Definition: Corporate fraud is the intentional misrepresentation of company financial information or activities designed to mislead the public and increase the profits of the company.
What Does Corporate Fraud Mean?
What is the definition of corporate fraud? Typical cases of corporate fraud are complex, highly secretive, and if discovered involve economic scandals or evasions of financial responsibilities.
In many cases, fraudulent activities start out small and are never intended to be ongoing. Thus, it’s difficult to detect fraud in its early stages. Often the fraud goes on undetected for long periods of time before the scheme is uncovered by a whistleblower, the lack of planning on the perpetrators part, or the inabilities of the scheme to keep up with the demands of its expansion.
The government actively tries to prevent fraud with policies, laws, and methods designed to help law enforcement detect schemes before they blow up. The main body in charge of fraud prevention in public companies is the SEC.
Let’s look at an example.
Example
QuikService, a company that specializes in quicker and cheaper delivery services, is completing its annual tax and financial reporting requirements for the year. The CEO, Devon Bricks, bribed the accounting department to made fake accounting entries that would make the business appear more profitable by promising large end of the year bonuses. Falsely reporting income and improperly reporting expenses in order to boost profits is fraud and can have far-reaching implications.
Cases of fraud commonly cause job loss, losses in investments, prison time for those found guilty, and long-standing distrust of the company. Enron’s bankruptcy, for example, cost the shareholders billions in investments, the employees their jobs and pensions, and the creditors their loans. Many of the Enron executives went to prison and most lost their life’s savings.
Auditing and legal regulations help detect and prevent fraud but many types of fraud exist and may go undetected for years. For instance, Enron’s collapse started when a whistleblower brought attention to their mistreatment of SPEs. This caused the accounting firm to restate the financial statements. Investors lost faith in the company and began selling off their stock.
Summary Definition
Define Fraudulent Corporate Activities: Corporate fraud means a corporation purposefully provides dishonest information with the purpose of obscuring truth and deceiving the recipient of the data with the intent to gain an advantage.
