What Is Corporate Fraud?

Corporate fraud refers to illegal activities undertaken by an individual or company that are done in a dishonest or unethical manner. Often, this kind of business fraud is designed to give an advantage to the perpetrating individual or company. Corporate fraud schemes go beyond the scope of an employee's stated position and are marked by their complexity and economic impact on the business, other employees, and outside parties.

Key Takeaways

  • When companies engage in activities that are dishonest or illegal, it is referred to as corporate fraud.
  • There are many forms of corporate fraud including falsified accounting and misrepresenting services or products.
  • The Enron scandal from 2001 is a well-known example of corporate fraud.

How Corporate Fraud Works

Corporate fraud can be challenging to prevent and tricky to catch. By creating effective policies, a system of checks and balances, and physical security, a company may limit the extent to which fraud can take place. Corporate fraud is considered a white-collar crime.

Types of Corporate Fraud

Though it may be conducted in a variety of ways, corporate fraud frequently is performed by taking advantage of confidential information or access to sensitive assets and then leveraging those assets for gain. The fraud is often hidden behind legitimate business practices or exchanges to disguise the illicit activity. Multiple stakeholders involved in corporate fraud also allows for elaborate fraud schemes to be protected by a group of complicit actors.

For example, a company's financial accounting records may be altered to present an image of high revenue and profits compared with the actual financial results. These actions might be taken to hide shortcomings such as a net loss, slow revenue, declining sales, or hefty expenses. Falsified accounting might be done to make the company more attractive to potential buyers or investors, or ultimately protect a public company's stock or valuation from dropping.

Other forms of corporate fraud may aim to disguise or misrepresent a service or product the company is developing or has in service, hiding its flaws or defects. Rather than investing in repairing, refurbishing, or redesigning the product, those responsible for the product attempt to deflect or disguise these issues. This might be done if the department or company does not have the finances to correct the problem or if revealing the issue might drive away customers and investors.

If a company or individual claims it is putting some of its funds towards investments or other types of monetary reserves that are intended to gain in value, but in actuality, those funds have been expended or diverted elsewhere, this counts as a type of corporate fraud.

Example of Corporate Fraud

The deceptive accounting and business practices that led to the downfall of Enron is an example of corporate fraud. Due to the widespread use of loopholes and other disguising tactics, the company hid debt from failed deals, the sum reaching into the billions of dollars. To maintain the charade, those responsible pressured their auditors to hide their deception, which included the destruction of financial documents.