This type of fraud occurs when the top management of an organization deceives shareholders, creditors and external auditors for the purpose of issuing misleading financial statements. The situations which give room for management frauds to occur are as follows:
- Affairs of the business are dominated by one man;
- Lack of sufficient competent staff to run the accounts department;
- Weakness in the internal control system;
- Related party transactions, this is, transactions between the firm’s management and its officers;
- When the board of directors do not get effectively involved in the supervision of the affairs of the organization.