Terms & Descriptions for Illegal Accounting Practices
As a business owner or manager, it is your responsibility to protect the company's assets. While managers try to hire upstanding ethical employees, sometimes a bad apple can fall into your backyard. By thinking like a fraudster and understanding common methods of illegal accounting practices you can anticipate the worst-case scenario and keep the company's funds where they belong -- with the company.
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Financial Statement Fraud
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A broad category of illegal accounting practices revolves around financial statement fraud. Financial statement fraud is the process of adjusting or misrepresenting a company's financial statements with malicious intent. The reasons for committing financial statement fraud are varied; manipulating results to achieve earnings targets, hiding expenses to receive bonuses and recording fictitious inventory to hide shrinkage from superiors would all fall under this category.
Check Kiting
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Check kiting is the process of depositing funds at one bank, using a check drawn on the first bank to open an account at another bank, and then withdrawing the funds twice, once at each institution, before the check clears. While this description is the most simple example of check kiting, elaborate kiting schemes can involve dozens of banks and thousands of dollars.
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Ghost Employees and Vendors
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In companies with poor internal controls, employees in the accounts payable department are able to create fictitious, or ghost, employees or vendors in the payroll and accounts payable system, respectively, and process payments to themselves fraudulently. Basic segregation of employee duties can stop all but the most sophisticated ghost employee and vendor schemes. However, in small businesses sometimes it is difficult to employ enough individuals to sufficiently mitigate this risk. In these cases, management must be vigilant to protect the company's assets and complete periodic reviews of employee and vendor lists.
Skimming
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The process of taking cash from company receipts is called skimming. Colloquially known as, "taking a little off the top," skimming can be a significant risk in cash-based businesses. Because managers are looking for evidence that cash receipts should be higher than what was received, detection can be difficult. In these cases, accountants usually look at inventory-to-sales or expense-to-sales ratios to detect abnormal activity.
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