Fraud & Unfairness

The topic of fraud has occupied sections of media and our daily conversations for some time now. This is partly because fraud affects possibly everyone whether as an organization or as an individual. Besides, how to handle fraud, whether at the point of prevention, detection or investigation is also an underrated puzzle, due to its complicated and dynamic nature, limited literature and low numbers of anti-fraud professionals available in the planet.

"It is important to note that unfairness may not necessarily result to loss of cash or assets but it can lead to distress in an organization or ultimate closure of operations"

Unfairness goes against a critical principle of corporate governance (fairness) and has had several ramifications ranging from low staff morale, fraud, lack of value for money, to bad reputation on an organization among its various stakeholders. It is important to note that unfairness may not necessarily result to loss of cash or assets but it can lead to distress in an organization or an ultimate closure of operations.

It is interesting, however, that despite fraud and unfairness having a negative impact on our daily lives, the level of awareness on how to identify, respond and deter it is worryingly low. In this particular article, we take a look at different forms of fraud and unfairness, then tackle the costs, causes, and how to prevent, detect and respond to fraudulent and unfair behavior in the succeeding articles.

"Put more simply, fraud refers to a deliberate act to deprive another of money or asset by means of deception or unfair ways. That said, fraud can be classified in various ways depending on what needs to be achieved"

But for starters, what really is fraud? According to Black’s Law Dictionary, fraud refers to multifarious means which human ingenuity can devise and which are resorted to by one individual, to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning or dissembling and any unfair way by which another is cheated. Put more simply, fraud refers to a deliberate act to deprive another of money or asset by means of deception or unfair ways. That said, fraud can be classified in various ways depending on what needs to be achieved. It can be classified by magnitude ranging from petty fraud, grand fraud, to plain looting. It may also be classified as asset misappropriation, corruption and financial statements fraud, loosely referred to a “cooking of books”. Fraud can also be classified in terms of organizational functions to include procurement fraud, HR fraud, Tax fraud etc and in terms of industry or sector to include schemes such as banking fraud, insurance fraud, heath care fraud etc. All these definitions must be taken into consideration when coming up with the various approaches of fighting and eradicating fraudulent and unfair activities in an organization or on an individual.

Let us start by examining asset misappropriation for example. One of the methods to perpetrate fraud is through skimming that involves an employee selling goods or services, collecting the associated payments but does not declare the sale. Skimming schemes are concealed through either understating sales, theft of cheques, crediting one account using cash collected from other debtors, forcing account balances, manipulation of sales data false accounting entries, inventory padding etc. The second form of asset misappropriation occurs where an employee intentionally takes cash/asset belonging to an employer against the latter’s will and knowledge. This form of asset misappropriation is fondly referred to as cash larceny and is executed through various ways among them, reversing of transactions, failure to make scheduled bank deposits, declaring stolen cash as “cash in transit”, and intentional alteration of cash count records.

Fraudulent disbursements is another form of misappropriation where an employee distributes company’s funds to various recipients for a dishonest and unintended purpose. Most fraudulent disbursement schemes center on irregular refunds, tampering of cheques and electronic payments, improper billing, payroll manipulation and irregular expense reimbursements. The last major form of asset misappropriation occurs through misuse and theft of inventory and other assets perpetrated through wrongful use or transfer to a perpetrator, accomplice or a fictitious person or company. Asset misappropriation is the greatest fraud scheme accounting for massive losses and organizations should be keen to counter the schemes.

The next form of fraud is corruption. Corruption refers to wrongful acts geared towards conferring an unfair advantage to an individual or an institution. Corruption takes many forms that include bribery, kickbacks, conflict of interest, impermissible gratuities and illegal extortion. Corruption is a frequent form of fraud and organizations should take great precaution to avert the great loss of reputation that comes with it.

Financial statement fraud is also a common form of fraud. Although financial statement fraud may not result in a direct loss, indirect losses such as irregular bonuses to officials, understated taxes, and stock overvaluation are imminent risks of losses to various stakeholders. Various schemes under financial statement fraud include, inter alia, asset and revenue overstatements or under statements occurring through timing differences, fictitious revenues, concealed liabilities and expenses, improper valuations and improper disclosures.

"For instance, an emerging form of fraud popularly referred to as “budgeted fraud” occurs at the initial stage of procurement budgeting and planning."

In determining the various fraud schemes to lay emphasis on, it is key that an organization determines its impact on profitability (revenues and expenses), balance sheet (assets and liabilities), shareholders wealth (can be affected by loss of reputation) and the organization's social responsibility. For example, procurement/contract fraud may result in huge losses, emanating from each and every procurement/contracting step. For instance, an emerging form of fraud popularly referred to as “budgeted fraud” occurs at the initial stage of procurement budgeting and planning. It is therefore paramount for an organization to ensure watertight processes on procurement from pre-solicitation, solicitation, contracting and administration stages of procurement of goods, services and works.

For individuals, it is critical to remain attentive on the various fraud schemes that may be executed, including social engineering, con schemes, telemarketing schemes, Ponzi/Pyramid schemes, identity theft and related cyber-fraud. Organizations should be keen (and be seen to be keen) in helping their customers not fall victims to consumer fraud schemes.

It may take not just one article to fully exhaust the various forms of fraud, but as a general guide, fraud and unfairness can fall into categories namely; fraud and corruption, collusive, coercive and abusive practices, acts of obstruction or retaliation, money laundering and terrorism financing, and sexual harassment, exploitation and abuse. In determining whether it’s a malpractice, it is important to establish whether there is a gap between the management/stakeholder expectations and employee/third party actions.