Fraud 101

Fraud Prevention Tidbit
April 2008

Fraud 101- The Basics
Crimes that a manger or supervisor must investigate today go beyond the traditional time keeping issue. Operating budgets are tighter now than ever and requires a manager to take on more roles than ever before and one of these basic roles includes the ability to investigate financial crimes. To be effective in this area a manager only needs a basic understanding of fraud.

Fraud is theft by trick or misrepresentation of fact. Fraud has some general characteristics that all managers should be able to recognize; fraud is always clandestine in nature, fraud is a breach of a fiduciary duty and has a direct or indirect benefit to the scam artist; fraud will always cost the employer assets. Fraud is generally broken down into three broad categories, asset misappropriation, corruption and fraudulent statements.

Asset misappropriation schemes are further broken down into cash or non- cash. About 90% of asset misappropriation schemes involve cash, this also includes check tampering. Two cash schemes that a manager should know about are fraudulent disbursements and skimming. Fraudulent disbursement uses tricks such as false invoices or fake time cards to trick the organization in to making some sort of payment. Skimming is larceny of cash before it hits the books and enters the accounting system; an example of skimming would be sales persons who takes payment, creates an invoice for a lower amount and then pockets the difference or stealing cash and checks as they come into the organization. People that collect payments with little oversight are especially tempted to skim because in these situations skimming is hard to detect. Always establish safeguards against payment thefts at the point of entry, mail rooms and payment storage areas merit special measures.


Corruption is the wrongful use of a position to influence business transactions to the benefit of themselves or another. Corruption includes kickbacks, bribes, conflicts of interests and bid rigging. Persons in the business of purchasing are especially venerable to these types of schemes; the dollar amounts involved in corruption can run into the millions. A contractor wanting a contract may try to obtain it with offers of travel, entertainment, discounts of their particular product of service or may offer other rewards for obtaining the business; some may sub contract a portion out to the purchasing agents' friend or family member. A manager should know his or her organizations’ guidelines for awarding contracts and anything that doesn't fall within these guidelines deserves closer attention.

The last basic classification of fraud that a Security professional should know about is fraudulent statements. Financial statements can generally be falsified by a number of methods; one of the favorite methods of falsifying statements is by over stating revenue or assets, and understating liabilities. This method overstates the value of the organization and keeps it appealing to perspective buyers, including potential stock purchasers and creditors. Another way that financial statements are falsified are by using timing differences; as a guideline revenue and expenses must be recorded in the same accounting period when the transaction took place. Transactions should not be posted ahead or back dated to another accounting period. By using various timing differences a financial statement can be adjusted as needed. You can consider the use of timing differences and overstating revenue and or understating liabilities both as classic ways of cooking the books. To falsify a financial statement the perpetrator would require a least a basic knowledge of accounting and the more knowledgeable the perpetrator, the more elaborate the falsification as a rule.

When it comes to preventing fraud, the two most effective methods are establishing an effective abuse hot-line for the organization and regular employee education. These two methods go hand in hand in both the prevention and detection of fraud and abuse within an organization and can't be recommended highly enough in my opinion.


Brian Taylor CFE, CPP
Certified Fraud Examiner
Certified Protection Professional