Corporate Fraud

Corporations can be large, and their internal structure of governance rather complicated. This complexity presents many opportunities for fraud. As reflected in the recent financial meltdown, it can be possible for corporations, especially ones dealing in arcane areas like banking and investing, to obscure harmful practices from the public until it is too late. Fraud happens when the facts or reality of a situation are hidden, at the expense of another party. Here is an overview of fraud that can occur in the corporate context.

Accounting Fraud

A corporation’s financial records are very important. A company’s quarterly profit and other financial indicators are key information for investors, when deciding whether to buy or sell a company’s stock. Lying about those numbers can be an appealing way to keep a company riding high, when they’re actually not performing well. As you can imagine, this stuffing of the books is tempting—accounting fraud has been the culprit in many of the major corporate scandals of the past few years.

Accounting fraud can come in a variety of ways. Accountants may simply record fake income the company never received, or backdate revenues so that they appear in an earlier financial period. Shifting current and future expenses and income is another way to make the books look more favorable than the company’s actual situation.

Prime Bank or High-Yield Investment Schemes

These investment schemes first appeared in the early 1990’s and became a widespread problem towards the end of that decade. They involve telling investors some version of this story: they have the potential to invest in a no-risk, secret exchange that happens between banks, in order to raise money for humanitarian causes. All they have to do is purchase bank notes from one of these prime banks, usually to the tune of a minimum investment of $100 million dollars.

These high-yield investment schemes are essentially Ponzi schemes, made famous as of late by Bernie Madoff. By taking large sums of money from a number of people, a frauder can then redistribute a small amount of it as “interest.” The investors take this as proof that the investment is sound, while the frauder simply pockets the rest of their money.

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