In my roles as Head of Internal Audit and International Forensic Co-ordinator, in both Philips and De Beers, I have had many years of experience investigating frauds. Based on this experience I have put together my personal “top ten” list of common types of fraud. I recommend that you also read Ten Reasons Frauds Occur (click here to read it).
1. Falsification of expense claims – an old favourite with both senior and junior staff. Common “ruses” include; inflating mileage claims, entertaining friends and relatives at the company’s expense and claiming for expenses never incurred by stating that “the receipt must have been mislaid”.
2. Stealing money from the company bank account – the perpetrator having got away with this once, will usually try it again and again; until it is discovered. I personally reviewed a case where the perpetrator had been routinely helping himself to company cash for some twenty years.
3. Manipulating sales figures so as to reach target and achieve bonus – a simple version of this involves booking sales in one month (usually a quarter end) then crediting them back the next. Naturally unless the perpetrator keeps this “teeming and lading” up, the overstatement in one month will be shown as a shortfall in the next. Another, well worn, version of this involves booking orders as sales.
4. Falsifying supplier invoices – this is a little more daring, one case I have on record involved a senior manager who had some substantial renovation work carried out on his house. He then arranged for the invoices from the contractor to be sent to the company, posing as costs for work carried out on company premises.
5. Theft of stock – a time honoured way to make a “fast buck”. The perpetrator will over a period of time abscond with a number of items from the warehouse, and resell these to friends, family and members of the public. So long as the stock losses are within tolerance, then it is possible for this “scam” to remain undetected for a significant period of time.
6. Transactions that are not “arms length” – when a well run company asks for tenders for a service contract with a third party they usually obtain at least three closed quotes. The best value quote should then be selected. When the system does not run effectively, there is an opportunity for friends and relatives of the purchasing department to send in quotes that are accepted; bypassing the quotes from reputable suppliers. “Arms length” also applies to sales transactions where the purchaser bribes the salesman in return for a favourable contract.
7. Tax evasion – fraud on the corporate level. Excessively complex organisational structures are created, designed to obfuscate the revenue streams; and so hide reality from third parties, such as the Internal Revenue Service. Enron, with its complex off balance sheet structure and transactions, is a textbook example of this.
8. Fictitious invoicing – where there are poor accounting controls and insufficient segregation of duties in the F&A department the fraudster, if suitably positioned, can arrange for invoices (for services never delivered) from connected parties to be passed for payment.
9. Acquisition of company property at less than market value – this requires the collusion of at least two people (usually quite senior). Company property, such as fixed assets, offered for sale is “sold” to one of the individuals at a bargain price approved by the other. The property is then resold at market value, and the profit split.
10. Theft of raw materials – manufacturers should measure the quantities and costs of the raw materials used in the manufacturing process. Some processes use expensive materials, such as gold. When the measurement system has been compromised, or management do not investigate adverse yield variances, the fraudster has the opportunity to steal the raw material and sell it to third parties.
As I have noted this is my personal top ten, believe me there are many other types of frauds that have been, and are being, perpetrated.