Occupational fraud is detrimental to an organization, impacting both internal operations and external reputation. With fraudulent schemes on the rise and constantly evolving, organizations should educate themselves on common occupational fraud schemes to determine whether they too, have been or could be a victim of fraud.
In our previous article, we explored the Association of Certified Fraud Examiners (“ACFE”) 2022 Report to the Nations that was released earlier this year and discussed the emerging trends in fraud occurrence, detection, and impact. In this article, we continue the 2022 ACFE Report Series and take a deeper dive into how fraudulent acts are committed.
Fraud, the wrongful or criminal intentional act for financial or personal gain, recognizes no boundaries and does not discriminate. Fraudulent behavior can impact all companies, big or small, public or private, well-established or start-up, in any industry, across the globe. While it is impossible to eliminate fraud risk completely, awareness and knowledge are the best ways to minimize the risk as much as possible. Managers, supervisors, and owners that know how fraud schemes are conducted, will not only be able to help prevent fraudulent acts from occurring but will also be able to develop effective fraud control measures.
Asset misappropriation, corruption, and financial statement fraud are the three fraud classifications that pose the greatest threat to organizations. Each fraudulent scheme and fraudster is unique, and as times change and technology evolves, so do fraudsters and their schemes. Knowing how fraudsters commit their crimes helps organizations with early detection and minimum damages.
Asset Misappropriation
Asset misappropriation is stealing or misusing company assets. As the most common type of fraud, the ACFE further dissected and analyzed this category based on sub-schemes to better understand the trends in how fraudsters commit fraud. Of the nine categories of misappropriation sub-schemes outlined within the ACFE Report, the top three that present the most risk to organizations are [1]:
- Billing schemes (20% of cases) – a perpetrator receives payment from their company for fictitious invoices or invoices for personal charges.
- Non-cash schemes (18% of cases) – theft of physical assets, investments, or proprietary information.
- Expense reimbursement schemes (11% of cases) – an employee submits and gets reimbursed for fictitious or personal expenses via the company’s expense reimbursement process.
Corruption
A corruption scheme involves an employee disregarding their duty to their organization and using their position or authority to influence a business interaction for their own personal gain. Corruption is a significant problem and since 2012, corruption schemes have increased 17% and damages have increased to a median loss of $150,000. [2] Employees take part in corruption schemes by:
- Paying or receiving bribes
- Giving and/or accepting kickbacks
- Rigging the bidding process
- Having involvement in undisclosed conflicts of interest
- Economic extortion
Financial Statement Fraud
A financial statement fraud scheme involves intentional material misstatements or omissions in the financial statements. The “tone at the top” is important and is quite often the problem because financial statement fraud schemes are usually orchestrated by upper management/executives in response to market pressure and investor expectations, as well as performance requirements for bonus payouts. Common financial statement schemes include:
- Overstatement of Income and Assets
- Fictitious revenue
- Timing differences
- Improper asset valuation
- Understatement of Expenses and Liabilities
- Concealed expenses and liabilities
- Timing differences
Withum’s Expertise in Occupational Fraud Investigations
If your organization has been the victim of an occupational fraud scheme or wants to proactively combat potential fraud schemes, Withum is experienced in all facets of fraud prevention and investigation. Our Forensic, Investigations and White-Collar Criminal Defense Team is comprised of Certified Public Accountants (CPA), Certified Fraud Examiners (CFE), professionals Certified in Financial Forensics (CFF), and former FBI Agents who are ready to assist.
Stay tuned for the third article in this series, The Typical Fraudster, in which we will explore the characteristics of the typical fraud perpetrator, based on global trends outlined in the ACFE’s 2022 Report.
Authors: Justin Sacks, CPA, CFE | [email protected] and Jen Rodriguez, MAcc, CFE | [email protected]
[1] Association of Certified Fraud Examiners Occupational Fraud 2022: A Report to the Nations page 12.
[2] Association of Certified Fraud Examiners Occupational Fraud 2022: A Report to the Nations page 9.
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