Fraud — Misappropriation and Manipulation

Unlike an error, fraud is an intentional act, done with the deliberate object of deceiving someone or gaining a wrongful advantage — typically financial. Auditing traditionally recognises two broad forms of fraud.

1. Misappropriation. This means dishonestly diverting an organisation's own assets for personal benefit, usually by an employee. It takes two common shapes:

• Misappropriation of Cash — for example, an employee who collects cash from a customer simply does not record the receipt at all, or under-records it and pockets the difference; or pads petty-cash vouchers with inflated or fictitious expense claims. A particularly well-known technique is "teeming and lading" (also called the "lapping" of cash): the employee first pockets cash received from Debtor A, then, when Debtor B's payment arrives, credits it to Debtor A's account to hide the earlier shortfall — and repeats the pattern down the chain of debtors, always covering an old gap with a newer receipt, so that no single account looks wrong at any one moment.
• Misappropriation of Goods — an employee steals physical stock, then conceals the shortage by falsely recording the goods as damaged, scrapped, given away as a free sample, or lost in transit, so that the books show a plausible (but false) reason for the missing quantity.

2. Manipulation of Accounts. Here nothing is physically stolen at all — instead, the accounts themselves are deliberately falsified, almost always by management or those at a senior level (since it requires the authority to override normal controls), to make the reported financial position look better, or sometimes deliberately worse, than it truly is. This is commonly called window dressing when profits/assets are inflated (for example, to attract investors, secure a bank loan, or boost the company's share price) and can equally take the opposite form of deliberately understating profits (for example, to reduce tax liability, resist pressure for a higher dividend, or build up an undisclosed secret reserve for a future rainy day).