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271 
QUESTION 
Sales fraud
 
See if you can come up with three ways of generating fictitious sales transactions or sales values. 
ANSWER 
The following are just three obvious suggestions. 
(a) 
Generation of false invoices 
(b) 
Overcharging customers for goods or services 
(c) 
Selling goods to friends (with a promise of buying them back at a later date) 
 
1.2.4 Manipulation of year-end events 
Cut off dates provide management with opportunities for window dressing the financial statements. 
Sales made just before year end can be deliberately over-invoiced and credit notes issued with an 
apology at the start of the new year. This will enhance turnover and profit during the year just ended. 
Delaying the recording of pre-year-end purchases of goods not yet delivered can achieve the same 
objective. 
1.2.5 Understating expenses 
Clearly, failure to record all expenses accurately will inflate the reported profit figure. 
1.2.6 Manipulation of depreciation figures 
As an expense that does not have any cash flow effect, depreciation figures may be easily tampered 
with. Applying incorrect rates or inconsistent policies in order to understate depreciation will result in a 
higher profit and a higher net book value, giving a more favourable impression of financial health. 
 
2
Potential for fraud 
The UK has witnessed a number of high-profile frauds, most notably the BCCI, Maxwell and Barings Bank 
cases. The real incidence of fraud is difficult to gauge, particularly because companies are often loath to 
publicise such experiences. However, all businesses – without exception – face the 
risk of fraud
: the 
directors' responsibility is to manage that risk. 
2.1 Prerequisites for fraud 
There are three broad 
prerequisites
or 'preconditions' that must exist in order to make fraud a possibility: 
dishonesty, motivation and opportunity. 
These are useful to know, because if one or more of them can be eliminated, the risk of fraud is 
reduced! 
2.1.1 Dishonesty 
Honesty is a subjective quality, which is interpreted variously according to different ethical, cultural and 
legal norms. However, we may define dishonesty as an individual's predisposition or tendency to act in 
ways which contravene accepted ethical, social, organisational and legal norms for fair and honest 
dealing. This tendency may arise from: 
(a) 
Personality factors: a high need for achievement, status or security; a competitive desire to gain 
advantage over others; low respect for authority. 
(b) 
Cultural factors: national or familial values, which may be more 'flexible' or anti-authority than the 
law and practice prevailing in the organisation. (Cultural values about the ethics of business 
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