Fraud refers to actions that are intended to bring harm to a person by way of misinforming or misrepresenting information to obtain financial gain. It is a criminal activity that robs a person of their hard-earned money. Even those cases where people are lured into investing money in non-existent services or businesses amount to criminal fraud.
Data shows that most fraud cases are masterminded in bigger businesses and organisations and not by plain, ordinary individuals. The extent and severity of the situation can be ascertained from the significant increase in the cases being filed, which amount to billions of pounds every year. In fact, in cases where the fraudulent activity is an insider’s work, which is usually the case, it has been found in a research by KPMG that bosses and management personnel are involved.
Does the current financial crisis have an impact on fraud cases?
The financial crisis in the recent times has added to the woes and worsened the situation as most industries witnessed a sharp rise in fraudulent cases. Turbulent market and economic conditions aggravate financial crime activity. The reasons as to why and how an economic or financial crisis affects these figures are many.
The foremost reason is that during tumultuous market conditions, there is an increased pressure on an organisation with respect to performance, which directly impacts earnings and profit. There is also the mounting pressure to acquire new business and clients in addition to maintaining the existing profitable ones. This gives rise to temptations to manipulate figures and accounts in order to achieve the desired results.
Furthermore, companies resort to aggressive cost-cutting measures in their fight for survival in these circumstances. This leads to a weak control environment and also hits the morale of the staff. A weak control environment along with negativity among the employees tends to provoke individuals into indulging in unethical practices.
Another impact of a financial crisis is on all the market role-players of an industry. The inventory of an organisation, under such circumstances, is more susceptible to embezzlement, both internally as well as externally. Having to manage with the results they have, organisations then tend to manipulate financial statements. This simultaneously leads to increase in cases of transgression and fraud.
An unstable economical environment also intensifies corruption practices in companies, in their bid to acquire new clients, while struggling to retain profitable accounts. Cost-cutting measures not only build negativity among people, but also lead to increase in work responsibilities as work delegation and segregation is affected due to reduction in staff. Such an environment serves as a breeding ground for fraudulent activities, as they tend to be disguised and overlooked as miscalculations or errors.
Many organisations feel that losses incurred due to such cases are low, whereas the truth is that most of such cases go undetected or unreported. These losses are disguised as operational losses, which are usually an accepted norm up to a certain extent in most companies. However, the failure to detect and report losses incurred due to fraud and misappropriation of accounts results in an unreal depiction of an organisation’s risk exposure to fraud. This further impedes the efforts towards an effective management of fraud cases.
Role of Financial Accounting in Fraud Detection
In order to increase profitability and sustain even during a financial crisis, a company does not only need to work on boosting sales, but also manage its cost in a manner which is more effective than those of its competitors. Working upon and improvising on strategies related to fraud risk management is a critical method to work proactively towards cost control.
With the growth in technology, ways of misappropriating accounts have also become advanced. To tackle losses owing to fraudulent activities, organisations have started employing forensic accountants who specialise in tracking and identifying the source of losses. Companies such as Forths Forensic Accountants and NIFA provide services related to different types of disputes and cases.
Forensic Accounting is evolving at a fast pace and deals primarily with the identification as well as prevention of fraud, along with such activities termed as white-collar criminal activities. The financial and other information gathered by a forensic accounting professional is acceptable at a court of jurisdiction. To successfully spot and track cases of fraud, a forensic accountant must be knowledgeable with respect to the usage and role of information technology (IT) in auditing and accounting processes. Along with these, investigative skill is the other criteria for success in forensic accounting.
In the wake of the prevalent financial crisis, forensic accounting is becoming more popular and relevant today. As the financial crisis shook public as well as investor’s trust in the financial and audit reports of organisations, the need of the hour was to find a way that looked beyond the conformation with the stipulated rules and regulations. And, hence, forensic accounting took centre stage.
Forensic accountants investigate financial records and numbers in detail, and probe deeper to detect fraud, misappropriated funds and hidden assets. Going beyond what traditional accountants do, they are well-versed with legal issues and proceedings (hence the word forensic) and serve as a channel connecting legal system to a company’s account system.
As the economic condition continues to be downtrodden, fraud is on the rise and simultaneously, companies are working towards eliminating corrupt and fraudulent practices by identifying sources and implementing ways to prevent them.
