Fraud definition

Fraud is a false representation of the facts, resulting in the object of the fraud receiving an injury by acting upon the misrepresented facts. Fraud is proven in court by showing that the actions of an individual involved the following elements:

  • A false statement of a material fact;
  • Knowledge that the statement was untrue;
  • Intent by the individual to deceive the victim;
  • Reliance by the victim on the statement; and
  • Injury sustained by the victim as a result of the preceding actions.

The key element in the preceding definition is intent. A company could make false representations in its financial statements simply because the accounting staff made a mistake in compiling certain financial information. This is not fraud (though it may be incompetence), since there was no intent to misstate the financial statements. Conversely, if a controller intentionally reduces the bad debt reserve in order to increase profits and thereby triggers a bonus for the management team, this is fraud, because a false statement was intentionally made.