What Is Corporate Fraud?

Corporate fraud occurs when the executives, directors, or employees of a corporation deceive the public, the government, or investors about aspects of the company's financial performance or other matters that could affect people's perception of the firm. People usually commit corporate fraud to conceal the failings of a company or for their own financial gain. Laws in most countries allow for the criminal prosecution of businesses and individuals that commit fraud.

The performance of a publicly traded company has a direct bearing on its share price. Poor quarterly results cause the share price to drop, and this means that both the company itself and its shareholders stand to lose money. Good quarterly or annual results usually cause a company's share price to rise, and many firms reward executives with bonuses when the company's results exceed expectations. Company officials may stand to gain financially from misleading the public about the company's actual results.

Companies and individuals both have to pay taxes, and the more money a company generates the more it has to pay in taxes. Corporate fraud is sometimes aimed at minimizing a company's tax burden by downplaying its profits to mislead the tax authorities about its tax liability. Accountants involved in fraud sometimes falsify records showing that the company's overheads were more than actuality in order to get tax deductions. Due to the complex nature of corporate accounting, instances of fraud normally involve high level employees and require the involvement of several employees because no one employee has the ability to successfully alter large numbers of company related documents.

Many instances of corporate fraud involve just one firm, but in other instances business partners and outside companies also play a role in committing the fraud. Laws in many countries require corporations to hire outside accounting firms to conduct annual audits. These laws are designed to ensure that company insiders cannot commit fraud, but some people circumvent the laws by persuading employees of the outside firm to become involved in the fraud. Instances of fraud are often harder to detect when large numbers of people are involved because records containing various kinds of information can be altered to make the truth harder to find.

Government investigators often uncover cases of corporate fraud on the basis of information provided by whistle blowers from inside the firm who are either involved in the fraud or somehow become aware of it and go to the authorities with their findings. Firms found guilty of fraud can be fined and even forced to cease operations. Individuals who are complicit in corporate fraud often face severe penalties, including fines and jail sentences.