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Running a business is hard work. In addition to dealing with hiring and firing, managing employee personalities, promoting your product, and making a profit, you have to make sure you stay on the right side of the law.
Not only does this mean filing your taxes as appropriately, but it also means avoiding all forms of corporate fraud, even those situations which might be happening without you knowing. If you’re worried that corporate fraud may be happening in your company, the information here will help you understand what exactly corporate fraud is and what it looks like.
When it comes to corporate fraud, there are many issues to be aware of.
Personal purchases made by an employee are an example of corporate fraud. This type of fraud is usually committed by someone who has a more senior position in the company that allows them control over expense reports or company purchases.
Payroll staff can execute another type of corporate fraud: ghost employees. In this situation, an employee (usually involved in payroll) creates a completely fake employee. When this fake employee gets paid, it’s actually the deceptive employee pocketing the money.
Another type of corporate fraud is referred to as skimming. In this crime, profits or payments due to the company are intercepted, and a certain amount is “skimmed” off the top before the remainder goes to the company as it should.
Additionally, employees may commit asset theft by stealing either cash or fixed assets. Another example would be the employee who uses company property (hotel room, vehicle, credit card, etc.) for their personal use.
Embezzlement is the theft or misappropriation of funds that belong to one’s employer, and any of the above-mentioned definitions can fall under embezzlement.
A business owner must also be aware of possible tax avoidance or falsification of financial statements by employees. Tax avoidance would generally be committed, or at least supported, by an employee in a very senior position who has the ability to alter tax returns to that the amount of taxable corporate income is reduced.
The falsifying of financial statements is especially a problem if that information was ever used to obtain a loan or to market the company’s stock. Falsification can include altering statements to delay depreciation recognition, capitalizing expenses, moving debt, and counting inventory that the company doesn’t actually have.
Corporate fraud can even be as simple as false representation of a product or service that the company offers. Additionally, a false claim of where funds are going, as simple as it sounds, is also corporate fraud.
Finally, any other tampering with the accounting books of the company can potentially qualify as corporate fraud.
Asset misappropriation is one of the most common types of corporate fraud. Also referred to as embezzlement, asset misappropriation simply means that an employee is stealing money and/or other assets from the company.
Corruption is another common example of corporate fraud, and can include a variety of situations in which an employee or company representative alters their decisions or actions as a result of information, money, materials, or other goods that are offered by an outsider.
Financial statement fraud is another one of the three most common forms of corporate fraud. In these situations, the company stands to lose a lot when an individual of the organization falsifies information about the company’s revenue, assets, profits, and liabilities, usually in order to deceive investors.
The definitions of corporate fraud may seem fairly straightforward, but it helps to understand what they might actually look like in the real world. One just needs to look at the downfall of Enron to understand how accounting practices that were less than honest could lead to the demise of a large company. In this situation, the company used a variety of tactics to hide debt – and even completely destroyed financial documents.
However, it is not only large, Enron-type companies or Wall Street financiers that fall victim to corporate fraud. In September of 2016, an Ohio man was convicted of corporate fraud after he embezzled funds from a restaurant company.
The individual was the assistant treasurer of the company, and therefore easily had the ability to wire funds and transfer money, on behalf of the company, for his benefit. In a six-year time period, the former employee embezzled almost $4 million from the company.
In Oklahoma, a woman was found guilty of both wire fraud and tax fraud. This individual, in her capacity as executive assistant to the wastewater treatment plant director, had access to the company’s credit cards.
She used these cards to make various unauthorized purchases, additionally altering receipts and claims for payment to cover up the inappropriate activity. She was ordered to pay over $200,000 to the IRS, as well as almost $1 million to the public works authority.
A pair of individuals that ran a funeral home were sentenced to prison after being convicted of filing false corporate tax returns. They did so by diverting certain receipts and by failing to report income for the company’s tax returns. Additionally, they altered invoices, pocketed cash payments without any reporting, and opened up separate checking accounts to divert funds.
An example of false advertising that led to a corporate fraud conviction can be found with the Iowa founder and owner of a halal beef company that marketed to religious groups seeking the product.
Although the company claimed to be a strictly halal beef supplier, the employees were directed to mark unapproved beef as being halal (when it in fact was not). This also involved falsifying government documents in order to ship the product to other countries.
Another example of false advertising that led to serious trouble involved the CEO of a “green” cleaning product company. This individual made various false claims and misrepresentations to investors regarding the financial health of the company. He was convicted, and sentenced to 51 months in prison and $2.9 million in restitution.
Clearly, there is a plethora of examples of individuals committing corporate fraud and the repercussions they faced. Much of this can be avoided by knowing who you hire and maintaining strong oversight of your employees and the company’s finances.
However, if you’re already facing a situation and not sure if it meets the level of corporate fraud, take another look at the definitions and examples discussed above, which will help inform your next steps.
About the Author:
Denver-based criminal defense and DUI attorney Jacob E. Martinez is a knowledgeable and experienced litigator with a record of success providing innovative solutions to clients facing criminal charges of any severity. Mr. Martinez has been designated a Top 100 Trial Lawyer by the National Trial Lawyers and has been awarded both the Avvo Client’s Choice Award and Avvo Top Attorney designation, evidencing his reputation for his exemplary criminal and DUI defense work and high moral standards.