Kiting

Kiting Fraudulent Accounting Cash Position Financial Fraud Account Manipulation Check Fraud Financial Reporting
Kiting is a fraudulent financial practice used to make the cash position of a company appear more favorable than it actually is by transferring funds between accounts just before the end of an accounting period.
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What is Kiting?

Kiting refers to a variety of fraudulent schemes used to make a financial position appear stronger than it actually is. In the context of accounting, it typically involves manipulating the timing of cash transactions to present an overstated cash position at the end of a financial period.

Detailed Explanation

Kiting often involves issuing a check from one bank account to another just before the end of an accounting period. Since the check may take several days to clear, the issuing account will not reflect the deduction immediately. However, the receiving account will often record the deposit immediately, making it appear that there is more cash on-hand than actually exists at that time. This kind of manipulation is particularly aimed at deceiving stakeholders about the financial health of the company.

Examples

  1. Company A writes a check for $100,000 from Account 1 to Account 2 on December 31, the last day of the accounting period. Account 1 will not be debited until January 3, but Account 2 is credited immediately, inflating the cash balance by $100,000.

  2. Individual B alters a check’s amount from $500 to $5,000 after it has been issued in order to withdraw more money fraudulently. This also falls under the category of kiting.

Frequently Asked Questions

Is Kiting Illegal?

Yes, kiting is considered a form of financial fraud and is illegal. Perpetrators can face severe legal consequences, including fines and imprisonment.

What are the Indicators of Kiting?

Common indicators include unusual account transfers at the end of a financial period, discrepancies between book and bank balances, and abnormally high deposit activity.

How can Kiting be Prevented?

Preventive measures include routine reconciliations of bank accounts, stringent internal controls, and using complex accounting software that cross-verifies transactions in real-time.

  • Check Fraud: The act of deliberately changing the check’s specifics such as the amount or the payee information to commit fraud.
  • Reconciling: The process of comparing the bank statements with the company’s own records to ensure that they match up and explain any differences.
  • Cash Overstating: Deliberately inflating cash balances in financial statements to misrepresent the financial standing of an organization.

Online References

  1. Investopedia: Check Kiting
  2. Federal Reserve: Fraud Prevention - Check and Payment

Suggested Books for Further Studies

  1. “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard Schilit
  2. “Forensic Accounting and Fraud Examination” by Mary-Jo Kranacher, Richard Riley, Joseph Wells
  3. “Essentials of Forensic Accounting” by Michael Sheetz

Accounting Basics: “Kiting” Fundamentals Quiz

### What is kiting primarily used for? - [ ] Improving investment returns - [ ] Deferring tax payments - [x] Creating a temporarily overstated cash position - [ ] Simplifying the auditing process > **Explanation:** Kiting is used to create a temporarily overstated cash position by transferring funds between accounts at strategic times, misleading stakeholders about the financial health of an organization. ### What type of transaction is central to kiting? - [ ] ACH transfer - [ ] Wire transfer - [ ] Check issuance and deposit - [ ] Direct debit > **Explanation:** Kiting primarily involves the issuance and deposit of checks to mislead bank statements temporarily. ### Kiting affects which type of financial statement? - [ ] Balance sheet - [ ] Income statement - [x] Both balance sheet and bank reconciliation statement - [ ] Trial balance > **Explanation:** Kiting affects both the balance sheet and bank reconciliation statement as it impacts the cash position reflected in these statements. ### What makes kiting appear more legitimate? - [x] Timing of transactions around financial periods - [ ] Amount of the checks - [ ] Frequency of transactions - [ ] Source of checks > **Explanation:** The timing of transactions, particularly around financial reporting periods, makes kiting appear more legitimate by leveraging the delay between crediting and debiting accounts. ### What is a key sign of potential kiting activity? - [ ] Minor discrepancies in financial records - [x] Unusual end-period transactions - [ ] Consistent low balance - [ ] Frequent cash withdrawals > **Explanation:** Unusual end-period transactions are a key sign of potential kiting as they may indicate an attempt to manipulate the cash position artificially. ### Is altering a cheque's amount also considered kiting? - [x] Yes - [ ] No - [ ] Only if the cheque exceeds a certain amount - [ ] Only if done by a business > **Explanation:** Altering a cheque's amount falls under the broader practice of kiting as it involves fraudulent manipulation of financial instruments. ### Which internal control can help detect kiting? - [ ] Annual audit - [ ] Random expense verification - [ ] Supplier credit checks - [x] Routine bank reconciliations > **Explanation:** Routine bank reconciliations can help detect discrepancies that might indicate kiting, as they involve comparing bank statements with recorded transactions. ### Who might typically get defrauded in a kiting scheme? - [ ] Suppliers - [ ] Investors - [ ] Employees - [x] Banks > **Explanation:** Banks are typically defrauded in kiting schemes as they are misled into crediting accounts with funds that have not yet been cleared. ### What legal consequences might arise from kiting? - [ ] Tax penalties - [x] Criminal charges including fraud - [ ] Civil lawsuit - [ ] Regulatory fines > **Explanation:** Kiting can lead to criminal charges including fraud, given the intentional deceit involved in manipulating financial statements. ### How critical is timing in the execution of a kiting scheme? - [x] Extremely critical - [ ] Somewhat critical - [ ] Not very critical - [ ] Irrelevant > **Explanation:** Timing is extremely critical in kiting schemes to exploit the delay between the issuing and clearing of checks, thereby temporarily inflating the cash position.

Thank you for expanding your understanding of kiting through our detailed guide and quiz. Continue enhancing your knowledge of accounting practices to safeguard against financial fraud!

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