Corporate fraud is a significant threat to most businesses worldwide. Getting involved in these cases can result in financial losses, damage to brand names, and erosion of stakeholder trust. Organisations working in every field should have the basic knowledge related to corporate fraud, its causes, types, and examples, so that they can take appropriate actions promptly for their organisation.
What is Corporate Fraud?
Corporate fraud refers to any illegal activity undertaken by any individual or a company for their financial benefit. These felonious activities can be performed by anyone, from internal (employees or executives) to external (third parties). Corporate fraud can cause small-scale embezzlement to large-scale scams.
Corporate fraud investigation is done with the aim of personal or organisational gain at the expense of shareholders, customers, or regulatory bodies. This type of fraud not only causes financial loss but also reputational damage, legal consequences, and investor losses.
What causes corporate fraud?
Companies need to understand the reasons behind corporate fraud and how to prevent and eliminate it through corporate fraud investigations. Some common causes of corporate fraud:
- Companies that don’t follow internal policies and oversight procedures provide open invitations to fraudulent activities.
- Employees or executives sometimes get involved in fraud cases to fulfil their performance goals or get bonuses.
- Companies that don’t have a policy of transparency are more likely to engage in fraudulent activities.
Types of Corporate Fraud
1. Employee Perpetrated Frauds
The fraud that occurs in the organisation by employees is often done for personal financial gain.
Misappropriation of Assets: Manipulation of balance sheets, income statements, or cash statements to present a false picture of a company’s financial health. Example- Overstating revenue to inflate stock prices or conceal losses.
Embezzlement of funds: Misuse of money or property by someone trusted within the organisation. Example: An accountant taking funds from company accounts for personal use.
Procurement Fraud:Changing the procurement process to help specific vendors or individuals.
Approach for Investigation:
The investigations for employees often rely on data analytics, forensic accounting, surprise audits, and digital forensics. Employers frequently interview, investigate, and trace the financial irregularities by using advanced tools.
2. Employers Perpetrated Fraud
Many times, organisations are also involved in fraud cases committed by top management to mislead investors, regulators, or the public. For example:
Financial Statement Fraud: Many times, employers manipulate the balance sheets, income statements, or cash statements so that they can present a false picture of the company’s financial status. Example: Stating false revenue so that stock prices can be inflated and losses can be hidden.
Corruption and Bribery: Giving or receiving expensive gifts to influence or persuade business decisions.
Phishing and Spoofing: Email, online messaging, and fake website services are often used to mislead people into sharing their sensitive information, such as personal data, login credentials, and financial information. Example- Fake websites are created, and in these cases, a list of email addresses is collected to share a campaign that tricks people into clicking on a malicious link. And when the person clicks this link, their login credentials, money and data are stolen.
Approach for Investigation:
These kinds of fraud cases demand a brief investigation, such as forensic audits, review of board-level decisions, whistleblower interviews, and compliance checks. Multiple organisations perform corporate fraud investigations by employing teams to uncover systemic deception and to gain accurate insights.
Process of Detecting and Conducting Corporate Fraud Investigation
Detecting and conducting a corporate fraud investigation is a challenging task. Businesses often opt for professionals who can help them track these actions and prevent the organisation from unwanted risks. The corporate fraud investigation performed by these organisations includes:
- Reviewing financial records
- Interviewing key employees
- Conducting forensic audits
- Using digital forensics to trace electronic transactions
- Identifying conflicts of interest or suspicious relationships
Management of Fraud Risks
Corporate fraud can be effectively managed if organisations implement proper fraud risk management programs. These programs are generally of two types, preventive/deterrence and reactive.
Preventive Measures:
These measures are taken so that fraudulent activities can be discouraged.
- Strong internal controls.
- Fraud awareness training for employees.
- Following an ethical work culture and transparency.
- Regular fraud risk assessments to identify vulnerabilities.
Reactive Measures:
Reactive measures often come into play after the fraud has caused some damage. These measures are taken so that the damage can be controlled and losses can be regained.
- Independent corporate fraud investigation.
- Forensic accounting and digital evidence gathering.
- Taking legal action and regulatory reporting.
- Taking remediation plans to close control gaps.
Real-Life Examples of Corporate Fraud
Many high-profile corporate fraud cases have made headlines globally:
Enron (USA): In 2011, this company collapsed due to a massive accounting fraud.
Satyam (India):Satyam, an IT organisation that got involved in an accounting fraud scandal in 2009. They manipulated their statements to show inflated profits.
Wirecard (Germany): German company Wirecard, which processes financial services, got involved in a massive accounting scandal leading to its insolvency and bankruptcy in June 2020.Corporate fraud affects businesses in the long run. Knowing the causes and types, proactive steps can be taken through fraud risk assessments and professional investigations, and companies can reduce these risks and strengthen their system.
