aware of how to follow the correct business conduct to avoid fraud.
How can corporate fraud occur?
Corporate fraud has increased in recent years due to the expanding size of corporations and the increased opportunities which allow corporations to push the boundaries. It can present itself in the following forms:
- In Accounting: Corporations and its employees can doctor the account documents. This is sometimes done with the purpose to conceal the business' losses.
- Tax: Corporations can evade tax by withholding certain information about the company or through utilising loopholes.
- Assets: Asset misappropriation is a common form of corporate fraud, with around 80% of corporate crimes originating with doctoring of assets.
According to Forbes, corporate fraud occurs most commonly in the IT and computing industries, because there are more outlets to cover fraudulent activity. The US Securities and Exchange Commission (SEC) found within their research that a corporation's chief executive officer and chief financial officer are involved in around 89% of corporate fraud cases. Within these studies it was also discovered that one of the most successful techniques used to create corporation fraud is not providing the correct revenue or expense documentation, whilst also overstating the company's assets. Thus, the bodies which should be used to audit a company's conduct, cannot do so properly because they have been given doctored information to work with.
Enron was a US based energy, commodities, and services company, who were found guilty of dishonest business practice which amounted to corporate fraud. Enron covered up its debt through creating false statements and destroying financial documents which could incriminate them. In the end this deception totalled $2 billion. In October 2001 the Enron scandal heightened and the corporation fell bankrupt, leading people to refer to Enron as the biggest audit failure. The US Securities and Exchange Commission (SEC) conducted an investigation into the fraudulent and corrupt activity which had been escalating within the Enron Corporation. The executives who were involved in the fraudulent activity of Enron were found guilty of destroying financial documents and doctoring of documents which were required by the SEC for the investigation, and therefore they were imprisoned.
How can an organisation prevent fraudulent activities by their employees?
The Annual Fraud Indicator 2017 has published research which states that in relation to fraud in the UK, from October 2017 to March 2018, 62% of the reports to Action Fraud were from businesses, and 39% of reports were from individuals. This highlights that businesses experience a lot of fraud scares within their sector and consequently there needs to be a crackdown on this.
Association of Certified Fraud Examiners (ACFE) conducted a report which examined fraudulent activity within organisations and found that on average it has taken 18 months for such activity to be recognised. In that amount of time a company can lose a lot of money to a fraudster, so organisations should have a robust anti-fraud system in place.
Organisations should know their employees well enough to spot any behavioural changes which could suggest that they might commit fraud. For large organisations it is hard for the management to monitor the changes in attitude of every employee, therefore in-depth screening should be taken when an employee joins the business to analyse whether they have any motives to commit fraud. Then, amongst employees your organisation should establish a reporting system which would hopefully set the precedent that if any strange behaviour does occur, management will be notified.
Controls should be implemented to best protect the assets of a company. There should be minimal opportunity for an employee to commit fraud and corrupt the assets of a company. For example, if you segregate duties then this will contribute to internal controls and reduce the risk of fraud; if any individual does not fulfil their role or does something strange and out of the ordinary, this will become apparent. Furthermore, documentation of everything conducted within the business should be completed and kept safe, to ensure employees cannot alter documentation or destroy it to satisfy themselves.
Corporation fraud is common. Whether it is conducted by the organisation itself or by the employees, it is still a fraudulent offence and all individuals should be aware of it when it has occurred.