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The Different Types of Internal Business Fraud


The Different Types of Internal Business Fraud

By Alyssa Natale, Associate – Audit & Assurance

Many companies do not implement and enforce proper segregation of duties, leaving all or most responsibilities to one person. When proper oversight of these duties is not enforced due to a close-knit working relationship and assumed trust in these environments, fraud can easily go undetected.

Financial accounting fraud is often driven by personal financial dilemmas and rationalization. Employees with minimal oversight may find themselves in financial predicaments or believe that they deserve more than what they are already being offered. Employees who commit fraudulent acts may justify their actions by classifying the fraud as a one-time event or by claiming that monetary amounts will be repaid before anyone notices.

Types of Fraud

Common acts of fraud include embezzlement, internal theft, skimming, and fraudulent financial reporting.

Embezzlement is the illegal use of company funds by the person who controls the funds, and can go undetected when proper segregation of duties is not in place.

Acts of embezzlement may include:

  • Double check fraud, which occurs when the employee writes two checks each time a bill is paid; one check is sent to the vendor and one check is sent to the employee.
  • Check kiting, which is when an individual draws a check for more than the amount available in the account. The employee deposits the check and withdraws from a second account. The employee deposits the amount back into the original account before the bank registers the transaction or check clears the first account.
  • Payroll fraud, which can occur in a few different ways. An example of payroll fraud includes processing payroll for a fictitious employee. Fictitious employee fraud occurs when an employee fabricates time and attendance entries to an employee who does not exist, and therefore, does not provide services to the company. The fraud takes place when this fictitious employee’s payroll is redirected to the bank account of the employee who is committing the fraud.
  • Overtime reporting fraud, which takes place when employees overstates their hours worked, which goes unnoticed by their supervisors. Another example of overtime reporting fraud could be when an employee and supervisor conspire to overstate and falsely approve the employee’s hours in return for a kickback of the compensation.

Another area of fraud within businesses is internal theft. An employee may steal company assets for personal use or resale. Employees may steal small amounts of inventory at a time, which accumulate to a large amount over time. Internal theft can also be the result of over-ordering products, such as office supplies, in small increments. The responsible employee uses the unneeded items for personal use or returns the items, keeping the cash.

Skimming is the act of an employee intercepting a payment from a company before the transaction is ever recorded; therefore, it cannot be matched with records and detected. An employee that could commit skimming would be one with direct contact to a customer or one that handles cash transactions.

Fraudulent financial reporting is the action of deliberately issuing misleading financial statements in order to protect the financial reputation of the entity and falsely satisfy the needs of financial statement users. Companies may modify their financial statements by altering revenue recognition through sham transactions, prematurely recognizing revenue, tampering with percentage of completion account, inflating their sales numbers, or billing for uncompleted products.

Protect Your Business against Fraud

According to the Association of Certified Fraud Examiners, “fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.” Fraud can be committed by a wide array of individuals within an organization and in a multitude of ways.

Typically fraud seems like an uncomplicated scheme, but it can easily go unnoticed in the business setting. If you start to see any signs of fraud, have a fraud investigation done to make sure your business isn’t being affected.

For more information about Apple Growth Partners’ fraud investigation services contact Bob Nemeth or Susan Burnoski. Also, check out our post on Fraud Prevention – Simple Strategies to Safeguard Your Business.

A Business Guide to Fraud PDF