Overview
Accounting fraud is the intentional manipulation of financial statements. Deliberately understating profit is "reverse window dressing." Unlike earnings management within accounting standards, fraud violates them.
📌 At a glance
- Definition
- Intentional misstatement
- Opposite
- Reverse window dressing
- Related
- Accrual accounting, Shell company
Motives
Share price and financing, executive pay, listing and covenant compliance, and covering earlier fraud.
Methods
| Method | Description |
|---|---|
| Revenue inflation | Fictitious or premature sales |
| Expense deferral | Capitalizing costs |
| Asset inflation | Overstated inventory and receivables |
| Hidden liabilities | Off-balance-sheet entities |
Enron collapsed within months in 2001. After WorldCom’s roughly $11 billion fraud, the US passed Sarbanes-Oxley in 2002.
Cases
| Country | Case |
|---|---|
| Korea | Daewoo (1999), Daewoo Shipbuilding (2015–) |
| Japan | Toshiba (2015), Olympus (2011) |
| US | Enron, WorldCom |
| China | Luckin Coffee (2020, about RMB 2.2 billion in fabricated sales) |
Regulation
Korea’s revised External Audit Act (effective Nov 2018) introduced fines up to 20% of the misstated amount and periodic auditor designation. Fraud also breaches fiduciary duty.
Frequently asked questions
- Fraud vs earnings management?
- Management stays within standards; fraud breaks them.
- Why understate profit?
- To cut taxes or gain leverage in negotiations.
- Why do audits miss it?
- Sampling limits and weak independence.
References
- 대한민국 「주식회사 등의 외부감사에 관한 법률」(2017. 10. 31. 전부개정, 2018. 11. 1. 시행).
- 日本「金融商品取引法」第197条、第172条の4.
- Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
- Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary Accounting Research, 28(1), 17–82.