Organizations can easily be victims of fraud perpetrated by external sources. That being said, fraud can also originate within the business in the form of false accounting practices! Whether it comes in the form of asset misappropriation, financial statement fraud, or misuse of company assets, the effects of accounting fraud can shake any business to the core.
While fraud in larger organizations can involve significant sums of money, for small to medium-sized businesses, the impact of the fraud can be just as huge, if not more. In extreme cases, fraudulent activity can threaten the very survival of the business itself!
Don’t let this worry you; keeping your business safe from fraud is simply a matter of being aware of what can go wrong and ensure you’re doing everything to prevent the same! Here’s a low-down on false accounting practices and how fraud can impact your business.
What Is False Accounting?
False accounting practices or accounting fraud comprises of manipulation of financial statements to misrepresent an organization’s financial health. Companies can falsify financial statements by under-recording liabilities, not disclosing expenses, transactions, and finance deals, or over-stating revenue and assets.
Accounting anomalies, bribes, or misrepresentations that could result in unauthorized benefit to the perpetrator are also types of fraud. Here are some common red flags to bear in mind:
Frequent Complaints
Don’t write off all complaints as venting; if you find there’s been an increasing number of complaints, dig deeper to identify the root cause.
Missing Documents
Accidents happen, so it shouldn’t be enough reason to worry if documents go missing once in a blue moon. However, if this becomes a frequent occurrence, there’s definitely something fishy going on!
Third-Party Transactions
Frequent and complex third-party transactions, especially ones that don’t add tangible value to the balance sheet, could actually be concealing debt!
Duplicate Payments
It’s normal for payments to get duplicated, so there’s nothing for you to worry about here. However, this creates an opportunity for fraud – an employee might forge an endorsement of the check. So be on your guard!
Surge in Performance
A significant surge in performance during the final reporting period of the fiscal year, consistent growth while competitors experience weak performance, unexplained rise in receivables, are all signs to watch out for.
Excess Purchases or Inventory Shortages
Excessive purchases could be covering possible payoffs of purchasing agents, and over the top shrinkage and product loss could indicate a number of fraudulent activities!
Large ‘Other Expenses’
‘Other Expenses’ cover miscellaneous purchases and expenditures that are usually inconsistent or too small to quantify. So if you have large expenses on your balance sheet classed under this tab, you really need to find out what’s going on.
What Are the Impacts of False Accounting?
False accounting practices can negatively impact any business, small or large, in the following ways:
Financial Loss
This is the most obvious effect of false accounting practices on any business. Misappropriation of company assets are easier to quantify – the company loses the same amount of money as embezzled by the employee. Fraudulent financial reporting is harder to take into account as an explicit figure cannot be determined.
To add to this, dealing with civil suits as a result of misleading investors and clients can manifest as severe financial losses. The business might also accrue losses while trying to reassure partners, clients, and the general public. Most importantly, business audits become more complicated. The more procedures auditors are required to perform, the higher the cost of the audit!
Damaged Business Image
Bad news travels fast and the smallest of slips can put a dent in the image of any business. At the slightest mention of fraud, customers and the general public are bound to form a negative image of the firm in their minds and lose trust in the company and its services and products.
While rebuilding business image and winning people over again is a challenge in itself, rival companies can easily seize this opportunity to pull in the crowds. In addition to this, corruption reports can compel shareholders and investors to rethink their decisions and cause them to lose faith in the business. Perpetration of fraud also discourages potential investors from extending their support.
Battered Team Morale
Irrespective of whether a firm has perpetrated or suffered fraud, the effects are sure to shatter company culture and team morale. Being associated with a firm that is in the news for fraud can be troubling and embarrassing for employees. What’s more, they might even carry the shame with them into their next place of employment despite not being responsible for the fraud!
In cases where the perpetrator turns out to be an employee, other employees might feel they are partly to blame as they couldn’t sense the danger earlier. On the other hand, fraud perpetrated by the management can adversely affect the normal momentum and functioning of the business.
Inefficiency
By disrupting the functioning of an organization, accounting fraud further jeopardizes business efficiency. For starters, resources are employed in unproductive functions instead of important operations like outsourcing accounting. Efficiency and productivity also suffer when employees accept bribes to award tenders and contracts.
Inefficiency can come about as a result of demoralized employees too! As discussed, they might feel responsible for the fraud or feel demotivated if perpetrators get to walk away scot-free.
Conclusion
Regardless of the amount of money involved, false accounting is a criminal offense. It is your duty to report fraud as soon as you realize something is wrong. Find out the nature and extent of your losses, and take the required action against the perpetrators.
Vetting employee CVs and references, having a whistleblowing policy in place, setting up controlled access, restricting and monitoring sensitive information, auditing processes, etc. are surefire ways to keep fraudulent activities in check.
So start off on the right foot, promote the right culture, and employ the right tactics to prevent false accounting from negatively impacting your business!
Latest posts by Pratik Hambardiker (see all)
- How False Accounting Practices Cease your Business Growth - February 2, 2018
