Fraud in financial transactions is a serious threat to the integrity of businesspeople. Fraud can be detrimental to the company and its investors, as well as ruining its reputation.
Therefore, it is crucial for financial professionals, particularly auditors, to know how to find financial transaction fraud in financial reports.
This article will provide a brief explanation of what fraud is, examples of it, and how to find it in a company.
What is fraud in a financial report?
Fraud in a financial transaction or financial report refers to purposeful actions taken by individuals or groups to manipulate financial information for personal advantage.
Fraud may provide personal gain for perpetrators, but the broader impact is more severe, causing harm to other parties, ruining the reputation and financial health of a business.
There are various forms of fraud, including concealing crucial information, manipulating numbers in reports, using fake data, and deceiving authorized stakeholders.
An example of fraud in a financial transaction that often encounters
Integrity and accuracy in financial reports cannot be ignored in business. Honest and accurate financial reports provide an accurate view of the company’s financial health.
But, in reality, there are various forms of fraud in finance that might harm a company, an investor, or other linked parties. What are some examples?
1. Misuse of assets
The first example of fraud in financial transactions and financial report preparation is asset misappropriation. This occurs when authorized parties use company assets for personal interests.
For example, a company fund used for personal use, purchasing goods or services that are unrelated to company operations, or transferring assets into personal names.
The impact of this fraud is that the funds that should have been used to develop the company instead caused it, its owners, and other stakeholders to lose money.
2. Corruption
Corruption is a breach of business ethics that can damage the integrity of financial transactions. The most common examples are manipulating numbers to avoid paying taxes, giving bribes to auditors to get beneficial reports, and illegally diverting funds.
This act of fraud is not only harmful to the company but also creates an unhealthy business environment and is harmful to the economy as a whole if it involves state authorities or civil servants.
3. Financial transaction fraud
Financial transaction fraud involves the manipulation of transaction data in order to create inaccurate reports about a company’s financial performance.
A common example is “window dressing,” in which a company transfers debt or receivables into the next financial report to cover for poor performance in a certain period.
This type of act provides incorrect information to investors and stakeholders about the company’s financial health, as though the company’s performance is good, causing its share price to soar.
4. Theft of data
In today’s digital age, data theft is becoming an increasingly widespread threat. This theft aims to gain illegal access to important information such as credit card information, bank account information, or business transaction data.
Data thieves can use this information to conduct other types of fraud, such as fraud, money laundering, and falsification of financial reports.
Data theft not only harms the company financially, but it may also harm the company’s reputation and undermine customer trust.
How to Find Financial Transaction Fraud
As explained earlier, there are many examples of fraud, which continues to evolve in tandem with technology advancements. As a result, it is critical for a company to have an effective procedure to find fraud in financial transactions.
How can you find fraud in financial transactions?
1. Analysis of Data
The first step in detecting fraud in financial transactions is to analyze the data. Financial data, such as financial reports, transaction records, and other information, could provide hints concerning suspicious activity.
Some big companies have employed technology to conduct data analysis. As a result, the process of identifying unusual transaction patterns can be swiftly found and detected.
2.Document Checking
Checking documents is a key step in detecting fraud. The examination includes reviewing transaction documents, such as invoices, contracts, and other letters.
The distinction between physical and electronic documents requires consideration.
Differences between information in documents may indicate manipulation or falsification.
3. Tracking every transaction
Tracking every transaction is key to detecting fraud. However, it is necessary to ensure that the company has a good record system, so that the tracking process becomes easier.
4. Thorough internal checks
Internal auditors have a critical role in detecting fraud in financial transactions. Through in-depth internal examination, the audit team can identify gaps that are vulnerable to fraud and make recommendations for improvement.
5. Examining external auditors in order to obtain objective data
Not only does it need an internal auditor, but one way of detecting fraud in financial transactions also necessitates the involvement of an external auditor. They can provide an objective view of the company’s financial situation.
External auditors have methodologies that differ from internal auditors for identifying potential fraud. By conducting an in-depth analysis of transactions and financial documents, an external auditor can provide unbiased findings related to potential fraud.
What should an auditor do if fraud is discovered?
After fraud is discovered, auditors have a responsibility and an ethics to report their findings to stakeholders. Internal and external auditors can take the following steps:
– Documentation: Record in detail all fraud findings with the evidence.
– Consultation with a legal expert: An auditor may consult with fellow auditors or directly contact legal professionals.
– Legal action: If it is determined that fraud has gone too far and has resulted in significant losses to many parties, legal action must be initiated as a last resort.
How to prevent and detect fraud with OCR tools
That is a short description of fraud and how to detect it in financial transactions. As previously stated, in order to avoid it, a company must implement an effective and powerful financial transaction system.
One of the steps that can be taken is to implement Optical Character Recognition(OCR) technology in financial management. OCR can record physical documents into digital data and can categorized them automatically
So, every financial transaction can be recorded neatly, and can be accounted for its validity, as it must be based on physical documents.
An example of an OCR that exists at this time is OCR+ from Fintelite. Fintelite’s OCR+ can automate the input verification and financial categorization processes. Very suitable for middle-sized businesses or large-scale industries that want the process of analyzing financial transaction data accurately and quickly.
