Question

Explain the three methods of fraud (Financial Statement Fraud, Occupational Fraud, Collusion), which means analyze each one and provide an example for each.

Answer 1

Meaning of FRAUD

The word fraud is a generic term used to describe any deliberate act to deceive or mislead another person, carry harm or injury. This intentional, wrongful act can be differentiated and defined in many ways, depending on classes of perpetrators. For example, frauds committed by individuals such as embezzlement or theft, are distinguished from frauds perpetrated by corporations or top level management.

FINANCIAL STATEMENT FRAUD

A complete understanding of the nature, significance, and consequences of fraudulent financial reporting activities requires a proper definition of financial statement fraud. ACFE (Association of Certified Fraud Examiners) defines financial statement fraud as "The intentional, deliberate, misstatement or omission of material facts, or accounting data which is misleading and, when considered with all the information made available, would cause the reader to change or alter his or her judgment or decision."

When the managers of a company provide false financial information, it's called financial statement fraud. Financial statement fraud is usually committed with the aim that a financial statement audit ensures that a company's financial reports are free from material misstatement and fraud. In today's challenging economy, organizations need to be prepared to fight fraudulent activities. Business professionals may prefer to believe that fraud will never occur. Financial reporting fraud involves the alteration of financial statement data, usually by a firm's management, to achieve a fraudulent result.

Example -

Overstating revenues by recording future expected sales. Inflating an asset's net worth by knowingly failing to apply an appropriate depreciation schedule. Hiding obligations/liabilities from a company's balance sheet. Incorrectly disclosing related-party transactions and structured finance deals.

Financial statement fraud is a serious social and economic problem worldwide and more severe in growing countries. A company listed with any stock exchange is required to publish its financial statements such as balance sheet, income statement, statements of retained earnings and cash flow statements yearly and quarterly. Financial statements of a company reflects its actual financial health by analysing which, stockholders can form a wise decision about investing in the company.

OCCUPATIONAL FRAUD

Occupational fraud is a type of fraud committed by employees against employers. In short, occupational fraud encompasses any type of fraud that an employee commits that somehow utilizes his or her role or employment as a factor for personal gain in a way that is an inappropriate use of the organization’s property, assets, or other resources. Employers need to be aware that employees at any level of the organization may be capable of fraud. And an employee may commit fraud against his or her employer without committing any other type of illegal or unethical activity outside of their work life, making it difficult to spot someone who may commit occupational fraud before hiring them—which is an important distinction for HR team members to know.

Occupational fraud exists across industries, across demographics, and across departments. Virtually no organization is immune. That said, smaller businesses may be even more at risk than larger ones, simply because they have fewer resources to dedicate to finding and eliminating fraud in the first place, so it’s much easier to get away with and more likely to result in high losses for the organization.

Eg: A volunteer treasurer of a not-for-profit had access to the corporate credit card and bank account, with the full trust of the organization’s president. The treasurer allegedly forged the signature of another authorized signatory on the bank account. Apparently there was no review or oversight in place to catch her embezzlement. In September 2019, To fraudulently obtaining over $400,000 across a seven-year period.

COLLUSION FRAUD

Collusion – a secret agreement between two or more individuals for a deceitful or fraudulent purpose – is one of the most difficult types of fraud to expose. Auditors routinely excuse themselves from the responsibility of detecting fraud, collusion in particular. Collusion plagues multi-party payment facilitators – banks moving money from payers to payees, marketplace owners connecting buyers and sellers, gaming companies serving multiple players simultaneously or ride-sharing companies that move money from passengers to drivers. They are at high risk when a single party commits fraud individually, but when multiple parties collude together, it becomes increasingly difficult to spot and even more difficult to stop. Machine learning and sensitive velocity triggers on Fraud net’s platform can halt these schemes very early before they cause significant losses.

Example : Poor internal controls resulted in fraud in excess of $500,000 for a newly acquired division of a publicly traded Fortune 500 Company. The culprits included an hourly line clerk, human resources clerk, an administrative assistant and the human resources manager. Investigators detected the fraud while implementing the existing sound internal control system into the newly acquired division.