When we say “fraud investigator”, we get several responses:
Frog Investigators? See the commercial… One of those “funny because its true” instances! People misunderstand what we say half the time.
Oh like Identity theft? Nice!: Most people’s initial connections to fraud jump right to things like identity theft. This is not what we often work with; we defend against and investigate internal, or occupational, fraud. Internal or occupational fraud addresses fraud against an organization from someone within the organization. (Ironically the frog protection commercial is exactly about identity theft...)
So fascinating!: Sometimes people do understand what we do. And they’re right; it is fascinating.
Hmmm. What?: Great question. Let's get into it.
Our experience is vast. Over 35 years and 450 cases investigated. Each fraud case has fascinating differences and unique attributes. Each fraudster has a different story, a different motivation, and a different method. It all seems so specific and customized, it is hard to recognize patterns at first. If there are no patterns, how can you build a plan of protection?
But internal fraud can be simply categorized into 3 types of fraud. Doing so helps identify problem areas and gives confidence that your anti-fraud program can do an efficient, reliable job in preventing and quickly detecting instances of fraud within your organization.
3 Types of Internal Fraud
1) Corruption
What it is: Corruption involves more than one party colluding to commit fraud against
an organization. Both parties can both be within the organization, or one or more
members can be outside the organization (like a vendor or client). Corruption involves
any trades of goods, services, or information that is unethical, illegal, or intended to
manipulate money or resources.
Examples: Conflicts of Interest, Bribery, Illegal Gratuities, Economic Extortion
Anti-Fraud Program Control: Areas that will defend against these types of fraud include
vendor establishment procedures, master vendor file audits, addressing conflict of
interest directly with employees, and separation of duties in which one individual does
not have complete control over an entire process.
2) Asset Misappropriation
What it is: This is the broadest category of internal fraud. Assets are generally
divided into two categories: Cash and Non-Cash.
Cash Fraud: While cash fraud can refer to literal cash being taken by hand, this
term is also used to refer to theft of any monies. These 3 subcategories give a
helpful breakdown:
1) theft of cash on hand
2) theft of cash receipts
3) fraudulent disbursements
Non-Cash Fraud: This is fraud dealing with theft of inventory and all other
assets.
You can see on the chart below the multitude of different ways people perpetrate fraud through asset misappropriation. This is why a robust anti-fraud program is so crucial. Without one, there are so many vulnerabilities.
3) Financial Statement Fraud: This type of fraud takes place in how the organization is represented in financial statements. Fraudsters can manipulate or alter documents to reflect the company incorrectly in one of two ways:
1. Asset or revenue OVERstatements--making the organization look more profitable
or favorable than it is. Whether this is done to please stockholders or owners, to
improve the appearance of the company's current debt situation and/or debt service
compliance, or any number of reasons, making the organization look better on paper is
a tempting motivation.
2. Asset or revenue UNDERstatement--making the organization's finances look less
favorable than they actually are. Asset or revenue understatements can save the
organization money during tax season, and recently we've seen companies
manipulating documents to file higher insurance claims for business interruption due to
Covid-19.
The Fraud Tree provides even more insight into the types of fraud we see in these categories:
So THIS is what we do. Not frogs, fraud. Not identity theft, theft against an organization by its own person or people. It is fascinating. And what is so fascinating is how common it is and how few people understand the need for protections against it. Unfortunately, this is one of those “to-do” list items many organizations don’t ever get to until they have already suffered loss.
Our ultimate hope is that anti-fraud programs become an unquestionable element of every successful business.