Accounting fraud

Accounting fraud is an intentional act involving the use of deception, which occurs to distort financial information and gain an unfair or illegal advantage and which is carried out by one or more persons in management, those responsible for the governance of the entity, employees or third parties.

American Institute of Certified Public Accountants tells us that tax fraud can be carried out in the following ways :

• Tampering with, falsifying or altering the accounting records or supporting documents from which the financial statements are prepared.
• Intentional misstatement or omission in the financial statements.
• Intentional misapplication of accounting principles related to the amounts, classification, presentation, presentation, disclosure, presentation and disclosure of financial statements. amounts, classification, a form of presentation, or disclosure.

Economic crimes

Accounting fraud is part of a variety of crimes, which in their totality are part of what is called economic crimes. Among them are corruption, fraud, cybercrime... Economic crimes are a huge and constantly growing problem that society is facing daily, and they know how to adapt to the times in which we live, making it even more complicated to control them. The globalised world in which we live means that we are constantly exposed to being victims of economic crime. From governments to multinationals, to small companies and not forgetting individuals, are at risk of suffering economic crime daily.

A clear example of the above is in the words of Steven L. Skalak, a Partner in Advisory Services at Forensic Services in New York, and his research, he states that “more than half of global chief executives, polled in our just-released 2014 Global CEO Survey, told us they are concerned or extremely concerned about bribery and corruption” . And if we ask ourselves how important accounting fraud is within economic crime, in the words of Sahle and Othman, accounting fraud accounts for 22% of the economic crimes that occur worldwide.

Negative impacts

The act of fraud entails many more risks than benefits for those who employ it because if it comes to light, the consequences are very harsh. Focusing on companies, mismanagement on the part of management can lead to damage to the company's image, causing it to lose its reputation and consequently diminishing the value of the company. Regarding the quantitative aspect of this global, social and economic problem, in 2018 data came to light from the ACFE (Association of Certified Fraud Examiners), which showed that "organisations lose 5% of their annual revenue due to fraud" and if we were to count it "it would be equivalent to 4 trillion dollars of the Gross World Product".

Fraud triangle

The fraud triangle is one of the oldest methods of fraud investigation and today covers 10% of all investigations. In terms of use, the Fraud Triangle method is ahead of the Fraud Triangle method in investigations that analyse aspects of the business organisation and the auditor's side of the business.

This method of investigation was created in 1961, when criminologist Donald R. Cressey and other experts determined that "for fraud to materialise there must be power, opportunity and rationalisation". Hence the name, since the theory is based on three pillars. The components arise when, "they arise when a person has high moral standards and is likely to have difficulty committing fraud. Those who are unprincipled simply find an excuse and justify themselves by saying that there is nothing wrong with what they are doing".

For an ordinary person to commit fraud, the three pillars discussed above must be kept in mind:

1. Power - Management or other employees have an incentive, i.e. something that induces them to commit fraud or they are under pressure, which gives them a reason to commit fraud.
2. Opportunity - The person is in a situation where circumstances exist, such as the absence of controls, ineffective controls, or management's ability to override controls, that facilitate the opportunity to perpetrate a fraud, with a sense of low risk of detection.
3. Rationalisation - At this point there are two possibilities, if the previous two have been fulfilled. On the one hand, someone who has clear principles and a solid ethical base at this point would not choose to commit crime. On the other hand, when the person has values that encourage him to commit crime without any remorse, there is a high probability that the fraud will be committed.

References

• ACFE (2018). Report to the Nations; Association of Certified Fraud Examiners: Austin, TX, USA.
• AICPA (2002). Statement on Auditing Standards (SAS) No. 99: Consideration of Fraud in a Financial Statement Audit. AICPA.
• Economic Crime: A Threat to Business Globally (2014). PwC.
• Donald R. Cressey, (1961). The Prison: Studies in Institutional Organization and Change New York: Holt.
• IFAC (2016). Handbook of International Quality Control, Audit, Review, Other Assurance Engagements, and Related Services Pronouncements. International Federation of Accountants. Edition 2013 (Vol. I).
• Moreno, W. L., & Ríos, J. A. S. (2011). El triángulo del fraude y sus efectos sobre la integridad laboral. In Anales de estudios económicos y empresariales. No. 21.
• Ramos Montesdeoca, M., Sánchez Medina, A. J., & Blázquez Santana, F. (2019). Research topics in accounting fraud in the 21st century: A state of the art. Sustainability, 11(6).
• Salleh, S.M. & Othman, R. (2016). Board of Director’s Attributes as Deterrence to Corporate Fraud. Procedia Econ.

Author: Iñigo Arin