Group of companies and
inter-company fraud: a case
College of Business Administration, California State University Stanislaus,
Turlock, California, USA
Purpose – This paper aims to present a real case of inter-company fraud where the Group’s Bank lent
money to a Group company and was never repaid. The company generates its own cash, but instead of
repaying its debt to the Bank, it funds other Group companies. Considering the Bank as being a public
depository institution and its illiquid situation, the case presents a fraud within the Group. In this
regard, the paper is considered to be an exemplary case for the accounting literature.
Design/methodology/approach – The paper analyses one of the Group Company’s audit reports for
the years 2003 and 2004 and explains the type of frauds committed by the Company’s management. The
study approximates the total US dollar gures that were inappropriately transferred to the other
Group’s companies in 2003.
Findings – The study examines the real case and discusses the reasons that led to the Group’s
bankruptcy. Lack of governmental controls may lead to bankruptcy of banks that have been abused by
its owners by transferring loans to other group companies exceeding the legal limits observable by the
Practical implications – Auditors, accountants and accounting lecturers, as well as professors, talk
about fraudulent accounting practices. The study explains a specic accounting fraud case in a group
of companies. It explores the type of inter-company money transfers without a valid base. The author is
of the opinion that readers with an accounting background will benet from reading the case.
Social implications – Economics is the study of allocation of scarce resources to the best use.
Public’s savings must be directed to the companies that produce the value added to the society. On the
other hand fraudulent money transfers within the group companies involving bank(s) may distort this
allocation. Public money-deposits might be wasted by dishonest business owners. The study is aimed
to disseminate this information to public in general.
Originality/value – The case study has been built on a real audit report from Turkey. The names and
the locations of the companies have been changed, and the gures have been approximated in US dollar
terms. The events and ndings on the audit reports have not been changed, and each fraudulent event
has been individually discussed.
Keywords Accounting fraud, Arms’ length transactions,
Fraudulent money transfers between the group companies, Inter-company transfers
Paper type Case study
Companies, especially group companies, under a common management whose
tendencies change overtime from full disclosure and transparent reporting to least
disclosure and fraudulent reporting may experience similar situations. The author’s
goal is to exert such cases and disseminate it to the public so that the company
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Journalof Financial Crime
Vol.23 No. 2, 2016
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