When you report your business financials every year, you share your financial standing with your internal stakeholders, such as upper management, and external stakeholders, including your creditors, investors, the IRS and the SEC.
Because companies, vendors and creditors use your cash flow statement, balance sheet and income statement to create credit and strategy decisions, they need to be precise. Inaccuracies, whether they are intentional or unintentional can result in accounting fraud charges. This is what you should know.
Unintentional financial errors
Unintentional errors may include duplications, omissions and data entry errors. You may also unintentionally post a credit as a debit or misallocate expenses or transfer incorrect inventory numbers to accounts payable.
Although you may not face prison, your company, its reputation and its finances can experience severe consequences for these errors. In addition, the IRS may charge you penalties and fines.
When fraud occurs
Fraud typically requires intent. In these cases, you intentionally record the wrong numbers, usually to deceive others. These frauds include overstating company assets, creating false statements, improper revenue recording, fast sales to meet forecasts, not recording losses or expenses properly, omitting or misrepresenting any of your accounting numbers, money laundering, auditing fraud and undisclosed income or expenses. However, you may have difficulty proving that you did not intend fraud in consistent and significant misrepresentations or reporting cases.
The Sarbanes-Oxley and Securities Exchange Acts of 1933 and 1934 govern the financial reporting for public companies, and SEC can investigate any instance of potential fraud. In addition, private companies are subject to federal securities law’s anti-fraud provisions. If convicted, you may face prison time, fines and disgorgement.
To prevent fraud charges, comply with GAAP requirements, use reputable software and implement rigorous audit processes.