On the path to success, companies face numerous risks, whether economic, regulatory, technology, supply chain, as well as the risks of fraud. Despite the great advance in the implementation of Governance practices, organizations still suffer consequences from fraudulent administrations.
Occupational fraud, for example, is defined as the use of a profession for personal enrichment through the misuse or misapplication of the resources of the employing company. Its types have been consolidated into three main categories:
Misappropriation of assets
Occurs when an employee steals or uses unduly the resources of an organization. It may include theft of money, theft of inventories, overestimated expense reports, creation of fictitious suppliers, and perpetuation of payroll and collection schemes.
Corruption
It usually involves an employee who misuses their influence to obtain a direct or indirect benefit. It also consists of conflicts of interest, bribery, and kickbacks.
Fraud in financial statements
It is the manipulation of an organization's financial records or information. It is performed for a variety of reasons, such as inflating stock prices or helping people obtain performance metrics in exchange for bonuses.
There are actions an organization can take to prevent occupational fraud and mitigate the impact if and when the fraud is discovered. Here are a few:
- Lead by example;
- Watch for warning signs of fraud. This may include the evasion of existing policies and procedures, as well as changes in the behavioral characteristics of those with financial duties, responsibilities, and custody of the organization's financial assets and systems;
- Have a written code of ethics and make sure that it is known to employees and included in appropriate training;
- Have an anonymous fraud reporting channel;
- Perform a periodic risk assessment and develop a plan to allocate the resources necessary for effective implementation;
- Develop a plan to review, test, and update systems and controls;
- Internal Audit;
- External auditing (independent auditing);
Vendor fraud, on the other hand, consists of schemes in which a company's accounts payable and other payment systems are manipulated for illegal personal gain. Common vendor fraud schemes fall into three categories:
Billing Schemes
This is where an employee creates false documentation to manipulate a company's billing system and generate a false payment for their own benefit.
Bank transaction tampering schemes
An employee manipulates banking operations so that they can be deposited in a bank account under their control. They often involve falsification, altering payee information, or issuing manual and inadequate checks.
Bribery/Extortion
An employee receives or requires inadequate personal payments from a vendor through which they obtain a sale or other financial advantage.
There are actions an organization can take to prevent occurrences of vendor fraud and mitigate the impact if and when the fraud is discovered. Here are a few:
- Employ due diligence in the vendor configuration process;
- Create systems and controls for the segregation of duties;
- Have a clear system of policies and procedures for those responsible for the supplier's configuration and payment process;
- Internal Audit;
- External auditing (independent auditing);
Finally, payroll fraud is a form of misappropriation of assets that involves the theft of money through a company's payroll processing system. Common payroll fraud schemes include:
Ghost employees
It involves creating a fake employee in the company's payroll system. Large companies become more susceptible to this, as the number of employees increases, because the compensation for tracking becomes more voluminous.
Collusion
This scheme involves an employee agreement that fraudulently creates a clock, allowing a missing person to receive their salary without being physically present and carrying out their work duties.
Change in payment rate
Employees of a company who conspire with the payroll department and/or system to adjust their salaries. This type of fraud is more likely in a small business due to a smaller amount of controls and segregations between work.
There are actions an organization can take to prevent the occurrence of payroll fraud and mitigate the impact if and when the fraud is discovered. Here are a few:
- Perform a periodic audit of payroll reports;
- Install a camera to monitor the clock. Advanced technology can be used to uniquely identify employees, such as fingerprints or retinal scans;
- Separate duties and controls. Allow only a few people to process the payroll and then different employees to register it;
- Internal Audit;
- External auditing (independent auditing);
Understanding how, where, why, and by whom fraud is practiced is part of the process of good Corporate Governance and is essential to preserve the organization's survival, regardless of its size and revenue.
It can be a challenge to eliminate all instances of fraud from an organization. But with the proper procedures, training, and awareness, you can significantly reduce your impact.
Contact TATICCA — ALLINIAL GLOBAL, which provides integrated auditing, accounting, tax services, corporate finance, Financial Advisory, Risk Advisory, technology, business consulting and training. For more information, visit www.taticca.com.br or email taticca@taticca.com.br. Our company has professionals with extensive experience in the market and has certified methodologies for carrying out activities.
