2022 has seen some of the most shocking accounting fraud cases in history. To add to this, around 40% of large companies have agreed to committing accounting violations in the past. Businesses face legal scandals for financial misconduct, from crypto scams to money laundering.
In this article, we'll be looking at some of the most shocking cases of accounting fraud from 2022 and how you can adhere to financial regulations and protect your livelihood as a business owner.
FTX Fraud and Money Laundering Charges
The growing popularity of cryptocurrency saw many companies rake in billions overnight. It is estimated that 21% of American adults have owned some form of cryptocurrency as of 2022. FTX was the third largest cryptocurrency exchange, with over a million users.
In November 2022, the cryptocurrency trading platform committed major accounting fraud by misusing customer investments and falsifying accounts. As a result, the Bahamas-based firm filed for bankruptcy before seeking a bailout from private investors. Rival cryptocurrency exchange, Binance, offered to buy FTX but walked away after conducting their due diligence.
The sequence of events that led to Bankman-Fried’s arrest is as follows:
- Nov 2 - CoinDesk leaks FTX’s balance sheets
- Nov 6 - Binance sells all FTT tokens
- Nov 8 - Binance offers to buy FTX but backs out of the deal
- Nov 12 - FTX reports a cyber hack and moves assets to cold storage
- Dec 12 - Bankman-Fried is arrested in the Bahamas
- Dec 22 - Bankman-Fried is released on the largest bond in history - $250 million
FTX collapsed ten days after suspicions arose about FTX’s sister company, Alameda Research. A news site leaked a report and balance sheets that stated Alameda Research was valued at $5 billion in FTT - the cryptocurrency created by FTX. Many celebrity investors lost money in the FTX scandal, including Shark Tank’s Kevin O’Leary and Tom Brady.
Luckin Coffee Fake Revenue Scandal
The Chinese company Luckin Coffee misused investor funds by creating false accounts and company revenue statements. The business used two separate databases to store its revenue and expenses to keep its actual orders and sales hidden from the public.
The chairman and CEO of Luckin Coffee were removed from their positions and ordered to pay a $180 million fine by the United States Securities and Exchange Commission (SEC).
Here is what we know about the Luckin Coffee accounting scandal:
- 2018 - Luckin raises $200 million to start their business, and is valued at $1 billion
- 2019 - Luckin becomes China’s largest coffee chain overtaking Starbucks
- 2020 - Muddy Waters Research raises questions about Luckin’s financial reports
- 2022 - Luckin is ordered to pay a $180 million penalty by SEC
The Starbucks rival has agreed to pay the SEC fine but has not agreed to any of the charges. However, a representative of the SEC revealed that “Luckin Coffee intentionally overstated its revenue and expenses in public financial reports from 2019.” Luckin has since admitted that their Chief Operating Officer and other staff fabricated sales reports of up to $310 million.
Weber Shandwick Embezzlement Scheme
In December 2022, the world watched as one of the leading global public relations firms came under fire for falsifying accounting records. Former CFO, Frank Okanuk, was sentenced to 52 months in federal prison for using company funds to buy luxury boxes at sporting events and fund outside business ventures. In addition, Mr. Okanuk admitted to embezzling $16 million from the PR firm.
Here are the events that led to the sentencing in December 2022:
- 2011-2020 - Okanuk uses his position to remove funds and create false invoices to justify his purchases
- Summer 2020 - Okanuk leaves his position at Weber Shandwick
- Dec 2022 - Okanuk pleads guilty to one count of wire fraud and one count of falsification of the books
Throughout his embezzlement scheme, Mr. Okanuk used company funds for various shocking reasons, including a payment to his former university.
He falsified records to indicate that funds would be used to pay for an economic survey when, in fact, he was paying off a previous tuition bill of $20,000. Instead, Okanuk claimed a refund from the university and kept the money for personal use.
Protecting Your Business Against Expense Fraud
Regardless of your business size, there are several ways to protect yourself and your employees from accounting fraud. First, it is essential to remain open and honest about your financial reports and to put emphasis on training your employees to recognize when things look wrong. In addition, business owners should use internal methods and restrict user access to protect their accounts from fraudulent activity.
Employ a Trustworthy Accountant
There are various methods that fraudulent accountants will use to help a company appear more fruitful than in reality. However, a certified public accountant (CPA) with positive reviews and recommendations will abide by financial laws and regulations. You can check their license number with the IRS Return Preparer Office Directory.
A CPA can also offer financial advice throughout the year, alongside preparing and filing your return. They may assist you with finding a suitable bank account if you have a poor credit history, manage your debt, and support you in various ways.
Understand Your Business Finances
You should never leave your finances solely in the hands of your accountant or finance teams. Your role as the business owner is also to monitor every cent that leaves and enters your accounts. Educate yourself and your staff on your state's financial laws and tax requirements.
Some simple ways to keep track of your accounts include the following:
- Monitor daily income and expenses
- Keep accurate records
- Include finances in your business plans
- Set up a record-keeping system
- Use stock control methods
You can protect your finances by monitoring your finances closely and making your employees aware of their responsibilities. Seek advice from your account immediately when financial issues arise to minimize the impact on your business.
Know Your Team
You must know your staff members and their role within your company. For example, employees with financial responsibilities should understand the consequences of submitting false financial documents or misrepresenting accounting information. Training and getting to know your team is an excellent fraud prevention method that business owners should not overlook.
Using an Expense Management Software
An expense management software eliminates the need to manually check every expense against company policies by automating pre-submission checks. This significantly boosts compliance against set corporate policies, mitigates expense fraud, and saves time for the Finance teams. In addition, the software also flags and notifies stakeholders of all expenses that violate company policies (including duplicates.)
Here are some specific examples of how expense management software can help prevent expense fraud:
- With real-time policy checks, employees are well aware of expense policies, with the software informing them of violations right away. This results in them being able to submit compliant expenses from almost anywhere.
- A centralized cloud system stores all your receipts in one place and makes it easier for finance teams to access them during audits. Also, with central storage, it gets impossible for employees to submit the same receipts twice.
- An expense management softwares comes with robust policy engines that can be fed custom business rules to tailor the company's needs. This ensures zero policy violations when an employee submits an expense.
- Expense softwares come with detailed digital audit trails that document all actions taken by all stakeholders on a specific expense or expense report. This ensures Finance teams are always in the know before approving any expenses.
- As receipt tracking becomes easier, reimbursement TATs greatly decrease; thus, increasing the trust and confidence employees have in the organization.
In recent years, companies have become more aware of expense fraud and are taking steps to prevent it. While it is impossible to control human behavior, management can take steps to reduce the risk of fraud, such as implementing clear expense guidelines, establishing consequences for policy violations, and switching to an automated expense software.