Three common types of white collar fraud

The act of fraud – knowingly deceiving an individual, government entity or business, usually for personal profit – is unfortunately a common practice across the world, from something as small-time as selling a knock-off designer brand purse to something as high-profile as widespread corporate revenue schemes.

Sometimes, perpetrators of fraud are only brought to light with the help of a whistleblower, usually through a program operated by the Securities Exchange Commission (SEC) or the Internal Revenue Service (IRS). Both governmental organizations have robust whistleblowing programs that help catch fraudsters.

The following is a summary of three types of fraud, usually committed by bigger businesses.

Revenue recognition schemes

A revenue recognition scheme essentially means that the company reported revenues that they did not actually make. This could be through inventory that was reported as being sold (to boost stock prices or to gain the trust of investors) as happened in 2014 to a California-based telecommunications equipment company.

The motivation behind these schemes is usually to make a company seem as though it is performing better than it actually is performing and can result in illicit manipulations of the stock market. As such, investigations of this type of fraud would likely be conducted by the SEC.

Revenue timing schemes

A revenue timing scheme involves knowingly manipulating the timing for which certain revenues and expenditures are recorded, intending to create a falsified and inflated illusion of profit. There are three common ways that this is performed:

  • Continuing to collect revenue after an accounting period has ended
    • By continuing to collect revenue after the accounting period is over, businesses can aesthetically (and illegally) inflate their profit margins.
  • Logging profits when services and expenses have yet to be completed
    • If a company has been paid to perform a service, they are legally obligated to complete the service before logging the payment for that service as a source of revenue, even if the service was paid for up front in cash.
  • Shipping merchandise before it has been sold.
    • Some companies deal in consignment merchandise, which they illegally report as already being sold. Others ship their merchandise to private warehouses before they are audited and count those shipments as legitimate sales.

Since these acts of fraud all have tax implications, investigations would likely be handled by the IRS. Any and all individuals who have good evidence to prove these types of illicit activity could become an IRS whistleblower, eligible for an award payment should an audit lead to criminal penalties.

Unrecorded liabilities fraud

An unrecorded liability is simply an item of expense in a company’s financial statement that is not recorded. Sometimes this is nothing illegal, such as a retroactive charge pending from a change in service from a contracted vendor. In this case, the financial statement prepared will expectedly not have this unforeseen change reflected in its liabilities.

However, unrecorded liabilities become illegal when the company knowingly chooses to not record liabilities that were clearly not unforeseen by the company, such as ongoing legal fees or obligations for goods and services. These manipulations can also coincide with other schemes, such as timing schemes, by waiting to report a liability later on in the year.

Fraudulent actions of this type would be handled by the SEC, and could result in payments awarded to any whistleblower who provides information leading to the uncovering of these types of schemes.

Don’t tackle fraud alone

White collar fraud more often than not involves complex accounting techniques and rarely leaves a simple paper trail to follow. Even if you are certain some nefarious activity is going on within a company, it is wise to always consult with a legal expert in such matters to help make sure you take all the steps necessary before trying to initiate any kind of whistleblowing.

In fact, the SEC requires that you have a lawyer sign off on your whistleblowing application form before submission, and the IRS is looking into enacting sanctions for all whistleblowing cases that don’t result in success. So it is always better to have legal counsel on your side.

At Altman & Altman LLP, we have over 40 years of experience in a wide range of legal affairs. We can sit down and go over the details of your whistleblowing case in order to take the best path forward. Call us for a free consultation today at 617-492-3000 or toll-free at 800-481-6199. We are available 24/7.


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