What Is Corporate Fraud?
Corporate fraud refers to activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are 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.
How Corporate Fraud Works
Corporate fraud can be challenging to prevent and 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. It is considered a white-collar crime.
- 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 is an example of corporate fraud.
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. For example, accounting for a company 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. The falsified accounting might be done to make the company more attractive to potential buyers or investors.
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 invest 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 using some of its funds to put toward 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, which is a type of corporate fraud.
Corporate Fraud Example
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.