It is estimated that one out of every three people has been a victim of some type of fraudulent crime in their lifetime. This includes everything from identity theft to corporate espionage and embezzlement. This article is going to look at 17 of the most common frauds that occur in business. And then examine in depth, a number of the most effective methodologies for prevention. Not surprisingly, the front loaded investment of time and resources may be your best investment to prevent fraud in the workplace. But technology can help too. We will also touch on the importance of having a proper whistleblower policy as a part of the strategy. But this story begins with the organization which spends the entirety of its existence on the means and methods of uncovering and preventing fraud.
ACFE stands for Association of Certified Fraud Examiners. ACFE is an international professional association for fraud examiners, forensic accountants, and researchers who are trained in Fraud prevention. Their vision is to reduce the incidence of occupational fraud through communication, education, research, training, and technology. To achieve this vision they publish research reports that are used to raise awareness on occupational fraud topics regarding corporate governance, (non-corporate entities governance issues), compliance management, etc.
- What does ACFE do?
- What is ACFE’s mission?
- What is ACFE’s vision?
- What is fraud according to ACFE?
- What is the role of ACFE in helping companies?
- What is occupational fraud?
- What three things are required for fraud?
- What are the types of frauds in auditing?
- Does auditing prevent fraud?
- What is the difference between auditing and fraud examination?
- What is a fraud examiner?
- What is an internal auditor?
- What are 17 of the most common accounting frauds?
- What are the best accounting fraud prevention methods?
- How is technology is being used to prevent fraudulent financial reporting?
- What are the benefits of anti-fraud tools in financial statements?
- What are 7 strategic processes and controls in fraud prevention?
- How do Internal audit & compliance functions prevent fraudulent actions?
- How does professional skepticism among employees help prevent fraud?
- How much fraud it there in business?
- How does employee engagement affect fraudulent activities?
- How can we prevent fraudulent activities in business?
- What is a whistleblower policy?
- Why is a whistleblower policy important?
- Caveats, disclaimers & how to obtain reasonable assurance
What does ACFE do?
ACFE designs education programs to help employees in identifying frauds and reporting them at right time. They also conduct research to learn about different types of frauds occurring around the world. The ACFE has certified anti-fraud specialists in around 100 countries worldwide. ACFE has collaboration with law enforcement agencies for legal matters along with many other professionals to fight against fraud.
What is ACFE’s mission?
ACFE’s mission is to reduce and discourage incidents of fraud around the world and to help companies in containing loss from such scams. They help public at large by providing reports about types of scams happening all across the globe. Their research findings are made public so that they can help public to avoid becoming victims of these scams.
ACFE has designed courses to train people for identifying frauds and learning how to deal with them once identified. ACFE also helps companies in recovering losses by providing compliance management services which include new business strategy development, anti-fraud training, monitoring policies etc.
What is ACFE’s vision?
The ACFE has a vision of “A World Free Of Fraud.” To achieve this, they collaborate with public at large by providing access to the knowledge of their research findings so that people can use it in order to avoid being victims of frauds. The ACFE also helps companies in recovering losses by providing compliance management services which include new business strategy development, anti-fraud training, monitoring policies etc.
What is fraud according to ACFE?
ACFE defines fraud as ‘any act of deceit, deception, manipulation or misrepresentation, that is intended to mislead another person for the purpose of gaining an advantage or benefit at the expense of that person’.
They specify all types of frauds occurring in different sectors like marketing & sales etc. They provide examples and case studies to make people aware of different types of frauds and how to report it.
What is the role of ACFE in helping companies?
ACFE helps companies in containing their loss from fraud by providing them suggestions on upgrading their company’s anti-fraud programs according to the current market trends. They help employees in identifying red flags indicating a scam
What is occupational fraud?
Occupational fraud is any crime committed by someone who is employed in the workforce to defraud an employer, company or organization. It includes embezzlement, health care fraud, tax evasion and bribery.
What three things are required for fraud?
- Opportunity: Fraudsters must have access to opportunity.
- Motivation: Fraudsters need a strong belief that their actions are justified and not illegal; we often call this “the mental set.”
- Ability: They need the ability to carry out their intentions (which includes knowledge of how to commit the fraud and an understanding that it is wrong).
These three elements, when combined, form the recipe for fraud.
What are the types of frauds in auditing?
There are two main types of frauds that can happen in auditing. These are financial statement fraud and operational fraud.
- Financial Statement Fraud: This occurs when there is intentional misstatement of the company’s financial information including reports, accounts, records stockholder equity, or other elements found on a balance sheet.
- Operational Fraud: The other type is operational fraud, where the company exchanges its own products for cash or other forms of payment that should not be taken. If these payments are for items such as stolen merchandise or non-existent services, we would call it a “bust out” scheme.
Does auditing prevent fraud?
Auditing is one of the most important processes in any company where there are hefty transactions involved. It is done by accounting professionals who try to find out if the company is following all proper procedures and has done legal paperwork correctly. Any kind of fraud or illegal activities can be identified with the help of auditors, but they cannot prevent it from happening.
Qualified professionals can identify the smallest of discrepancies, but they cannot prevent it from happening; auditing is meant to be reactive not proactive. Auditors check records provided by companies at different levels like subsidiaries or suppliers for any form of suspicious activity like embezzlement or fraudulent accounting records.
They also examine internal controls that can either help in preventing fraud or catch fraud when it occurs. Internal Control are strategies or policies used to achieve management’s objectives with regard to fraud risk.
What is the difference between auditing and fraud examination?
The difference between auditing and fraud examination are the targets they focus on. Auditors’ target various financial reports, managers’ fiduciary responsibility, compliance with regulations and laws, etc. A fraud examiners’ targets are not only at the financial reports level but look at whether criminal acts have been committed or not. They also care about the interests of all parties involved in the fraud, not just the organization.
What is a fraud examiner?
A fraud examiner is an independent investigator whose role is to assist in fraud detection by using scientifically derived, non-criminal methods . Fraud examiners are trained in various disciplines such as accounting, law, finance and criminal justice. They understand possible fraud trends. Thus, they can recognize when fraud exists or will exist, and how to detect it early. The fraud examiners’ primary role is to detect and prevent fraud using audit methodology.
A fraud examiner is not usually considered an internal auditor (even if their job description includes assessing internal controls) . However, it is possible that both jobs can co-exist in one organization. Fraud examiners work alongside auditors, but they are not required to report their findings up the management chain, unless it is related to fraud. Instead, they are encouraged to implement corrective measures which mainly involve enforcing compliance with established controls.
What is an internal auditor?
An internal auditor is an independent assessor who helps plan, coordinate, conduct, control and report on the internal controls within an organization. Their objective is to assess the extent of risk that there might be material misstatement in financial records due to error or theft . They usually work with the board of directors and other staff. They are assigned to the bookkeeping department, but they will report directly to senior management.
What are 17 of the most common accounting frauds?
Some of the most common accounting frauds that appear in the financial statements include:
1. Accounting Irregularities: Irregularities occur when a company fails to classify or improperly classifies transactions on its books and records. The objective is usually to hide money from others by hiding it among legitimate transactions, making it hard for others to detect. A classic example of this is recording revenue before it is earned or expenses after they are incurred.
2. False Financial Statements: A false financial statement is an intentionally falsified, “official” statement of a company’s finances by someone within the organization to mislead others into thinking that the organization has no problems financially when in fact it does.
3. Income Theft: This type of fraud occurs when either an individual or a company sets out to steal money from another company. Income theft is also known as skimmed sales, skimming, churning, kiting or boosting.
4. Overstatement of Assets: An overstatement of assets occurs when a person records fictitious inventory items on the books of his employer in order to inflate the company’s assets and, thus, its stock value.
5. Billing Fraud: This type of fraud involves inflating the expense and/or revenue accounts in order to manipulate the profits on a company’s books and records for personal gain.
6. Cash Smuggling: Cash smuggling is the secretive transfer of large sums of cash across borders to avoid reporting the movement of money through customs.
7. Fraudulent Sales: Fictitious sales transactions are created with either nonexistent customers or for goods that were never actually sold to them. Other fictitious transactions may be created in order to inflate revenues on the books and records of a company. Transactions may be real or completely false; they can include invoices or quotes that have not been paid, or claims for payment of nonexistent products.
8. Billing Errors: Billing errors occur when a company overcharges a customer and keeps the excess money, usually by accident. They may also occur when a company undercharges a customer for an item but then records the amount as revenue from sales on its books and records.
9. Fraudulent Debt: A company commits fraudulent debt when it records revenue before the transaction is actually completed, often by overstating how much was sold. The company may also record expenses for nonexistent sales transactions or sales that were never completed to reduce its taxable income on its books and records.
10. Revenue Theft: Revenue theft is the unauthorized withdrawal or adjustment of money from a company’s bank account. A person might, for example, put an invalid deposit slip on a pile of real deposit slips and withdraw cash at the bank.
11. Asset Misappropriation: Asset misappropriation occurs when someone in possession of assets belonging to another party chooses to use those assets for personal gain. The asset may be an entire business or a part of one, such as inventory or accounts receivable.
12. Payroll Misappropriation: Payroll misappropriation occurs when someone falsifies records or uses fraudulent methods to obtain money from the company’s payroll account, often by inflating wages for employees so their paychecks will contain more than their actual earnings.
13. Fraudulent Issues: Fraudulent issues is the creation of unapproved securities or share capital without shareholder approval and/or counterfeit or unapproved debt instruments intended to be sold to the public.
14. Revenue Recapture: Revenue recapture occurs when a company that has collected sales tax, VAT, excise taxes or other taxes on behalf of the government fails to remit those taxes to the appropriate authorities.
15. Software Piracy: Software piracy occurs when software is duplicated and used or distributed without paying royalties to the copyright owner. This most often involves copying commercial software for personal use, but may also include creating unapproved copies of proprietary software for sale in foreign markets.
16. Stock Manipulation: Stock manipulation occurs when someone buys or sells shares of company stock with the intent of artificially affecting the price, often by spreading false information about the company’s performance. Once the share price has risen, this person may sell his shares at a profit; if it drops, he can buy back in later for less money than he originally used.
17. Insider Trading: Insider trading is the act of using proprietary or privileged information to illegally buy or sell securities, commodities or currencies that are traded in markets where such information is not yet available to the public. Insiders usually attempt to make trades based on nonpublic inside information, which they use for their own purposes (for example, to make a profit on a trading tip).
What are the best accounting fraud prevention methods?
There are many ways to prevent fraud, but some of the top methods include:
- Leveraging technology
- Strategic processes and controls
- Training & awareness
- Internal audit & compliance functions
- Professional skepticism among employees within the organization
While each of these methods have their own strengths, an organization should always consider a multifaceted approach to fraud prevention.
How is technology is being used to prevent fraudulent financial reporting?
There are three main types of software companies are using to detect fraud. Rule based, statistical and decision tree – classification based.
- Rule based – this is also referred as expert systems; it sets rules on what transactions to flag for further investigation and which ones to automatically approve. It takes into consideration who the customer is, what they normally buy and how much money they usually spend.
- Statistical – uses historical information on purchases to flag an item as high risk or low risk. For example, if the customer usually spends under $100 on clothing every week but makes a purchase for $2,000 then that transaction will be flagged as fraudulent. This statistical software is more advanced than rule based systems because it uses all the data available before making its decision.
- Decision tree – the most advanced of the three types, it works in a similar way to statistical software but its advantage is that if new information about an account is found then it re-evaluates the fraud score. For example, if you are looking into a fraudulent transaction with high risk level and find out that line items were made last year therefore the account is not as high risk as originally thought.
These types of software work great together to bring the most accurate results. For example, rule based systems flag certain transactions as high risk and statistical software can be used to verify those transactions. If a transaction does not fall under the rules from the rule based system then it is automatically approved and if it does fit under the rules of statistical software, it is flagged for further investigation.
Both rule based and decision tree software allow Businesses to create customised parameters to meet their specific business’s needs.
What are the benefits of anti-fraud tools in financial statements?
Using technology to detect fraud helps businesses maintain an efficient method of transaction processing, providing a secure environment for their employees and to maintain strong relationships with their customers.
What are 7 strategic processes and controls in fraud prevention?
Strategic processes and controls in fraud prevention is a way for businesses to prevent fraud from happening; it’s the first line of defense. Strategic processes and controls include:
- Business ethics – this includes all the things that businesses do on a day-to-day basis like treating customers fairly, ensuring employees don’t abuse their power etc. If managers, employees and staff are always aware of fraud, it will make it easier to identify fraud.
- Business planning – planning processes should include fraud prevention measures from the beginning, from selecting vendors to setting up a database that holds all the necessary information about your customers. Businesses can also hold fraud awareness training or present fraud awareness materials at meetings.
- Business process management – ensuring that all internal controls are in place and that fraud is prevented during the process of transactions, should be managed throughout.
- Business control environment – this looks at how fraud can be prevented based on the company’s business environment. For example, for companies who do a lot of internet sales, setting up fraud detection software will prevent fraud from occurring.
- Business system environment – this involves ensuring that the right fraud detection tools are in place to protect your business, taking into consideration risks and vulnerabilities. This will help ensure that fraud prevention is set up immediately and there is not a time lapse between when fraud occurs and when it is detected.
- Business action – implementing effective controls during transactions. For example, when a fraud is detected the business will do things like raising an alarm and contacting law enforcement.
- Business strategy – devising ways to prevent fraud such as incorporating fraud prevention into your mission statement. Fraud prevention should be reviewed continually in case any changes need to be made in order to adapt to new technology or vulnerabilities that can occur because of new business practices.
How do Internal audit & compliance functions prevent fraudulent actions?
Internal audit and compliance functions can prevent fraudulent actions by auditing for fraud in a company. Internal Audit or an audit by an external agency, is an independent function that reports to the board, investigates risk areas or concerns identified by management, and provides solutions to improve operations within the organization. In addition to conducting audits, internal auditors implement controls and reporting mechanisms designed to prevent fraud from occurring. Compliance functions are generally performed by an employee or group of employees within or outside the organization’s operations. The compliance function ensures that all laws, regulations, and other types of legal statutes are being adhered to in business transactions.
How does professional skepticism among employees help prevent fraud?
Professional skepticism helps prevent fraudulent activities from going unnoticed in a company. As more and more people become aware of the risks of fraud, they are also given more power to report it. Employee engagement is an important factor when preventing fraud within a company because employees you interact with on a daily basis are the ones most likely to notice fraudulent activities.
While some employees may not be naturally skeptical of their coworkers, it is important that they still maintain this sort of mindset when at work. Professional skepticism can be cultivated in all employees by engaging employees in exercises designed to raise awareness of the risk of fraud, implementing regular fraud awareness training and encouraging employees to be vocal when they get an inkling that something is amiss.
How much fraud it there in business?
Fraudulent activities are on the rise globally, with a total loss of in the trillions dollars worldwide. According to ACFE survey results from 2020, organizations have been rocked by this trend of fraudulent activity, with nearly half of respondents agreeing that fraud has reached epidemic proportions within their industries. Employee engagement is key to combating this growing threat. Employees who are skeptical of the goings on of their colleagues will be more likely to catch fraudulent activity before it does any real damage.
How does employee engagement affect fraudulent activities?
According to ACFE research, engagement has been found to be positively correlated with prevention of fraud. Employees who are more engaged in their work and employers are more likely to be less likely to participate in fraud. A lack of professional skepticism is also indicated as a factor for organizations that failed to implement effective internal controls. This is because, according to ACFE research, the more engaged employees are with their work, the more likely they are to report systemic issues within an organization where it may be more difficult to conceal fraudulent behavior.
How can we prevent fraudulent activities in business?
The first step when fighting fraud is to raise awareness of the risks involved and this can be done by implementing a regular training schedule that enhances the perception of risk for both management and employee levels.
For example, fraud awareness training can be implemented at least once annually to remind employees of the risks involved. It is important to reinforce the notion that fraud doesn’t always have to take place on a massive scale for it to negatively impact an organization. Fraudulent activity may not necessarily carry with it negative consequences right away, but they can accumulate over time, as one fraudulent activity compounds the effect of another.
For example, a small-scale embezzlement can compound into a larger-scale embezzlement if it is not reported. To prevent this from happening, employees should be encouraged to report any unusual activity they see. It is also important for management and senior level staff to demonstrate their commitment to reducing fraud by publicly acknowledging and punishing fraudulent behavior and rewarding the reporting of such behavior. This type of accountability sends a message that management will not tolerate it and can help discourage others who may be considering fraudulent activity. It is important to have a Whistleblower policy in place first.
Another way to raise awareness of the risks involved in fraud is by encouraging employees to report any suspicious activities. There are proven ways to do this, which include implementing anonymous reporting programs and keeping up with on-going training for employees who may be dealing directly with company funds. Doing so makes it more likely that an employee will come forward to report any suspicious activities that they see.
Many companies incorporate internal auditing within their fraud prevention plans, which is important for both management and employee levels of an organization. This can be done by giving employees the tools they need to identify fraudulent activity while also acting as a deterrent by showing offenders that detection methods are in place. This will help prevent them from engaging in fraudulent activities.
Another option is to work with other companies and organizations, such as banks and law enforcement agencies, to combat fraud. There are many ethical reasons for an employee not to engage in fraud, but this is another good deterrent. Having outside support can help prevent employees from committing fraud by showing them that they will be held accountable for their actions if caught.
Fostering an ethical culture within a company or organization sets the stage for preventing fraud and supporting those who do so responsibly. As it turns out, knowing what to look for in the workplace is not the only thing that’s important. A company’s ability to identify and prevent fraud also depends on its employees, who serve as the first line of defense.
What is a whistleblower policy?
A whistleblower policy is a policy that allows an individual to report wrongdoing or possible violations of law or company policy without fear of retribution. The whistleblower may be any employee within the organization who feels they have witnessed conduct that is unethical, against company policy, or illegal. Whistleblowers are encouraged to speak out when they see something wrong because if they don’t it can lead to more serious consequences. Employees who report wrongdoing are protected under law by the False Claims Act of 1986, which encourages people to come forward if they see anything that isn’t right.
Why is a whistleblower policy important?
A company’s vulnerability to fraud increases when it does not have an effective system in place for encouraging whistleblowers to report misconduct. This is because employees who see wrongdoing or suspicious activity may not come forward for fear of retaliation. An effective whistleblower policy will protect the employee from any type of unlawful discrimination, verbal abuse, demotion, firing, along with losing benefits and bonuses. A proper whistleblower policy will also provide protection to an anonymous whistleblower if they feel that it would be unsafe to identify themselves. Employees will usually report wrongdoing if they feel that there is a system in place for them to do so without being punished.
Whistleblower policies should have clear, concise language and must also state the protection afforded to employees who choose to speak out about possible misconduct. A successful policy will detail how an employee should go about reporting the activity and how it will be handled by management. A company that has an effective whistleblower policy is more likely to have employees who are willing to report wrongdoing, which makes it possible for them to protect themselves from fraud.
As with most policies, training is very important in order for employees to understand what they need to do if they witness misconduct. Management should provide ongoing training to employees so they have a better understanding of how the policy works and what types of behavior it protects them from, along with what not to do if they observe something that may be in violation. The whistleblower policy will specify where potential violations can be reported and what kind of information needs to be included when reporting a violation. Finally, the policy will state what employees can expect if they report something.
Generally speaking, having a whistleblower policy is one of the most effective ways to prevent fraud because it encourages employees to speak up before misconduct gets out of hand. If an employee knows that they will be protected for coming forward, they are more likely to stand up against unethical activity and be the first line of defense against companies who may take advantage of employees and customers.
Caveats, disclaimers & how to obtain reasonable assurance
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Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SME’s and Investment professionals focusing on ESG principles. Their primary goal is to help middle market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, Uk, Europe and the global community. If you want to get started, don’t forget to Get the Checklist! ✅