Anatomy of Fraud

Anatomy of Fraud

Business Frauds

Fraud is any kind of intentional harm, damage or wrongful act to deceive another person and it involves misrepresentation of facts or information to obtain undue or illegal financial benefits. There are three basic elements to describe fraud :

  • Wilful and secretly carried out act or omission of act
  • Intention to get unfair direct or indirect financial benefit.
  • Damage to another person’s name, assets, revenue or reserve.

Why identification and detection of fraud is required?

It is believed that ,as much as 5-6% of annual sale or receipts of organization is lost on account of fraud or white collar crime and 50% of fraud losses are not recoverable from fraudsters.

Who does fraud?

As per recent research conduct by ACEF and prestigious audit firm : -

  • Employees (internal fraudsters) commit more frauds than external fraudsters.
  • Employees working with organization for more than 6 years commit more frauds than others.
  • Employees with a graduation and above qualifications commit more frauds than others.
  • Employees with a designation as managers and above commit more frauds than others.
  • Employees with age group between 36-55 commit more frauds
  • Fraudsters are well respected in organization and never convicted to any crime.
  • 62% of frauds are committed by Fraudsters with collusion of others.
  • 52% of frauds are committed by Fraudster working in accounts (22%), sale (13%) and operations (17%) department


Why fraudster commits fraud?

The core driving force for fraudster to commit fraud is the lure for money,greed and lust for wealth but strangely sometimes fraud may take place due to non- monetary reasons such as, jealousy , job dissatisfaction , ill working environment or inability to carry out given task, etc.

How fraud is committed?

Fraudster applies different methods to commit fraud but largely they are classified into three categories :

  • Misappropriation of Assets – It involves theft or misuse of organization assets (for example stealing inventory , committing payroll fraud etc)
  • Corruption – Fraudsters wrongfully use their influence in a business transactions to procure some benefit for themselves (for example accepting kickbacks from vendors for giving them business )
  • Financial statement frauds – It involves purposeful misreporting of financial information about the organization with intent to mislead those who rely on it. (for example overstating revenue to shareholders or bankers)

The most common fraud method is misappropriation of asset but most devastating method in terms of loss of revenue or funds is financial statement fraud.

What are the symptoms or indicator of fraud?

The quintessence of fraud detection lies in detecting symptoms or indicators of fraud, following are some common symptoms that may trigger existence of wrong-doing:

  • Huge backlog or incomplete accounting and unusual delays in statutory compliances.
  • Poor or weak internal control system.
  • The best opportunity is available to fraudster when some disaster has taken place – for example fire has occurred and Company’s assets and have recorded have been destroyed.
  • Sudden profit in an otherwise loss making business not supported by any reasonable justification.
  • Consistent losses in an otherwise growing business.
  • Absence of rotation of duties or long exposure in the same working area
  • Income tax raid or seizure of records by relevant authorities.
  • Close nexus with client or vendors or other external influencing parties.
  • Influencing employee or fraudster is avoiding eligible vacations.
  • Fraudster is living lavish lifestyle or beyond his means.
  • Fraudster is suffering from financial or family crisis.
  • Employee’s irrational behaviour like he is rude or inconsiderate or very secretive.
  • Poor or lack of proper reporting system and authorization matrix
  • Absence of qualified and skilful employees to review risk assessment process.

56% frauds may be detected if any action is taken on warning signals but sadly only on 6% of red flags were acted upon.

How to identify and detect fraud ?

Different tools may be used to identify and detect frauds but tips off or inputs from employees or vendors or customers is the most common source to get reliable information to unearth fraud, apart from tips off, regular management review, assessment of internal control systems, account reconciliation, external audits, document verifications, IT audit are some other important tools that may help to detect frauds.

How to identify and detect fraud ?

90% of fraud cases are committed by employees of the organization so it is important to implement systematic fraud prevention plan within the organization and should focus on following points:

  • Regular review of Company’s financials & internal control systems.
  • Segregation of duties among employees. (for example person handling cash should not be allowed to record cash transactions)
  • Create positive working atmosphere.
  • Set up Employee’s support system.
  • Create a policy for whistle-blowers.
  • Regular fraud training for Managers/Executives.
  • Conduct surprise internal audits.
  • Implement process for job rotation and mandatory vacation
  • Implement reward plan for whistle blower.

Ref : Study conducted by ACEF

  • Mahendra Sarin