so fraud is more likely to be uncovered. Companies should have a proactive approach to fraud protection to avoid increases in the level of fraud. Organizations need to be taking a profit-and-loss approach to fraud risk. If companies continue to take a reactive approach to preventing fraud, it will continue to rise year after year. You cannot design all fraud risk out of a business, but you can put tripwires in place.
Chapter 2
Types of Occupational Fraud and Corruption
MOST OCCUPATIONAL FRAUD AND CORRUPTION SCHEMES use one or more of the following embedded techniques: abuse of power, embezzlement, misuse of business time, computer fraud, stock and equipment pilferage, and expense abuse.
• Abuse of power. This scheme involves making inappropriate financial decisions to benefit the employee rather than the organization. For example, the employee signs contracts with more expensive outside vendors and receives a kickback in return. Kickbacks are a form of corruption, also defined as an abuse of one's position of power.
• Embezzlement. One of the most common occupational frauds is the manipulation of accounting records to steal business funds. Financially astute employees may be able to devise sophisticated schemes to cover their theft. This is called misrepresentation, one of the characteristics of fraud.
• Misuse of business time. Employees who perform nonwork-related functions while at work are committing fraud because they are depriving the business of employee productivity during that time. The act of fraud itself is also included in this category. Alternatively, running a personal business from the employment office constitutes theft of time, as does the time occupied by committing fraudulent activity.
• Computer fraud. The advent of modern technology has provided more opportunities for employees to commit computer or electronic fraud, facilitating the electronic manipulation of business funds so as to deposit them into personal or other third-party accounts. Not only do computers facilitate the fraudster's activities, but they are also essential in fraud detection.
• Stock and equipment pilferage. The theft of stock and capital equipment such as laptop computers, furniture, printers, and so on.
• Expense abuse. Disguising personal expenses as business expenses in order to steal funds.
A Myriad of Fraud Schemes
Within the three types or classifications of corruption, asset misappropriation, and fraudulent financial statements, the list of occupational fraud types, schemes, and methodologies is endless and includes the following:
• Theft. The intent to permanently deprive another, usually of either assets or money.
• Procurement fraud. Stealing items purchased or the funds intended to pay for those purchases and covering the theft by false accounting entries.
• Bribery. Offering or requesting, paying or receiving anything of value with the intent to influence actions, inactions, opinions, or decisions, usually paid up front.
• Corruption. The abuse of a position of power to gain an advantage.
• Embezzlement. When a person entrusted with safeguarding an organization's money or property misappropriates it for his or her own benefit.
• Computer sabotage. Using a computer virus or some other highly technical method to incapacitate the business's computer system with a view to extortion.
• Counterfeiting. The copying or imitating of an item or document without due authority and passing the copy off as being an original.
• Forgery. An unauthorized change to a real or original document, which is then used to deceive in order to obtain an advantage.
• Credit card fraud. The unauthorized use of a credit card to obtain value and personal gain.
• Extortion. Illegally obtaining property from another by actual or threatened force, fear, or violence.
• Financial statement fraud. Reporting incorrect results or facts in the financial statements in order to deceive the reader and user. Such fraud can be committed by omission.
• Insider trading. Using inside, confidential, or advance information to trade in shares and obtain an advantage.
• Intellectual property theft. The theft and sale of cutting-edge technology by employees from their employers.
• Kickback. Paying an employee a portion of an inflated purchase price as a reward for facilitating the deal, usually after the event.
• Bank fraud. Engaging in activity where fraudulent transactions go through a bank.
• Money laundering. The movement of the proceeds of crime to disguise the illegal source.
It is usual, and perhaps a good time now to note, that the counterfeiting and forgery methodologies are quite often those used to hide the misrepresentation implicit in the fraud act itself and are fundamental to most forms of organizational fraud and corruption.
Cybercrime
Cybercrime warrants a separate discussion as a methodology or fraud type as it has specific advantages to the fraudster and corresponding challenges to the investigator, enabling the fraudster to effectively remain anonymous, thereby camouflaging his profile. The threat of cybercrime is growing, according to the Association of Chartered Certified Accountants' February 2012 edition of Accounting and Business international magazine. Cybercrime is now ranked as one of the top four economic crimes, after asset misappropriation, accounting fraud, and bribery and corruption, according to PricewaterhouseCoopers' (PwC) Global Economic Crime Survey 2011. Of the 3,877 respondents polled in 78 countries, almost half (48 percent) thought the risk of cybercrime was on the rise, with only 4 percent believing it was falling. Worryingly, stated PwC, 4 in 10 respondents said that their organization didn't have the capability to prevent and detect cybercrime.
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