Three Types of Occupational Fraud to Know and Understand

Jul

According to research from The Association of Certified Fraud Examiners (ACFE), it’s estimated that global businesses and organizations lose approximately 5% of their total annual revenue to occupational fraud (i.e., fraud committed against an organization by its own officers, directors, or employees.)

The hefty price tag of occupational fraud, also known as workplace fraud, translates to roughly $7B in losses each year to businesses and organizations. This staggering cost is made even more remarkable by the fact that a significant number of organizations simply overlook the most effective anti-fraud measures.

Understanding the various types of fraud that take place within organizations, and educating leaders about them can help businesses be proactive in protecting themselves.

There are three major categories of organizational fraud, each of which can devastate a business financially and reputationally: asset misappropriation, corruption, and financial statement fraud.

#1 – ASSET MISAPPROPRIATION

ACFE’s research shows that the most common type of occupational fraud is the misappropriation of company assets. This variety of fraud includes both the theft of company assets, such as cash or inventory and the misuse of company resources, such as taking the corporate jet for a personal trip.

While asset misappropriation is the most common form of workplace fraud, it is also the least costly to organizations with a median loss of $114,000 per incident. The schemes generally start small and get larger as perpetrators gain confidence in their ability to get away with their dishonesty.

Asset Misappropriation Schemes Include:

stealing cash, services, inventory, time or intellectual property
inflating expense reports, timesheets, and sales reports for commission payments
falsifying purchase orders for payments made to bogus vendors
abusing a company credit card for personal expenses
tampering with checks or check forgery
personal use of company vehicles, property or equipment
register disbursement schemes
billing schemes such as inflating invoices
falsifies payroll records, timekeeping records, or some other document concerned with the payroll function

# 2 – CORRUPTION

Corruption occurs when an owner, executive, or employee deliberately abuses an organization’s resources or assets for personal gain. Forty percent of the cases reported in ACFE’s study involve some type of corrupt activity resulting in a median loss of $250,000 to victim organizations.

Corruption occurs in many forms with the recipients of these schemes ranging from low-level clerks to CEOs and public officials. This form of fraud can result in massive damages to an organization, particularly smaller businesses. Beyond destroying a company’s finances, corruption often ruins a company’s reputation and devalues their brand equity.

The associated activities of corruption often occur in tandem with misappropriation or financial statement fraud rather than as individual schemes.

Corruption Schemes Include:

bribery, kickbacks, illegal gratuities, economic extortion
conflicts of interest, bid-rigging
money laundering and bid-rigging
colluding with others to make or receive false payments for services or goods never delivered
colluding with an insurance provider to falsify insurance claims
replacing purchased goods with lower quality or counterfeit goods

# 3 – FINANCIAL STATEMENT FRAUD

The least prevalent, but most costly form of occupational fraud is financial statement fraud. It occurs in ten percent of ACFE’s case studies with a median loss of $800,000.

Financial statement fraud occurs when a balance sheet, income statement, or cash flow statement is intentionally altered by an employee or owner to deceive an auditor the organization’s financials. The motive of the employee may be private gain, obtaining credit for the company, or keeping the company afloat.

Some cases of financial statement fraud can also be classified as misappropriation of assets or corruption.

Financial Statement Schemes Include:

understating or overstating income, assets, liabilities or expenses
postponing reporting income or expenses to a later period so that current earnings look higher or lower
improper asset or inventory valuation
improperly concealing financial disclosures

HOW TO PROTECT YOURSELF FROM FRAUD

Educating yourself and your staff about the different forms of organizational fraud is an essential first step to fraud prevention. Next month we will discuss fraud protection and the proactive steps every organization can take to reduce the risk of becoming the next victim of organizational fraud.

If you have questions or want to learn more, contact us here. We would love to help make sure you are both educated and comfortable with a professional who knows how to handle these situations.