A Basic Understanding of Fraud
By: Shawn R. Bradley, CFE
This article should make clear any misunderstandings about the definition of occupational fraud. I wrote this article to give practical knowledge to businesses trying to combat company fraud and keep company investments, tangible and intangible.
What is fraud?
In its basic definition, fraud intentionally and secretly deceives an outcome or a person. Of the many fraud types, they fall into one of three basic categories: asset misappropriation, corruption, and financial statements. To a trained eye, various red flags detect fraud. Red flags are circumstances that do not complete the normal flow of business. Some warning signs or red flags to the untrained eye are bogus invoices, employee debt, purchasing expensive items, untraceable emails, eerie feelings of “something not feeling right”, and making purchases at store opening or closing times.
Fraud existed since the beginning of man. Even though man was a less complicated creäture back then fraud was still rampant. For instance, during the hunting experience, the stronger more agile man surpassed the weaker man. So in turn, the strongest survived and became even more powerful and driven. So how does the weaker rival compete? Born are schemes and thoughts to “get them the next time.”
The Foreign Corrupt Practices Act of 1977, states it is illegal for an US citizen or company to promote bribery to a foreign official to get or keep a business. The Department of Justice and the Securities and Exchange Commission jointly enforce this Act. The Committee of Sponsoring Organizations of the Treadway Commission of 1985 is a joint effort of sponsoring organizations such as the American Accounting Association, The American Institutes for Certified Public Accountants, The Financial Executive Institute, The Institute for Management Accountants, and the Institute for Internal Auditors developed to give a framework for enterprise risk management, fraud deterrence, and internal controls. Another Act created, the Anti-Kickback Act of 1986. This Act usually eradicates compensation in any form and or favoritism involved in government contracting. Prohibited attempts such as offering, accepting, or attempting favorable treatment in awarding contracts are illegal. The Sarbanes-Oxley Act of 2002 is a set of 11 federally mandated titles that only applies to public companies. These mandates are a set of complex regulatory laws engaging into the financial environment of the U.S. financial markets that ultimately provides a sense of confidence to investors and foreign financial service providers. Another federal mandate created the U.S. Sentencing Guidelines of 2005. This aids federal judges in determining the fairness and clarity in ruling on criminal cases such as federal crimes and policies.
Current fraud trends
Now in the time of computers and our rich, global economy, fraud occurs due to strategic schemes. Mortgage fraud, identity theft, fraudulent emails requesting banking details, counterfeit drugs, and producing fraudulent financial records are all some of the current trends afflicting the American economy and globally. According to the ACFE’s study of The Impact of an Economic Recession, employee embezzlement showed a significant increase in 2010 up to 48.3% with the expectation to rise to 70% in 2011. Of the polled CFE’s, 51.3% expect an increase slightly in the change in level of fraud expected during the next year 2011.
Collectively, fraud prevention and detective controls account for more company spending in the near future. Fortunately, enough companies in this tough economy see the prolonged benefit of a certified fraud examiner. Governance, risk management, and control (GRC) is the new tool used within companies to watch, uncover, and correct. GRC are essential and are at the base of the new fraud diamond, transformed from the original fraud triangle with adding a point of capability.
Basic types of occupational or white-collar fraud:
1. Asset misappropriation
The theft or misuse of company resources for personal gain is the definition for asset misappropriation. For example, stealing inventory and physical intellectual property are both illegal. According to the ACFE’s Report to the Nations on Occupational Fraud and Abuse 2012 Global Fraud Study, asset misappropriation accounts for 86% of cases in this study. Other examples include cash larceny, skimming cash receipts and check tampering. This group is home to a vast amount of examples, as this area is the largest of the three categories.
Under the second basic group, corruption is home to many types of fraud. In the ACFE’s Report to the Nations on Occupational Fraud and Abuse 2012 Global Fraud Study, corruption accounted for just under 1/3 of the cases in the study. Under the corruption umbrella, more of the crimes considered white-collar due to their underlying nature. Fraud schemes in this area include larceny (petty and grand), embezzlement, and bribery. This group of fraud is also home to such federal mandates such as the Bank Secrecy Act of 1970 (BSA) and the Foreign Corrupt Practices Act of 1977 (FCPA). The Bank Secrecy Act of 1970 also known as the Currency and Foreign Transactions Reporting Act detects and prevents money laundering. If customers’ bank accounts conduct transactions exceeding $10,000, the bank has to file a cash report. This report determines if money laundering activity, tax evasion, or some other criminal activity may happen.
3. Financial statements
This last class commands a small amount of fraud, less than 5% in the Occupational Study prepared by the ACFE; however, this entails one of the largest impactful and more publicized areas of the three most overarching prevalent areas of fraud. Financial statement fraud usually consists of hiding and or limiting the amount of losses and padding income and or sales. Supporting documentation is unclear, missing, or falsely completed to show a profit for the specific company.
In summary, flexibility and uniformity is vital in understanding and having a successful business. The global economy demands that companies constantly enhance and reinvent themselves to keep good governance, risk management, and compliance in the forefront ultimately keeping the regulatory bodies at bay. An integrated approach to business flows from its top players to the lower level business players and without this backing, work together is lost and fraud ultimately wins.
Acknowledgements and Credits
Copyright SRB FRAUD COMPLIANCE & INVESTIGATIONS, LLC