Fraud and corruption is real and results in actual financial loss to entities. It is important for all parties involved in the conduct of business to understand occupational fraud to be in the best position to respond appropriately, thereby mitigating the potential financial loss.
Fraud and corruption have escalated into a way of life, causing entities to lose an estimated 5% of their annual revenue. Entities do not only face attacks from external parties but also from their own employees, managers, executives and even the owners of the business. This is referred to as occupational fraud. Understanding occupational fraud schemes can assist entities in improving their anti-fraud controls to prevent or detect this type of fraud. This article based on the Association of Certified Fraud Examiners’ (ACFE) survey results as published in the 2018 Report to the Nations aims to shed light on occupational fraud schemes.
Analysis of the survey results
The survey analysed 2 690 international fraud cases, which included 267 Sub-Saharan and 87 South African cases. This survey also included an analysis of entities of all sizes. Occupational fraud at smaller entities (<100 employees) made up 28% of the total cases, 22% of the cases were at entities with between 100 and 999 employees, 26% at entities with between 1 000 and 9 999 employees, and 24% of the total cases occurred at entities with more than 10 000 staff members. With respect to smaller entities, a concern was noted in that they suffered a median loss of $200 000 − almost double the loss compared to larger entities (>100 employees), who suffered a median loss of $104 000.
The survey classified occupational fraud into three primary categories, namely corruption, asset misappropriation and financial statement fraud, as depicted in figure 1.
Figure 1 Occurrence and median loss of primary categories
*Some cases involved more than one primary category.
The total percentage of occurrence per category amounted to 137% because certain individual occupational fraud cases involved fraud being committed in more than one primary category by a single perpetrator. Asset misappropriation schemes was the most common (89%) but had the lowest median loss ($114 000). On the other hand, financial statement fraud schemes were the least common (10%) but had the highest loss, with a median of $800 000. Corruption lies in the middle at 38% with a median loss of $250 000.
Occupational fraud scheme: asset misappropriation
Asset misappropriation as depicted in figure 2 involves schemes in which the perpetrator steals or misuses the entities resources.
Figure 2 Occupational fraud schemes
Asset misappropriation schemes involve either non-cash or cash schemes. Non-cash misappropriation is any scheme where the perpetrator steals or misuse non-cash assets of the entity. Cash schemes involve three methods, namely theft of cash on hand, theft of receipts, and fraudulent disbursements. Theft of receipts can be committed through skimming or cash larceny, while fraudulent disbursements can be committed through billing, payroll and expense reimbursements schemes; cheque and payment tampering; and register disbursements.
These schemes can be explained as follows:
- Skimming is the act of stealing from an entity before the incoming payment has been recorded in the entities books.
- Cash larceny is when money is stolen after it has been accounted for.
- Billing schemes involve the creation of invoices either for fictitious goods and/or services, or at inflated prices.
- Payroll schemes involve false claims for compensation, for example claiming for overtime that was not worked, or the creation of ghost employees.
- Expense reimbursement schemes involves claiming for fictitious or inflated expenses.
- Cheque and payment tampering is committed through intercepting, forging or altering payments.
- Register disbursement scheme involves employees making false entries on a cash register to conceal the fraudulent removal of cash.
Other occupational fraud schemes
Financial statement fraud is committed when the perpetrator intentionally causes a misstatement or omission of material information in the entity’s financial reports. The goal can be to either over or understate the net worth or income of the entity. This can be achieved through timing differences, fictitious or understated revenues, concealment or overstatement of liabilities and expenses, improper asset valuations and improper disclosure.
Corruption occurs when the perpetrator misuses his/her authority in a business transaction in a way that breaches his/her fiduciary duty to the entity in order to gain a benefit. It can occur when there is a purchasing or sales scheme that creates a conflict of interest, bribery that can occur through invoice kickbacks or bid rigging, illegal gratuities and economic extortion.
Entities of all sizes must be committed to the development, implementation and maintenance of anti-fraud controls to address this ever-lurking occupational hazard.
Jana Lamprecht CA(SA) is Senior Lecturer at the School of Accountancy at the University of Free State.
This article was originally published in the August 2018 issue of ASA.