What is accounting fraud?

Accounting fraud can be committed when a company:

• Records inaccurate financial statements

• Overstates its profits or revenue

• Does not record its expenses

• Misstates assets

• Misstates liabilities

Accounting fraud occurs when an organization, a professional, or groups within an organization knowingly falsifies financial records and statements.

Here are some details on three common types of accounting fraud:

• Overstating Revenue or Profits

  Accounting fraud is considered when a business entity overstates its revenue on financial documents. For instance, if a company is operating at a loss (not gaining enough revenue) but states that it is producing more profits on its financial statements, that is accurate and true.

  The revenue would be inflated and inaccurate on the company's financial statements. Committing this form of accounting fraud is sometimes done to drive up share prices for the company's stock, thus projecting the false image of good financial health.

• Unrecorded Expenses

  This accounting fraud occurs when a company does not accurately record its expenses, thus understating its net income and costs on key financial statements.

  Unrecorded expenses display a false impression of how much net profits a company makes when it might be losing funds.

• Misstating Assets and Liabilities

  This instance of accounting fraud happens when an organization understates its liabilities and overstates its assets. This often happens when a company overstates its current assets and understates its current liabilities.

  This kind of accounting fraud misrepresents a company's financial health in terms of its short-term liquidity. It tricks investors into thinking that an organization has enough liquid assets to cover its current liabilities.