Question

Compare and contrast the various types of occupational fraud schemes. Fully describe how each type of scheme impacts the financial statements, how each type is discovered, and how revisions to the existing internal control system would likely reduce the risk of those fraudulent activities. Include a biblical application in your analyses.

Answer 1

Solution:-

Every company must have a deliberate plan to prevent and detect fraud, and must never underestimate the potential of an attack from within.

According to the 2014 Report to the Nations on Occupational Fraud & Abuse, the typical organization loses 5 percent of its revenues to fraud each year.

To understand how to prevent fraud, leaders must first understand the types of fraud they’re most likely to encounter. According Bernie Brown, CFO, Coppermine Bakery Holdings, the three major categories (asset misappropriation only, corruption along with asset misappropriation, and financial statement fraud) can each devastate a business financially and reputationally.

Asset Misappropriation

According to a recent study, of the three primary categories of occupational fraud, asset misappropriations are by far the most common, occurring in 89 percent of the cases in the study. However, they are also the least costly, causing a median loss of $114,000.

The scheme involves an employee who steals or misuses the organization’s resources, theft of cash, billing, or inflated expense reports.

The types of cases are noncash (21 percent), billing (20 percent), expense reimbursement (14 percent), check and payment tampering (12 percent), cash larceny (11 percent) and payroll (7 percent). Of those, check and payment tampering represents the highest median loss at $150,000.

“Every once and awhile someone can work through the IT systems and they can add a charge to every invoice,” shared Brown at FEI’s 2018 Financial Leadership Summit. “And that adds up and they can funnel the money on the back end.”

Brown also shared that expense reimbursement is hard to catch. He gave the example of employees signing up for travel and asking that the company pre-pay their ticket. They may put the travel on their credit card and cancel the trip. “You’ve got a hundred people traveling. How do you know Joe didn’t go on the trip he booked three months ago?”

Corruption

In corruption cases, Brown shared, you’re often dealing with senior management. In fact, seventy percent of corruption cases were perpetrated by someone in a position of authority (38 percent were managers and 32 percent were owners).

This type of fraud, which involves an employee who misuses his or her influence in a business transaction to gain direct or indirect benefit, bribery, or conflicts of interest, is the next most common form of occupational fraud. Thirty-eight percent of the cases in the study involved some form of corrupt act. These schemes resulted in a median loss to the victim organizations of $250,000.

Financial Statement Fraud

The least common, but most costly form of occupational fraud is financial statement fraud, which occurred in 10 percent of the cases and caused a median loss of $800,000.

Prevention

According to the last ten surveys conducted by the Association of Certified Fraud Examiners, the tip six red flag behaviors have not changed. While eighty-five percent of fraudsters displayed at least one of the following behaviors, fifty percent exhibited multiple red flags:

• living beyond their means
• unusually close association with vendor/customer
• financial difficulties
• wheeler-dealer attitude
• control, issues, unwillingness to share duties
• divorce/family problems

There are many ways to detect fraud in your business. Brown suggests holding birthday roundtables in which employees born in that month gather to raise questions or concerns with the manager and HR representative. Employee reviews can also be very useful, as those with financial problems may push harder for a bigger increase. Company events can serve as a good time to check in with spouses. Employee surveys can also be very effective.

Brown urges leaders to have deliberate plans to prevent fraud such as:

• Meeting with board and senior management and showing the facts
• Enlisting support to take the problem seriously and set the proper tone from the top
• Review the top internal control weaknesses
• Create a plan and align the resources in your organization to take action
• Execute and review the plan and its effectiveness on a an annual business

Every company must have a deliberate plan to prevent and detect fraud, and must never underestimate the potential of an attack from within.