White-collar crime is
the overarching term that encompasses a range of financial frauds which are
committed in the corporate context. Sutherland (1940) describes white-collar crime as a
violation of delegated trust. In the corporate context, management is entrusted
with the responsibility of managing a corporation on behalf of its owners and
stakeholders. A corporate fraud involves the violation of such trust where the
management does not act in the best interests of the corporationís stakeholders
but rather acts opportunistically to benefit certain specific stakeholders at
the expense of others.
Given the potentially
damaging consequences of corporate fraud, the auditing standards in various
jurisdictions have attempted to define it. For instance, the Indian auditing
standards describe corporate fraud as ëan intentional act by one or more
individuals among management, those charged with governance, employees, or
third parties, involving the use of deception to obtain an unjust or illegal
advantageí (ICAI, 2007-SA 240).
Similarly, the US
standards describe fraud as ëan intentional act that results in a material
misstatement in financial statements that are the subject of an audití (AICPA, 2002). Both US and Indian standards categorize
corporate fraud into two broad categories fraudulent financial
reporting (FFR) and misappropriation of assets (MOA)
(AICPA, 2002; ICAI, 2007-SA 240).
from FFR typically involve ëintentional misstatements or omissions of amounts
or disclosures in financial statements designed to deceive financial statement
users where the effect causes the financial statements not to be presented, in
all material respects, in conformity with generally accepted accounting
principles (GAAP)í (AICPA, 2002).
FFR does not involve
the actual theft or misappropriation of the companyís assets, rather in such
cases the management of a company tries to manipulate the companyís financial
results to benefit certain stakeholders of the company. Misstatements arising
from MOA typically ëinvolve the theft of an entityís assets where the effect of
the theft causes the financial statements not to be presented, in all material
respects, in conformity with GAAP)í (AICPA, 2002).
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