The Dangers of Accounting Fraud

Accounting fraud is an intentional and illegal way of maneuvering the recording of sales revenue and expenses in a business. Accounting fraud, which may be known with other terms as ‘profit smoothing’ or ‘creative accounting’, is done by some businesses in order to show better profit performance even when it does not actually show.

Some elements that may constitute accounting fraud are not recording prepaid expenses and other incidental assets; not listing specific classifications of current assets or liabilities and shrinking into one amount short term and long term debts.

The most typical practice of accounting fraud is the over-recording of sales revenue. For instance, a company may consign products to clients that were not yet placed, on the assumption that these products will be returned back at the end of the year. The business will record the shipments and treat them as if it were actual sales, unless the products are returned.

A business can also practice channel stuffing wherein it sends products to dealers or customers which they do not really want but gives them deals such as discounts, incentives and other special privileges if the recipients do not object to receiving these products that were delivered prematurely. Moreover, a business may also postpone the listing of products that have been returned by customers in order to keep these offsets from being recognized against sales revenue in the present year.

Other means by which a business can commit accounting fraud are under-recording of expenses, for instance, not listing depreciation expense and not recording the total cost of goods sold expense for the sales transactions concluded during a given period. These improper practices can increase gross margin and bloat the company’s inventory asset with products that are not really present in the inventory since these have already been delivered to customers.

Furthermore, a business may not choose to list asset losses like uncollected accounts receivable, even when it should be recognized. It might also not record inventory under the lower of cost market or LCM method as well as understating in the business’s balance sheet the liability amount for a particular expense the full amount of the liability for an expense. All these can result to an overstatement of the business’s profit.

Companies engaging in accounting fraud can be legally held liable for such an offense. It can cause a business’s downfall as well. Accountants must, at all times, live up to the principle of fairness, transparency and accuracy in performing accounting principles and not allow irregularities such as accounting fraud to slide.