Fraud 101 - Back to School

Corporate Finance/Restructuring

August 26, 2014

It’s that time of year again — new uniform pressed, pencils sharpened, shoes shined, fake invoices being printed. As a new school year starts, we thought it would be an opportune time for a refresher class on how to commit fraud — large scale, illegal, personally enriching financial statement fraud. Welcome back to school everyone. Class is in.

This article was written in light of the regularity of the types of frauds we have been seeing lately, making it seem like fraudsters are following a how to guide on committing fraud. There is plenty more to cover and a number of tricks to go over — unless of course you are a fraudster about to appear in Court. Let’s start.

What is Financial Statement Fraud?

Financial statement fraud is the deliberate misrepresentation, misstatement or omission of financial information from the financial statements for the purpose of misleading the reader and creating a false impression of an organisation’s strength.

Whilst the size of financial statement fraud can be large (actually extremely large — think Enron, WorldCom and Parmalat), the ways in which it occurs are rather limited. On an accounting level it can basically be broken down to the overstatement of revenue and the understatement of expenses or the overstatement of assets and the understatement of liabilities. However, what fraud allows, is for debt to be sourced, unsuspecting investors introduced, covenants met and inventory supplied. All of these consequences can have a dire impact on the innocent counterparties involved.

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