Question

What is considered management errors, omissions, material fraud, illegal acts, and provide examples?

Answer 1

Management Error:

An error means a mistake made. So a mistake made by a management is known as management error. In accounting the role of management is important. An error can happen in following cases. Few are explained:

1) Failure to reconcile the books of accounts with the comparative data.

2) Failure to follow the accounting standards and comply with the GAAP.

3) Improper planning i.e. cash flow forecasts are not held effectively.

Ommission:

Ommission refers to exclusion or deletion. In accounting it can be complete ommission or partial ommission.

1) Complete Ommission: A transaction is completely omitted. Eg: Failed to enter a sale Invoice.

2) Partial Ommission: Partially excluded or omitted mistake. Eg. A journal of Purchase is entered but posting to supplier account is missing.

Material Fraud: Fraud cam be defined as a mistake done but intentionally. Accounting fraud happens due to the following reasons:

1) Fraudulent Financial Reporting: Revenue recognition, closing entries, valuation of assets and liabilities etc.are fraudulently reported.

2) Falsification of data, ommission of important aspects can also be one type of fraud. Eg: Fraud concealed by hiding a contract agreement.

3) Misapplication/ Misappropriation of Assets: Eg. Employee steals some part of assets say cash or any intellectual property is a fraud.

4) Ineffective Internal Control and lack of reconciliation of accounts can also be a reason.

Illegal Acts:

The various examples of illegal acts in accounting are:

1) Sales skimming: Not showing few sales made in books of account.

2) Recording personal Expenses in Business is alsi a illegal activities.

3) Taking or giving under table pays or doing bribery expenses

4) Money Laundering: Concealing the main source of money received and infusing into business.

5) Management providing incentives, pressures or opportunities for doing errors and encouraging them.