Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Organizations in the United States lose hundreds of billions of dollars per year to fraud.
Many believe that most frauds against organizations are never reported to law enforcement authorities to avoid negative publicity and legal liability.
Many companies actually consider employee or vendor theft as a cost of doing business.
Law enforcement is likely to choose not to pursue an embezzlement case involving a only few hundred or even thousand dollars.
Frauds can sometimes be hard to prove without a confession.
The fraud triangle helps to explain who commits fraud.
Pressure Usually related to financial pressure such as large medical bills, gambling problems, drug habits, and extravagant living.
Opportunity Required to commit fraud.
Rationalization Likely depends on the type of criminal and the criminal’s personality type or possible personality disorder.
Basic Sales Skimming
“Your meal free if you don’t get a receipt.”
Advanced Sales Skimming
Forged receipt for service
Anecdote about “business on the side”
Checks Swapped for Cash
Automated check approval; don’t take checks?
Cash Box Robbery
If sales, cash not reconciled
Shortchange Sales (by the clerk)
Mail Room Theft
(These frauds overlap revenue cycle frauds)
Cash stolen in transmission
Lapping of accounts receivables
Short bank deposits
Noncustodial theft of money
Fraudulent credit approvals Dishonest employees could intentionally engage in fraudulent credit approval by granting credit accounts to fictitious customers.
Improper credits Accounts receivable clerks could make improper credits to friends’ accounts.
Improper write-offs Employees also could make improper writeoffs to friends’ accounts instead of sending the accounts to collection.
Improper Purchases and Payments
Fraudulent Purchases to Related Parties
Misappropriation of Petty Cash
Abuse of Company Credit Cards or Expense Accounts
Theft of Company Checks
Theft of Inventory and Other Assets
Improper changes to employee personnel files for pay raises
Improper work-related reporting
Production cycle fraud involves theft of raw materials and finished goods.
Waste, Scrap, and Spoiled Goods
Other Types of Employee Fraud
Financial Statement Fraud
Many other employee fraud schemes are not discussed here.
Short shipments A company is susceptible to paying for goods not received if it does not count its incoming shipments and match the counts against purchase orders and vendors’ invoices.
Balance due billing Some vendors send their customers statements that show only the balance due. Companies whose vendors bill this way are at high risk for being overbilled.
Substandard goods Vendors can ship substandard goods if the receiving company does not have a method of receiving and inspecting goods.
Fraudulent cost-plus billing
Input manipulation (the most common mode of attack)
Abuse of Access Privileges
Direct File Alteration (bypass normal access software)
Program Alteration (requires access and technical skill)
Data Theft (hard to detect and prove)
Sabotage (typically by disgruntled employees)