Accounting Information Systems: The Processes and Controls, 2nd Edition

ACCOUNTING-RELATED FRAUD (STUDY OBJECTIVE 2)

Fraud can be defined as the theft, concealment, and conversion to personal gain of another's money, physical assets, or information. Notice that this definition includes theft and concealment. In most cases, a fraud includes altering accounting records to conceal the fact that a theft occurred. For example, an employee who steals cash from his employer is likely to alter the cash records to cover up the theft. An example of conversion would be selling a piece of inventory that has been stolen. The definition of fraud also includes theft, not only of money and assets, but also of information. Much of the information that a company maintains can be valuable to others. For example, customer credit card numbers can be stolen. An understanding of the nature of fraud is important, since one of the purposes of an accounting information system is to help prevent fraud.

In fraud, there is a distinction between misappropriation of assets and misstatement of financial records. Misappropriation of assets involves theft of any item of value. It is sometimes referred to as a defalcation, or internal theft, and the most common examples are theft of cash or inventory. Restaurants and retail stores are especially susceptible to misappropriation of assets because their assets are readily accessible by employees. Misstatement of financial records involves the falsification of accounting reports. This is often referred to as earnings management, or fraudulent ...