Is your organisation at risk of fraud? The simple answer is yes. Any organisation holding assets is in danger of having those assets targeted by dishonest individuals. While fraud is not something an organisation wants to deal with, in practice most organisations experience fraud to some degree.
Unfortunately, a big part of the threat comes from the very people who have been hired to carry out the organisation’s operations and so it can be hard to prevent.
Video transcript summary
In this presentation, we are going to talk about different types of fraud.
Fraud is quite a broad concept, but at its core it is a breach of trust by an employee who abuses their position for their own personal gain. It comes in three categories:
– Asset misappropriation
– Financial Reporting
Asset misappropriation is by far the most common type of fraud. It essentially means stealing from a business.
Cash is obviously most susceptible to misappropriation and can happen by skimming, reversing a sale, paying fictitious invoices or ‘lapping’.
Skimming relates to the theft of cash. (This is where an employee steals cash from a customer before it’s ever recorded by the company).
Employees can also misappropriate cash after it’s been booked into the accounts by reversing a sale or by recording a fraudulent return.
Cash can also be stolen through payment schemes to fictitious suppliers or payments for fictitious invoices.
Other asset misappropriation happens in a variety of different ways but concealing it can be tricky. For example, an employee could create a fictitious customer and misappropriate inventory.
They could invent an employee and pay them, forge payment documentation or submit false expense claims.
An employee could also adjust inventory records to conceal theft, steal a laptop or confidential information, or simply take stationery for their own use.
These types of asset misappropriation schemes are among the most common types of fraud and they can amount to a substantial loss over a long period of time.
Fraud statistics from the Association of Certified Fraud Examiners indicate that the average loss is in the order of $150,000 over 18 months before the fraud is detected.
The second group of fraud schemes that we’re going to discuss is corruption. This includes bribes and illegal gratuities and payments in kind, received by an employee from customers or suppliers for special consideration.
Corruption through extortion is somewhat different to a bribe, in that an employee will approach the vendor or a customer and threaten them with losing the business if they don’t pay them off. The issue here is when this happens the company can’t extract the best value from the terms of the business relationship.
Worldwide the ACFE estimates that there are over $1 trillion worth of bribes paid out each year.
Financial Reporting Fraud
And lastly, the third fraud category is financial reporting fraud.
It’s usually perpetrated by Senior Management, through abuse of power to override processes and controls. This is the most complex type of fraud and results in the greatest loss of value to stakeholders.
For example, senior management may ship products to customers just prior to year-end to bolster sales, with an unwritten arrangement allowing the customers to return the unsold products at a later date. This is a scheme called channel stuffing.
Some fraudulent reporting schemes don’t involve the accounting numbers at all but instead fraudulently report other important information to stakeholders.
For example, when a mining company misleadingly reports to the market, announcing that it has found large reserves of mineral deposits.
I leave our discussion on the types of fraud at that for now. But as you can appreciate, there are a lot of ways fraud can occur. And if you’re still doubtful that fraud can take place at your organisation then consider the 20-60-20 rule which goes as follows:
– 20% of the people within an organisation will be honest no matter what;
– 20% will be expected to exploit situations for their own personal gain; and
The remaining group is the real risk, these people are generally honest but in the right circumstances, this 60% will likely commit fraud.
Next time we’ll talk about what these circumstances are. In the meantime, contact me if you would like assistance.
By Steven Zabeti, Audit Partner, Accru Felsers Sydney
Steven specialises in external auditing, due diligence and financial reporting with a focus on data analytics and fraud prevention. His clients include multi-national subsidiaries in Australia, public companies, universities and schools, financial services licensees and not-for-profit organisations.