Accounting Fraud

ACCOUNTING FRAUD, or false financial reporting, is often at the heart of the most extensive white-collar crimes. Among the examples are the Equity Funding Corporation of America, the fiscal fabrications of hundreds of savings and loan annual reports in the 1980s, and Enron Corporation. Accountants and auditors may assist in other corporate offenses by covering up evidence. For example, by making profit from labor or environmental law violations appear as legitimate income or keeping it off the records altogether.

Accurate financial statements and reports of assets and liabilities, profit or loss, are absolutely required for business and investment decisions. Accounting fraud involves falsification of financial records by overstating profits and assets, understating liabilities and debt, or hiding profit from tax authorities. The complexity of accounting practices makes obscuring a company's true financial standing easy. As such, the public relies on the professional ethics of accountants.

Opinion polls place accountants among the most honest professionals. The designation Certified Public Accountant (CPA) after an accountant's name tends to reassure us her report is a true representation of the financial status of a business or organization. The image is enhanced by independent auditors, whose accounting examinations are often required by law.

With honest accountants and auditors doublechecking figures, we assume correctly, in most cases, that financial statements are reliable descriptions of financial positions. Incidents involving Enron, WorldCom, and other corporations engaged in massive accounting fraud caution against such assumptions.

Accountants may overtly falsify or issue highly misleading statements for many reasons. Just because they are audited is no guarantee financial statements are correct, as the Enron and other caswcases illustrated.

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Accounting fraud can be complex or as simple as changing the left-most digit in a column.

The role of accountants and auditors in accounting fraud is complex. Accountants do not have control over the data they are given. There is a lot of room for dishonesty, if not by the accountant, then by employers or clients applying pressure or misleading financial data. The potential for fraud is considered in training accounting students, alerting them to the possibility of being asked to certify financial reports that are less than accurate.

The auditor's main job is ensuring standard accepted accounting practices are followed. Even if not, given the complexity of corporate accounts, they can explain “irregularities” that are not fraudulent. Extensive accounting frauds require some cooperation between auditors and executives in a company to falsify and certify incorrect reports. Auditors may not want to question some practices or data submitted by good clients.

The line is crossed when what is clearly fraudulent is termed an “irregularity” by auditors remaining silent in the face of an obvious accounting fraud. Accounting practices can be so far from standard regulations, or in violation of regulations that auditors who remain silent or otherwise cover-up a fraud can be criminally charged. By such inaction they become part of a criminal conspiracy.

Accounting fraud takes many forms. While some are complex requiring advanced knowledge of accounting principles, those most common are easy to understand. To name a few, the oldest is keeping two sets of accounting books. First, there is the set that accurately indicates the company's financial position, and the second set of books is for the Internal Revenue Service, illustrating a much less profitable enterprise for tax purposes. There are many ways false financial records help executives or other company personnel. If short-term revenues fall short of goals needed to receive a bonus, accountants can be asked to make it appear as if goals were reached. Fraudulent invoices for products and services not delivered make revenues appear higher.

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