Fraud: Definition, Factors, Types and How to Prevent It in Accounting

Accounting is very vulnerable to errors and fraud. In fact, both are almost similar, but there is a small thing that distinguishes the two. Which error is done accidentally? Meanwhile, fraud meaning in accounting is an event that is done intentionally carried out to benefit one party, either an individual, a company, or another institution. This scandal is unfair or violates the law which causes the other party to suffer losses. Therefore, you can use Accounting Software to facilitate your financial management.

Factors of Fraud in Accounting

Fraud or cheating does not just happen. There are several factors that influence a person or a party to commit manipulation, including:

Opportunity

Perhaps “strike while the iron is hot” is the most suitable idiom for those who commit this when there is an opportunity. Opportunity is one of the factors that open up possibilities for fraud to occur. Lack of or weak internal control can be a space for opportunities to occur. This opportunity can come anytime, anywhere, and to anyone, regardless of their position in the company. Indeed this is why a company needs to monitor how its employees perform by using a Human Resource Management System.

A person’s bad traits

A person’s view of life, morals, and character also affect the occurrence of fraud in the company. People who are greedy and selfish will look for loopholes and opportunities to commit scandals and criminal acts. They don’t even care that they are committing crimes, as long as they get the results they want.

Economic demand

Economic need is also a frequent factor that makes someone commit fraud. Urgent living needs and economic burdens often make people desperate to take shortcuts by committing fraud, even though they know that it is an illegal act and violates the law.

Weak law charges

People who intend to commit this cheating sometimes underestimate the legal sanctions they may receive because the applicable laws are weak, not burdensome, and have no deterrent effect. If caught, the perpetrator may only be subject to private law and need to pay the fine or return the money he took. This will greatly benefit the perpetrators of fraud who have high positions, because they may even be immune from the penalty.

Types of Fraud in Accounting

Broadly speaking, accounting fraud consists of two types, which are based on the perpetrators who commit fraud and based on the acts of scandal committed.

Based on the Fraudster

Employee fraud 

Employee fraud is manipulation or scandal done by the employee of the company. Therefore, the motivation for employee fraud is for personal benefits.

Management fraud

Meanwhile, fraud management definition within the company is referred to as management fraud. In addition, This fraud is usually carried out on financial reports or transactions to deceive stakeholders.

Based on the Act of Fraud

Assets misappropriation

The definition of asset misappropriation is an intentional misuse or even theft of company assets and property for personal use. Assets misappropriation is the easiest form of manipulation to detect because it is countable. Therefore, some examples of asset manipulation include embezzlement of cash, misuse of office facilities for personal purposes, and others.

Fraudulent financial report

Manipulation against financial statements is a misrepresentation of data, neglect of sum, and also disclosures that are intentional to deceive users of the financial statements. Company management is the one who usually does this type of manipulation. Some examples of financial reports fraudulent are overstating assets and understating liabilities.

Fraudulent of statement

Then accounting fraud is the manipulation of financial statements usually beginning with false statements or fraudulent statements made by management, officers, or company executives to cover up the company’s real financial condition. Then this manipulation happens by changing some financial information in the presentation of financial statements, with the aim of deceiving investors, banks, and taxes.

Corruption

Unsurprisingly, corruption is also one type of scandal because it includes abuse of power, bribery, and economic extortion. Corruption is hard to detect because this scandal involves alliances with other parties.

Data theft

The last accounting fraud is the theft or sale of consumer data intentionally by individuals within the company to other parties is a form of scandal. The company should secure and properly keep their consumer personal data such as name, address, telephone number, financial data, and so on because they are confidential data. Sometimes the data is leaked, stolen, and even worse, sold to irresponsible parties. This will cause consumer data leakage and is possible to threaten the consumers themselves.

How to Prevent Fraud in Accounting

Promoting SOPs and anti-corruption

Every company has SOPs or Standard Operating Procedures that regulate the acts of fraud. Companies need to promote socialization regarding the contents of SOPs that regulate performance and anti-corruption activities for employees. Not only that, but companies also need to convey strict sanctions and penalties if their employee commit any scandals, regardless of who violates them.

As well as the sanctions must be firm and not just stop the responsible dismissal but also need to take into account their actions. Hopefully, it will minimize or even eliminate the occurrence of fraud within the company.

Good financial analysis

Analyzing finances properly is one way to prevent any type of financial manipulation. Good and thorough financial analysis can minimize the occurrence and also as a form of anticipation and closing the opportunity for employees to commit fraud.

Conclusion

Using an integrated accounting system will generate financial reports automatically without the intervention of many parties and minimize human error. So the financial reports will be transparent, factual, and as is. An integrated accounting system will prevent opportunities for fraudulent financial statements.

HashMicro provides Accounting Software for enterprises in Singapore to automate the preparation of your company’s financial statements. Moreover, monitor the actual and comprehensive financial condition of your business, manage budget management according to real data, reconcile all bank transactions, and create accurate financial reports in seconds with one integrated and secured system.