What is Fraud?

What is Fraud? 2017-10-04T21:34:30+00:00

Definition: Fraud is a deliberately deceitful activity in order to gain an advantage or generate a profit. In other words, corporate fraud is the equivalent of cheating in business or the financial markets.

What Does Fraud Mean?

What is the definition of fraud?Fraudulent corporate scandals tend be cyclical in nature. As businesses and institutions find gray areas in the laws and regulation, they start to take advantage of them. These advances sometimes go too far and become out right fraud. At a public level, fraudulent activities are monitored by a large variety of financial institutions: the SEC, the FASB, as well as the federal government and local and state organizations. Corporate fraud, whether in the form of accounting or otherwise, is a large offense and despite the effort of regulators, tends to occur periodically in our economy.

Keep in mind that public companies are the only perpetrators of fraudulent activities. They are just the biggest. The most common case of fraud is among small businesses where a trusted employee or partner deceives others while stealing money from the company. This fraudulent activity is typically called embezzlement.

Let’s look at an example.

Example

Enron was a company that provided energy, commodities, and services to a large variety of Americans. However, during the early 2000’s, the company became known as the poster child for corporate fraud in the new millennium. It was discovered that Enron was using special purpose entities (SPE) to hide its losses and debt, by keeping those losing businesses off of the main company’s books and financial statements. Although this practice was commonplace, Enron took it to a new level by capitalizing the SPEs with Enron stock and making guarantees to the partners of the SPEs. Additionally, its accounting firm, a well-known and respected organization, Arthur Andersen, either willfully ignored or was complacent in the fraud.

Enron hid over $591,000,000 in losses by December 2000. It later filed for bankruptcy the following year. This example, perhaps the most astonishing instance of corporate fraud in the past 16 years, shows the level of deceit and influence that corporate scheme has in the financial world. The greed of Enron’s executives toppled a billion-dollar company, and left a bad taste in the mouths of investors and financiers.

Summary Definition

Define Fraud: Corporate fraud means intentional deceitful acts designed to profit from unknowing individuals.