Identifying the Different Types of Fraud

Did you know, that the biggest fraud threats come from within a business? Of the companies that reported fraud in one study¹, 81% experienced fraud from an insider or employee. Though harmless (and even unintentional) it may seem, fraud is one of the most common crimes that affect not only businesses, but the individuals as well.

There are three stages of the decision for a worker to commit workplace fraud, categorised by the effect on the individual: pressure, opportunity, and rationalisation. The Fraud Triangle, a visual representation evolved from Donald Cressey's research in criminology_², contains Cressey's stages:

• Step one: pressure. This is the cause of the stress and thus is the motivation behind the crime. Typically in the form of financial pressures such as debt or a shortfall in income, their situation seems inescapable, and thus there is “no other way out”, than to commit fraud. 
• Step two: opportunity. This is the step when opportunity to commit fraud presents itself, and the individual then commits the crime. At this stage, there is a clear plan of action, and will abuse their position in the workplace to "solve" their pressure. Typically, if the pressure can be solved in secret, the more likely they are to commit fraud.
• Step three: rationalisation. This stage is the personal justification in the individual's crime. This requires the fraudster to rationalise their actions in a way that is acceptable to them, and typically view themselves as the victim (rather than the offender) as their circumstance has put them in this position, making it more justifiable and less immoral to the fraudster.

The most common type of fraud is, unsurprisingly, obtaining finance or credit by deception. False documents are involved in more than two-thirds of fraud cases committed, as will be seen in the points below. 

We have listed five types of fraud we have encountered, and, as obvious some may seem, it is important to bring these to the attention of all within the business to ensure these actions are starkly labelled as fraud³:

1. Falsification of expense claims - This includes, inflating mileage claims, entertaining friends and relatives at the expense of the company, and claiming for expenses never incurred by stating that “the receipt must have been mislaid”
2. Stealing money from the company bank account - If the offender has successfully “gotten away” with this once, it is likely for them to repeat this action until it is discovered.
3. Falsifying supplier invoices - Not as common, as it is more difficult to successfully execute, but is most likely in the form of personal invoices being sent to the business under the pretence that it was services carried out on the business grounds, rather than for personal use.
4. Inappropriate amendments to supplier banking details - When an individual falsely claims to be a supplier, and contacts the accounts payable of a business to "update" the banking details of the supplier. The funds that would go to the valid supplier now goes to an unknown source until the inappropriate update is spotted.
5. Fictitious invoicing - Where there are poor accounting controls and insufficient segregation of duties in the finance and accounts department, the offender can approve invoices for payment, when there were no services delivered in the first place. This also relates to approving personal invoices to be paid by the organisation.

Whilst not all fraud will be detected and prevented, most can be mitigated through proper controls and procedures, and by having a fraud check. To find out more on implementing proper internal controls and where your business sits with fraud, contact our Audit and Assurance team today.
 
¹ "Kroll Global Fraud Report 2015/2016". anticorruzione.eu/wp-content/uploads/2015/09/Kroll_Global_Fraud_Report_2015low-copia.pdf.(2016), 9.
² Cressy, D R. (1951) "Why Do Trusted Persons Commit Fraud? A Social-Psychological Study of Defalcators". Journal of Accountancy, 92 (1951), 576-581.
³ Lomer, D. "41 Types of Fraud and How to Detect and Prevent Them". https://i-sight.com/resources/41-types-of-fraud-and-how-to-detect-and-prevent-them.