Question

Give a real examples of fraudulent activities and show the benefits of these acts? (Write max 200 words with evidence and in your own words)

Answer 1

As the question is in accounting subject, I will here discuss about accounting fraud, how it is done and use of acts in preventing such frauds.

An accounting fraud is intentional manipulation of financial statements to create a deception about company's financial health. It can be done by an employee or by the management.

For eg. In a small company where a single employee is resposible for accouting entries and is also accountable for collecting dues from debtors,In that case, employee may indulge in fraud by directly collecting the money from debtor himself and writting off the same in company's books as bad debts.

In order to counteract such financial frauds, Sarbanes Oxlay Act has been enacted which required companies to set up a audit committee to conduct an independent examination of financial affairs of company.

Here in this case, if an audit has been conducted , than auditor will ask for certified letter of balance confirmation from debtor that how much he has to pay to company leading to which employee act of declaring the debts as bad debts will be disclosed.

Management fraud eg. -Management fraud includes manipulating financial statements by presenting overstatement of assets(like including non-existent debtors ) and understatement of liabilities (not revealing all loans obtained by the company). This is done by company to present good financials of company so as to facilitate raising of funds from market and bank while in actual company may not be in the position to repay the debts.

This type of fraud can be prevented if an audit has been conducted becuase auditor asks for evidence for every monetary transaction.