(First in a 3-part series)
By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
[email protected]
Most people may think they know what “fraud” means, but for a business owner/manager it is especially important to understand how to find and prevent fraud in their operations. In a three-part series beginning this month, we’ll look at types of occupational fraud, learn who commits it and why.
The following is a basic discussion of fraud schemes that often occur in privately held businesses. Having a rudimentary knowledge of these schemes can help you design internal controls that reduce the opportunity for fraud in your business or organization.
Asset misappropriation is a common type of occupational fraud. It is simply a fancy word for theft. Asset misappropriation can happen either internally (committed inside the business by employees) or externally (committed outside the business by non-employees, i.e. customers, vendors, etc.).
Asset misappropriation comes in many different forms and can involve any number of business assets (cash, accounts receivable, inventory, etc.). Cash schemes tend to be the more popular types of asset misappropriation. These schemes include skimming, larceny and fraudulent disbursements.
Skimming in its simplest form is theft of cash before it is reported by the company. Not reporting or under-reporting a sale in the company’s records and keeping the payment is a typical skimming technique. Outright theft of a company’s incoming payment or swapping a payment made by check with company cash are two other methods.
Larceny is also theft. The primary difference between skimming and larceny is that while skimming happens “off the books” (before cash is reported by the company) larceny happens when funds “on the books” are stolen.
Fraudulent disbursement schemes include check tampering, register disbursement, billing, expense reimbursement and payroll schemes. These approaches tend to be the most common type of asset misappropriation.
These schemes are also “on the books” and involve an employee misdirecting company cash for their benefit – for example, an employee’s use of a company-issued credit card for personal transactions. Without appropriate internal controls, expense reimbursement schemes can be difficult to detect.
Most people believe that occupational fraud involves a complex conspiracy with lots of moving parts and many levels of deception. Our experience, however, indicates that this conception rarely aligns with real-world occurrences. In fact, in most cases, if basic safeguards had been in place and utilized, the occupational fraud that occurred could have easily been prevented.
In next month’s installment, we’ll look at what types of employees are most likely to engage in occupational fraud.
If you are concerned about occupational fraud in your organization, please call Jason Thompson at (317) 608-6694 or email [email protected] to discuss how we could be of assistance in finding or preventing fraud.