Why Is Preventing Fraud Important in Corporate Finance?

By Sharmista Thota

Financial fraud is the intentional deception or misrepresentation of financial information, which is done for personal or corporate gain and profit. This could be seen with falsifying records, inflating accounting revenues, undermining expenses, or hiding records from investors, shareholders, etc. to intentionally mislead them. Financial fraud is simply a flawed act done to steal money. There are many things that financial fraud could cause within a company–financial losses, reputational damage, and eroded customer trust.

Preventing financial fraud is crucial to keep a corporation up and running in its peak condition. There are also many other reasons to maintain truth while giving financial information, like protecting businesses, maintaining economics stability, or ensuring legal compliance. These notions are all made and protected to protect a company from going under financial losses or possibly even worse.

There are many types of financial fraud that should be known by financial professionals. Accounting fraud is an example of financial fraud where you manipulate financial records to misrepresent your company's financial health. There is also tax fraud–a common type of fraud among individuals–in which you purposely falsify tax returns, so you pay less taxes. Another example of financial fraud is phishing, when criminals steal credentials to infiltrate company accounts and to trick employees to transfer funds.

Many laws were put in place since then to prevent financial fraud from becoming more prevalent, like the Sarbanes-Oxley Act. Made in 2002, the SOX act made it required for financial reporting to be transparent and accurate. This act was created so that investors wouldn’t have to be fooled and led on by falsified reports, so they could make accurate decisions on their investments. There are also acts of internal control that are enacted by businesses, so that corporations would comply with laws and respond with pure truth.

Unethical behavior done by businesses or anyone in a corporation will set their company to fall into ruin. Preventing fraud is vital for maintaining trust, protecting investments, and ensuring the stability of the financial system.

Citations

9-28.000 - principles of federal prosecution of Business Organizations (2024) Justice Manual | 9-28.000 - Principles of Federal Prosecution Of Business Organizations | United States Department of Justice. Available at: https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations (Accessed: 09 June 2025).

The sarbanes-oxley act (no date) Sarbanes. Available at: https://www.sarbanes-oxley-act.com/ (Accessed: 09 June 2025).

Van Nuys/Encino headquarters (no date) Eisner Gorin LLP Federal. Available at: https://www.thefederalcriminalattorneys.com/accounting-fraud (Accessed: 09 June 2025).