Overview
Bookkeeping fraud (also referred to as accounting fraud) refers to types of fraud committed by officers, accountants, and other employees that manipulate company finances and records to achieve some kind of personal gain. There are numerous laws to prevent bookkeeping fraud, depending on whether a business is public or private and the type of fraud involved. Bookkeeping fraud can be extremely damaging to a business and can come in many forms such as: an officer inflating profits in a quarter in order to receive bonuses, an employee manipulating expenses to hide money laundering, or an accountant wrongly documenting income sources to reduce tax liability. Many reporting laws for public companies make fraudulent bookkeeping illegal, and for all businesses, bookkeeping fraud may lead to other statutory or common law liabilities.
Public Companies
Bookkeeping fraud often involves large public companies, and after numerous accounting scandals in the early 2000s, they have been subject of numerous securities laws attempting to reduce the likelihood of bookkeeping related securities fraud. The broadest applicable law is rule 10b-5 which makes individuals civilly and criminally liable if they knowingly misrepresented material information related to securities that causes loss for investors relying on that information. Under 18 U.S.C. 1350, officers can be criminally liable for knowingly submitting false financial data. Other laws against crimes like racketeering, embezzlement, wire fraud, and conspiracy can be triggered by officers and employees of public companies intentionally misrepresenting financial information. States may have their own laws targeting bookkeeping fraud, such as New York Penal Law § 175.05, 175.10 which makes it a misdemeanor or felony to intentionally falsify business records.
Other Laws and Causes of Action
Officers, employees, accountants, and other individuals involved in bookkeeping fraud can face charges and individual claims based on negligence, fraud, breach of contract, and breach of fiduciary duties. The availability of these causes of action differ but typically depend on how direct the reliance is on the information and whether the person responsible for the fraud intentionally or recklessly provided such information. Also, in the case of intentional bookkeeping fraud involving tax liabilities, responsible individuals can be charged under 26 U.S.C. § 7201 and other sections that target tax evasion, which is punishable by imprisonment and fines.
[Last updated in April of 2023 by the Wex Definitions Team]