FRAUD – What you need to know

What is fraud?

In the broadest sense, the term fraud encompasses actions that are meant to deceive for financial or personal gain. It’s any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means. Occupational fraud is fraud committed by people who work for, or do business with, an organization. This specific form of fraud represents a real and large risk to any organization that employs individuals.

Describes fraud:

Broadly speaking, the word fraud refers to acts meant to fool for either personal or financial benefit. It is any deliberate or intentional act using guile, dishonesty, or other unfair means to deny another of property or money. Occupational fraud is fraud carried out by employees of, or business associates with, a company. Any company that hires people runs actual and significant risk from this particular kind of fraud.

Why should fraud concern us?

Every year fraud damages businesses, governments, and people individually for billions of dollars. Apart from that, fraud can seriously impact the quality of life of its victims as well as the employees of those victims; it leads to job losses, lost savings and investments, damaged public institution trust, and a major burden on public resources.

Anti-fraud experts in the Association of Certified Fraud Examiner’s (ACFE) Report to the Nations project that fraud costs the average company 5% of its annual income. Regarding your company, consider. Should those monies be lost from your business, there may be less raises, possible layoffs, more pressure to boost income or cut expenses, or lower employee benefits. Occupational fraud compromises your company’s reputation as well. Would you be at ease opening an account with a bank known for staff dishonesty? Do you believe investors want to fund businesses unable of adequately safeguarding their assets?

What are some of the most common occupational fraud schemes committed by employees?

Some of the more common frauds committed by employees include the theft of company assets, such as cash or inventory, and the misuse of company assets, such as using a company car for a personal trip. Here are more details about the schemes.

Stealing cash

Unsurprisingly, most people prefer to steal cash because the theft of physical cash is easier to conceal than many other types of theft. Skimming is the process by which an employee removes cash from the business before it enters the accounting system. This includes not recording a sale, or recording a sale for a lower amount than its actual cost, and pocketing the unrecorded amount.

Payment tampering schemes

Payment tampering is a type of fraudulent disbursement scheme whereby an employee either prepares a fraudulent payment for their own benefit or intercepts a legitimate payment intended for a third party and converts it to their own benefit. In these schemes, fraudsters manipulate either traditional check payments or some form of electronic payments — such as automated clearing house (ACH) payments, online bill payments or wire transfers. Some fraudsters abuse their legitimate access to their employer’s payment system. Others gain access through social engineering or password theft, or by exploiting weaknesses in their employer’s internal control or payment system. Regardless of how they access the system, the perpetrators use this access to fraudulently disburse or divert payments to themselves or their accomplices.

Billing schemes

Billing schemes cause the victim organization to buy goods or services that are nonexistent, overpriced or unnecessary. In a typical scheme, the perpetrator creates false support for a fraudulent purchase. The fraudulent support documents, which can include invoices, purchase orders, purchase requisitions, receiving reports and others, cause the victim organization to issue a payment for the purchase. However, the fraudster directs the payment to their own address or bank account, thereby reaping an illegal gain.

Expense reimbursement schemes

Most inventory and warehousing frauds involve misappropriating or stealing inventory for personal use or resale. For example, an employee might order excess inventory and then resell that inventory at a discount to another business. Likewise, the personal use of company assets, such as consuming office supplies for non-work-related purposes, can develop into a fraud or an abuse situation if management does not address it.

Payroll schemes

Payroll schemes occur when an employee fraudulently generates overcompensation on their behalf. These schemes are similar to billing schemes in that the perpetrator generally produces a false document or otherwise makes a false claim for a distribution of funds by their employer.

Inventory fraud schemes

Most inventory and warehousing frauds involve misappropriating or stealing inventory for personal use or resale. For example, an employee might order excess inventory and then resell that inventory at a discount to another business. Likewise, the personal use of company assets, such as consuming office supplies for non-work-related purposes, can develop into a fraud or an abuse situation if management does not address it.

Why do people engage in fraud? Among the first people to investigate how white-collar criminals vary from violent offenders was Dr. Donald Cressey. Developing the Fraud Triangle was part of Dr. Cressey’s work on occupational fraud. This view holds that occupational fraud cannot take place without three elements:

Pressures

Usually financial in nature, this non-shareable issue drives a person to commit fraud. Among these kinds of pressures are those from a gambling or drug habit, personal debt or poor credit, a major financial loss, or peer or family pressure to succeed. For a variety of reasons—including shame, pride, or a need to prove oneself—they could think fraud is the only fix.

Opportunity

This speaks to the alleged capacity for fraud committed. An employee has to believe they have chances to carry out their plan with success. This could show up as a lack in anti-fraud controls—that is, as lacking separation of duties—that they have discovered.

Rationalization

Rationalization helps offenders keep a good image of themselves and defend or excuse their criminal activity. Many times, people are not ready to see their actions as immoral or bad. Offenders justify their dishonesty in several ways to maintain a good self-image. They could tell themselves they’re only “borrowing” the money and will pay it back at the first opportunity, or they could feel underpaid for their work and so merit additional pay.

1. Living beyond means
   Particularly in cases where an employee’s pay does not match their way of life, big spending is sometimes a sign of dishonest activity.
2. Economic problems
   Many times, the reason behind occupational fraud is financial difficulties. High student loan debt, auto loans, mortgages, taxes or high credit card debt are a few of the examples.
3. Close personal contact with consumers or suppliers
   This could point to an employee’s collusion with a vendor or customer creating a conflict of interest.
4. Control problems or a refusal to divide work
   If fraudsters let another employee handle their job responsibilities, they could be discovered. They might come up with reasons to gatekeep material from their colleagues, or they might not use their allocated time off.
5. Irritability, mistrust, or defensiveness
   To project suspicion onto others or to deter questions, fraudsters may behave unusually hostile or paranoid with colleagues.
6. A fraudster might show a “wheeler-dealer” attitude—that which is cunning or dishonest.

Every staff member, from whatever level, can help stop fraud. Companies should give anti-fraud systems under consideration proven ability to lower fraud costs top priority. The Report to the Nations claims that the six anti-fraud systems displaying the strongest correlation with reduced fraud losses were:

1. An established, company-wide code of conduct
2. An internal audit department
3. Management certification of financial statements
4. External audit of internal controls over financial reporting
5. Management review
6. Hotlines

Apart from general controls across the company, individual staff members are indispensable in spotting and stopping fraud. Here’s how you and your colleagues might influence things.

Increase awareness by means of fraud training.

Companies who gave staff members fraud training observed a 38% lower median loss per fraud incident. Should your company lack committed anti-fraud experts to oversee training, you can act and distribute the free tools available on FraudWeek.com or request a CFE to visit your company. Just beginning discussions about fraud and increasing knowledge of the problem could discourage possible criminals from acting.

See red flags; trust your gut feeling.

Knowing some of the red flags now will help you to be alert. Although most workers are honest, you should assess the matter if you come across something that seems wrong. Then, should you still have questions or doubts, you could have to act.

Variations in reports

Most businesses have a reporting system in place—a hotline, perhaps—that lets staff members anonymously document misbehavior. Should your company lack a hotline or if you would rather not use it, you could write an anonymous letter to the relevant official either inside your company or to the internal audit or anti-fraud team if one exists. Should the allegation center top management of the company, it can be forwarded to the audit committee of the board of directors or the independent auditors of the company.