3 Basic Types of Financial Fraud That Can Harm a Business

Fraud comes in many shapes and sizes. It goes by several different names, including internal fraud, occupational fraud, or employee dishonesty.

There are three basic types of fraud:?

• Asset Misappropriation,
• Bribery and Corruption,?
• Financial statement fraud.?

We hear about?asset misappropriation?the most often, probably because they are the frauds that occur the most often and they’re the easiest schemes to understand. An asset misappropriation might include things like check forgery, theft of money, inventory theft, payroll fraud, or theft of services.

• Recent statistics show that asset misappropriation happens in over 91% of fraud schemes. This easily makes it the most common fraud, but statistics show that it is the least expensive fraud on a per-fraud basis.

The next most frequently occurring fraud scheme is?bribery and corruption, which is part of about 30% of all fraud that is uncovered. Bribery and corruption include schemes such as Kickbacks, shell company schemes, bribes to influence decision-making, manipulation of contracts, or substitution of inferior goods.

The least common type of employee fraud is?financial statement fraud. Although it occurs least frequently, in only 10% of all fraud cases, it is easily the most expensive. The average financial statement fraud costs a company approx $3 million. This type of fraud centers on the manipulation of financial statements in order to create financial opportunities for an individual or entity. Think manipulation of stock price, increased year-end bonuses, favorable loan terms, or other indirect benefits from the financial statement fraud.

Detecting and Preventing Accounts Payable Fraud

The accounts payable department often looks like the equivalent of a poorly guarded cashbox. Any time money exits a business, it flows through accounts payable. At most companies, that makes this function the most vulnerable and attractive opportunity for thieves both inside and outside the business.

It’s not always easy to see the signs, however, unless you know where to look. Fortunately, accountants have developed effective ways to not only spot accounts payable fraud, but to also reduce the chances of it occurring. Here are the main ways to detect accounts payable fraud in any business.

• Reconcile your accounts payable entries and your company checkbook monthly.?This single step will make it difficult for employees to write checks to themselves.
• Look for invoice oddities.?If invoices aren’t sequentially numbered, if there are gaps or skips, or two or more invoices have the same number, it may indicate that a false invoice has been created. If an examination of paper invoices reveals use of correction fluid, photocopied invoices, or invoices that appear to have been scanned and printed on a computer, investigate further.
• Check out check amounts.?If you see checks for amounts that are just below the threshold requiring additional review, a second signature, or another security measure, be suspicious. In other words, if your company’s threshold for review is INR 10,000, a check for INR 9999.99 should set alarm bells ringing. Also look for rounded amounts that don’t include any cents.
• Vet your vendors.?Cross-check addresses of vendors against employee home addresses. A match is a bad sign. Also look for checks sent to local post office boxes, addresses that seem to have more than one vendor, and vendor names that resemble well-known vendors.
• Smile and dial.?Look at the phone numbers on vendor accounts. No phone, an unlisted phone, a home phone, multiple vendors with the same phone, and phone numbers that are always picked up by answering machines should make your spider sense tingle.
• Trace transactions.?Be alert for unusual transactions, such as those taking place in faraway cities, occurring in the middle of the night, or involving amounts that are unusually large or unusually small.
• Be aware of the human factor.?Unhappy employees in accounts payable are almost a prerequisite for accounts payable fraud. Keep an eye on morale there, and ensure that pay, benefits, and other issues are addressed so that these employees don’t have reason to complain. Avoid excessive turnover here, and try not to hire temporary employees for these jobs.

Technology is an invaluable aide for sifting through your accounts payable entries. If your company processes a large volume of transactions through accounts payable, it’s almost a necessity. Even if you don’t have all that many records to check, you can use accounting, database, and spreadsheet software to go through your accounts payable quickly and accurately, looking for signs of trouble. For instance, you can merge the files for your employees and your vendors to scan for matching addresses, phone numbers, bank account numbers, and other identifiers.

The best way to handle accounts payable fraud is to prevent it to begin with. So reconcile accounts payable and your checkbook monthly, audit accounts payable for red flags regularly, and rotate different employees through the job of paying bills with the help of required cross-training and mandatory vacations for workers in that department. Your accounts payable may still resemble a stuffed cashbox to those inclined to larceny. But at least it will be locked up tight.