What to Do If Your Manager Is Committing Fraud: Part 1 of 8

What to Do If Your Manager Is Committing Fraud: A Complete Guide for Accounting Professionals Part 1

 You noticed the numbers don't add up. Maybe it started as a small discrepancy you explained away — a data entry error, a timing difference — but the anomalies keep appearing. Your instincts are telling you something is wrong, and now you suspect your manager, controller, or even your company's owner is committing financial fraud.

 This is one of the most stressful situations an accounting professional can face. You chose a career built on accuracy and integrity, and now you're watching those values being violated from the inside. You may feel confused about your obligations, afraid of retaliation, unsure who to trust, and uncertain about your own legal exposure if you stay silent.

This guide is written specifically for you. We'll walk through how to recognize the signs of financial statement fraud and illegal revenue schemes, how to document and report what you've found, and how to protect yourself — including how to exit the company safely if necessary.

Important Note Before You Read Further

If you believe you are witnessing active, ongoing fraud, your personal safety comes first. Do not confront the individual directly. Do not destroy or alter any documents. Do not tell colleagues unless absolutely necessary. This guide will explain why — and what to do instead.

Part 1: Recognizing Financial Statement Fraud

Financial statement fraud is the deliberate misrepresentation of a company's financial condition. Unlike simple theft or embezzlement — which tends to siphon money out — financial statement fraud manipulates what the numbers say to deceive investors, lenders, regulators, or the IRS. It is a federal crime under multiple statutes, including the Sarbanes-Oxley Act, the Securities Exchange Act, and general federal fraud statutes.

 As someone who works in accounting, you are uniquely positioned to detect it — and that position comes with both power and responsibility.

1.1 Overstating Revenues

One of the most common forms of financial statement fraud is making revenue appear larger than it actually is. Watch for these patterns:

•       Recording sales before they are earned — for example, booking a contract as revenue the moment it's signed rather than as services are rendered.

•       Channel stuffing: shipping products to distributors or subsidiaries with an undisclosed right of return, then counting those as completed sales.

•       Round-trip transactions: selling an asset to a related party and simultaneously repurchasing it, so the same cash cycles through as "revenue."

•       Fictitious customers or invoices: revenue entries that have no corresponding customer PO, signed contract, or collection history.

•       Side agreements: separate written or verbal arrangements with customers that contradict the terms of the official invoice (such as extended payment terms or guaranteed returns).

•       Mismatched shipping and billing records: revenue recognized in a period where there is no corresponding shipping documentation, delivery confirmation, or accounts receivable aging entry.

1.2 Understating Liabilities and Expenses

Fraud can also make a company look healthier than it is by hiding what it owes:

•       Failing to accrue known liabilities, such as pending lawsuits, vendor invoices, or warranty obligations.

•       Improperly capitalizing expenses — routing ordinary operating costs through the balance sheet as long-term assets to avoid recognizing them on the income statement.

•       Round numbers and suspiciously "clean" figures in accrual accounts, suggesting manual override rather than normal accounting entries.

•       Vendor payments that are processed but don't correspond to purchase orders, receiving reports, or deliverables.

•       Intercompany eliminations that are incomplete or missing, inflating consolidated revenues or understating costs.

1.3 Asset Misrepresentation

The balance sheet can be manipulated just as aggressively as the income statement:

•       Inventory that appears on the books but cannot be physically verified — or inventory whose value is inflated beyond market rate.

•       Accounts receivable that are old, uncollectible, and haven't been written off — or where the allowance for doubtful accounts has been artificially reduced.

•       Fixed assets recorded at inflated values, or depreciation schedules that don't match the actual useful life of assets.

•       Related-party loans recorded as legitimate assets when they are unlikely to be repaid.

•       Goodwill or intangible assets that should have been impaired but haven't been.

1.4 Red Flags in the General Ledger and Journal Entries

In your day-to-day work, these are the transactional-level signals that deserve immediate scrutiny:

•       Journal entries posted after the close of a reporting period with no supporting documentation.

•       Entries made by senior management or the controller that bypass normal approval workflows.

•       Recurring adjustments that always increase revenue or reduce expenses by just enough to hit a target.

•       Transactions posted to unusual accounts — especially clearing accounts, suspense accounts, or inter-company accounts.

•       Large, round-dollar entries posted late in the fiscal year or quarter.

•       Discrepancies between the trial balance and the final financial statements.

•       Audit adjustments that are accepted but then partially reversed in the following period.

Pro Tip: Trust Your Instincts

Experienced accounting professionals develop pattern recognition over time. If something makes you uncomfortable even when you can't immediately articulate why — a vendor you've never heard of, an entry that "just doesn't feel right," a report that looks too clean — write it down. Your instincts are often your best early-warning system.

Have Questions? MMB MBA Can Help.

At MMB MBA, we specialize in forensic bookkeeping, QuickBooks consulting, and helping businesses untangle financial irregularities. If you suspect fraud in your organization — or if you're a business owner who suspects something is wrong — we can conduct a discreet, professional review of your books and help you understand what you're looking at.

Contact us today at www.mmbmba.com

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