Fraud can have a substantial impact on a business, no matter what size it is. The two most basic types of fraud are misappropriation of assets by employees and fraudulent financial reporting by management, whereby misleading or inaccurate financial information is disseminated to investors, stakeholders and the public. The first type of fraud often happens without management knowledge, and the second type is often unknown to employees. Both can devastate a company.
Financial loss is an obvious effect of both types of fraud. When someone misappropriates company assets, the loss is fairly easy to quantify. For example, if a cashier takes $60 from the cash register, the company loses $60. The costs of fraudulent financial reporting are harder to determine. If a small-business owner perpetrates financial statement fraud, an explicit dollar figure might not be obvious. However, fines assessed for misleading investors, civil suits to recoup investor and creditor losses and the unwillingness of companies to extend credit to the business in the future all add up to a severe financial loss for the company.
Reference :
Fich, E. M., & Shivdasani, A. (2007). Financial fraud, director reputation, and shareholder wealth. Journal of Financial Economics, 86(2), 306-336.
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