Understanding the 3 types of occupational fraud

The most common form of fraud is misappropriation of assets, in which an employee, executive or owner of a company uses his or her position to steal from an organization (Shutterstock/Milan2983)

Occupational fraud—also known as workplace fraud, internal fraud or employee fraud—falls into three general categories: misappropriation of assets, corruption and financial statement fraud.

Understanding the types of fraud and educating employees about them can help business owners protect themselves, says fraud-prevention expert Jennifer Fiddian-Green, CPA, CMA, a partner and forensic accountant at Grant Thornton LLP.

“It’s important that you set the tone from the top, talk about it with your people, educate them about the kinds of things that could happen,” she says.

1. MISAPPROPRIATION OF ASSETS

The most common form of fraud is misappropriation of assets, in which an employee, executive or owner of a company uses his or her position to steal from an organization. Of the cases of employee fraud reported in Canada, 85 per cent involved misappropriation of assets, according to the Association of Certified Fraud Examiners’ Report to The Nations: 2018 Global Study on Occupational Fraud and Abuse. (Some cases of misappropriation may also be considered corruption or financial statement fraud.)

Examples include:

• theft of cash, services, inventory, time or intellectual property
• falsified expense reports
• purchase order schemes, in which payments are made to false vendors
• credit card abuse, in which a company card is used for personal expenses
• cheque forgery and tampering
• falsified sales with the intention of collecting commissions on those sales
• falsified time sheets
• personal use of company vehicles or machines

2. CORRUPTION

Of the reported cases of occupational fraud in Canada, 40 per cent involved corruption, in which an owner, executive or employee abuses his or her power to subvert the decision-making process for personal or company gain. (Some cases of corruption may also involve misappropriation or financial statement fraud.)

Examples include:

• collusion with a vendor to make false payments for goods or services that were never delivered
• collusion with a health care provider to create false health insurance claims
• kickbacks, in which an employee receives payments from a third party in exchange for business advantages 
• product substitution, in which an employee colludes with a supplier to replace purchased goods with lower quality or counterfeit goods
• bribery, in which an employee uses company funds to provide benefit to another business or individual in exchange for business advantage or personal gain

3. FINANCIAL STATEMENT FRAUD

Of the reported cases of occupational fraud in Canada, 14 per cent involved financial statement fraud, in which an employee alters balance sheets, income statements or cash flow statements with the intention to deceive people who read them. The employee’s motivation may be personal gain, to attain loans for the business, or to keep the business afloat. (Some cases of financial statement fraud may also be classified as misappropriation of assets or corruption.) 

Examples include:

• falsifying sales records
• postponing reporting expenses to a later period so that current earnings look higher
• inflating the value of an asset

HOW TO PROTECT YOURSELF FROM FRAUD

Once you and your employees understand the forms fraud can take, it’s important to keep an eye out for the behavioural red flags that are associated. 

To learn more about how to protect yourself from fraud and what to do if you are a victim, CPA Canada offers a softcover book called Protecting you and your money: A guide to avoiding identity theft and fraud. You can also request a one-hour learning session about fraud with a CPA volunteer in your community.