Identifying Dangerous Types of Fraud for Companies
Identifying Dangerous Types of Fraud for Companies
Every company needs to realize that fraudulent activities are dangerous. This should be emphasized to all employees to prevent fraud. Engaging in such actions can harm the company both materially and immaterially. Therefore, it is important for employees to understand the various types of fraud.
Several experts have provided opinions on the types of fraud. To further understand, let's explore this article thoroughly.
Types of Fraud
According to The Association of Certified Fraud Examiners (ACFE), a professional organization in the field of fraud, fraud is classified into three levels known as the Fraud Tree.
1. Asset Misappropriation
One of the easily detectable forms of fraud is asset misappropriation. Why is it considered easy? Because it is measurable. The first level involves the misuse of assets for unauthorized purposes. There are two types of asset misappropriation:
- Cash Misappropriation: Misappropriation of cash assets such as embezzlement and withholding vendor invoices.
- Non-cash Misappropriation: Misappropriation of non-cash assets such as using facilities for personal purposes.
2. Fraudulent Financial Statements
The second type involves actions that create engineering in financial statements. This manipulation can involve inflating or deflating actual financial conditions. The goal is to gain excess profits for personal or group interests.
Examples include falsifying transaction evidence, applying specific accounting methods to artificially increase profits, and adopting asset recognition methods to make assets appear larger than they actually are.
3. Corruption
One of the most dangerous forms of misconduct is corruption. In addition to being dangerous, this action is difficult to detect because it involves collaboration with other parties such as bribery. Why is it difficult to detect? Because both parties benefit. There are four elements of corruption: bribery, abuse of power, illegal acceptance, and economic extortion.
According to Albrecht, there are five types of fraud:
- Management Fraud: Management providing financial reports with biased or unclear results.
- Occupational Fraud: Theft committed by company employees, both directly and indirectly.
- Investment Scams: Scams promising greater returns than the invested capital.
- Customer Fraud: Sellers deceiving customers using specific tricks to gain excessive profits.
- Vendor Fraud: Companies incurring high costs in shipping goods, leading to inflated operational expenses.
Three Underlying Factors of Fraud
There are three factors that lead people to commit fraud:
1. Pressure
Heavy life burdens accompanied by high demands lead people to act irrationally. However, it's not just heavy life burdens but also high lifestyles that unconsciously drive people to commit fraud. Financial factors are the main reason or the biggest reason why people have a desire to commit fraud.
2. Opportunity
Besides pressure, another factor leading individuals or groups to commit fraud is the presence of opportunity. This can occur due to weak supervision by the company, ineffective internal controls, and abuse of authority. Examples include adopting policies approved by the company that are not implemented according to procedures. This will endanger the company financially and non-financially.
3. Rationalization
Within the company, there are always intrigues that make employees feel "accustomed" to performing actions (which are actually fraud). So, there is a kind of rationalization from the company environment that makes employees feel they are not harming the company. However, such actions are actually detrimental to the company. For example, using company assets for activities outside the company.
These three frauds fall under the fraud triangle. However, there is also what is called the fraud diamond. There is an addition of a category besides pressure, opportunity, and rationalization, namely capability. So, if there is fraud with a very large nominal amount, the person usually has special abilities that others do not have.
Companies need to equip themselves with good data systems to prevent fraud. When you understand the types of fraud, both you and the company should be vigilant and provide strict supervision to all employees.
Fraud is indeed a threat to companies. To ensure that your business is not disrupted by fraudulent behavior, Brick is here to provide an API verification solution, namely digitalization of bank statements. There are three advantages to using digital bank statement API: the user interface is very neat, there are various document formats, and it prevents fraud. Optimize your business processes with Brick for a better business.
