Though fraud can occur in a variety of ways, the most common reason for corporate fraud is a lack of or weakness of internal controls. As discussed in a recent Accounting Web article on the most important internal controls that companies should monitor, this is a challenge—especially for small businesses.

“Internal control weaknesses can range from the most simplistic, such as checks to cash, to the more complex, such as illegal kickbacks from vendors. The main objective of the perpetrator is to gain access to the businesses’ cash.”

Though their article goes on to discuss one of the most simplistic forms of internal control failures—checks written to cash—we would like to explore some of the other types of fraud that take place as a result of internal control weaknesses as reported by an Association of Certified Fraud Examiners report.

Unscrupulous Individuals Walk Away with Your Money

In their tenth annual Report to the Nations, the Association of Certified Fraud Examiners (ACFE) dug into the challenges that organizations face trying to stop fraud. In the 2,690 cases identified by the study, ACFE found $7.1 billion missing from company coffers—nowhere near the true estimates lost to fraud.

But what are the most common ways that fraudsters walk away with your money—and which ones are the costliest?

Most Common

Broken into three categories—Corruption, Asset Misappropriation, and Financial Statement Fraud—ACFE documents everything from conflicts of interest to improper disclosures, finding that while asset misappropriation is the most common, it is also the least costly.

“Of the three primary categories of occupational fraud, asset misappropriations are by far the most common, occurring in 89% of the cases in our study. However, they are also the least costly, causing a median loss of USD 114,000. Corruption schemes are the next most common form of occupational fraud; 38% of the cases in our study involved some form of corrupt act. These schemes resulted in a median loss to the victim organizations of USD 250,000. The least common and most costly form of occupational fraud is financial statement fraud, which occurred in 10% of the cases and caused a median loss of USD 800,000.”

As noted, there is a common overlap in fraud cases investigated, meaning that if one control is lacking, your unscrupulous employee is likely exploiting other avenues. Here’s how the report broke down the cases:

  • Asset misappropriation only: 57%
  • Asset misappropriation and corruption: 23%
  • Corruption only 9%
  • Corruption, asset misappropriation, and financial statement fraud: 4%
  • Asset misappropriation and financial statement fraud
  • Financial statement fraud only: 3% 
  • Corruption and financial statement fraud: 1%

Most Common Types of Fraud at Small and Large Businesses

Knowing this, companies face a variety of risks. However, with fewer controls in place, small businesses are often targeted by employees, customers, vendors, and more. Breaking the risks into organizations with fewer than and more than 100 employees, cases are broken into the following:

Corruption: 43% of Large Businesses, 32% of Small Companies

A common occurrence at both small and large businesses, corruption includes conflicts of interest, bribery, illegal gratuities, and economic extortion. The most common case documented case reported by both small and large businesses, corruption is defined by the report as “A scheme in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest)”

Billing Fraud: 18% of Large Businesses, 29% of Small Businesses

Defined as a fraudulent disbursement scheme in which a person causes his or her employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases, billing schemes are another common occurrence at both small and large businesses. A billing scheme, for example, could occur when an employee creates a shell company and bills employer for services not actually rendered; employee purchases personal items and submits an invoice to employer for payment.

Check and Payment Tampering: 22% of Small Businesses, 8% of Large Companies

One of the greatest discrepancies between small and large businesses, check and payment tampering is much more common at small businesses than large ones. Occurring when a person steals his or her employer’s funds by intercepting, forging, or altering a check or electronic payment drawn on one of the organization’s bank accounts, these are common due to the lack of controls and reliance on paper checks at small businesses.

Stay Vigilant

Especially in the wake of the COVID-19 pandemic, employees face immense pressure to keep food on the table. Paired with the opportunities that exist with less oversight, and the potential for fraud could skyrocket.

Check out our faces of fraud article to learn who is most likely to commit fraud and the common behaviors of a fraudster.

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