3 Types of Financial Fraud In Business

Business fraud can have a monumental impact on an organization. There are many types of fraud that go by different names, such as financial statement fraud, bribery and corruption and asset misappropriation. It is often the case that fraud instigated by an employee will involve more than one type of fraud. Also, business fraud is not always easy to detect because it does not always show up in a company’s official accounts system. In general, the most typical way to detect this type of fraud is by receiving a tip from an employee, a customer, or an outside vendor.

Here is an overview of the different financial fraud in business:

Asset misappropriation

Asset misappropriation is the type of fraud that involves a member of staff who uses their position to take from their employers. This fraud is often committed by those trusted to manage the interests and assets of a company, which can include board members, employees or directors.

This type of fraud activity can include theft of company formulas, patents, or sensitive data, theft of credit notes or vouchers, inventory theft, theft of money or check forgery.

Any company that suffers from asset misappropriation will experience cash flow issues in some form. Plus, it can also have a negative impact on staff morale and the company’s reputation. It is believed that over 90% of business fraud is related to asset misappropriation which makes it by far the most common issue. On average, the lost from this type of fraud is in the region of $150,000 per case.

Bribery and corruption

Bribery and corruption is the next most common issue related to fraud in a business environment. Even though this type of fraud is less common than asset misappropriation, the average cost of a bribery scheme is significantly higher, and likely to exceed over half a million dollars per case.

The type of schemes involved in this area are quite broad and can include substitution of inferior goods, manipulation of contracts, bribes to influence decision-making, shell company schemes and kickbacks.

Financial statement fraud

Financial statement fraud takes place less frequently, but is almost certainly to be the most experience per case. On average, this type of fraud can lead to a company losing up to $2 million per case. This fraud involves an entity or individual falsifying earnings or income statements in an attempt to make a financial gain for them.

This type of fraud can include manipulating a company’s records in relation to more favorable loan terms, an improvement in year-end bonuses, or influencing the stock price.

Fraud Analytics: Salient Way of Detecting Financial Fraud in the Banking Industry

Turning a blind eye into fraud and financial crimes is no longer acceptable for business. With the latest technology at hand, fraud schemes are growing more sophisticated. When it comes to fraud in retail banking, to overcome these challenges, the banking industry has gradually started adopting new ways of fighting financial fraud by conducting fraud analytics. In order to assertively protect themselves and their customers, organizations are now taking the road less travelled and formulating a comprehensive counter fraud approach with the help of analytics.

A large number of business processes are now automated and depend on effective use of technology. While fraudsters are regularly exploiting flaws in security and controls to perpetuate their crimes, the good part is that the technological advancements can help combat fraud at a very early stage. Efficient use of fraud analytics software can help in understanding the organizations’ business data in a better way which in turn will allow identifying transactions that evince fraudulent activity.

To effectively test for fraud, transactions should first be analyzed at the source level so that the auditors can get a sense if the fraud is about to occur. A regular follow-on analysis helps auditors to understand data patterns and search for symptoms which can lead to fraudulent behavior. A wide spectrum of analysis can be conducted to detect different kinds of frauds. For example, a point-in-time analysis can prove useful for one-off fraud detection; a repetitive and continuous analysis is needed if the frequency of fraud is high and recurring.

In the process of carrying out fraud analytics, many a times, organizations end up wanting to dig deeper. Financial fraud happens in a variety of ways and the intensity of loss occurred also ranges accordingly. Corruption, cash on hand, billing, check tampering, skimming, larceny, financial statement fraud are some of the negative activities that regularly happen in banks. Any loophole in the business cycle is a window for crime to happen in a blink of an eye. Understanding customer behavior is thus a key ingredient that helps in analyzing fraudulent patterns. For example, high net worth individuals are likely to make rampant transactions at odds hours while small business owners might sometimes have unpredictable online banking activity for clearing payments. Such activities, though are not fraudulent, may be considered as negative. In such cases, timely verification is vital. Another important thing to be considered while detecting fraud is the workflow of the organization. A lot of hoops to make way through to rectify issues can sometimes prove cumbersome. A cohesive workflow allows auditors to improvise the remediation process.

With a rise in transaction volumes in future, such financial crimes are also expected to be elevated. Thus, rapidly evolving technology is dual-faced in nature, sometimes acting as an ally and sometimes as an enemy. On one hand, it offers fresh opportunities to the fraudsters and on the other hand also allows financial institutions to stay ahead and prevent fraud. In a fast-paced business environment, a computer and an internet connection is indeed a powerful weapon that can make or break the business. It’s time we leverage fraud analytics to detect and mitigate financial crimes. How is your organization handling financial fraud? Share your thoughts in the comments below.

How to Avoid Investment and Financial Fraud

News of the Bernard Madoff, Allen Stanford Financial Grp and other scandals has provided ample evidence that financial fraud against investors is alive and well. It’s always a good time to review some of the principles that will protect one from investment / financial fraud. Let’s take a look.

Of course, the first and foremost is having a trustworthy investment advisor and company. Know your investment company. A quick check on the Internet* can highlight any major problems or complaints your company may have had with the SEC or other government bodies. Many companies may show complaints against them. Carefully evaluate them to determine if your company’s business problems /policies are such that you don’t want to do business with them.

A similar investigation can be done for your specific broker / financial advisor. If you find serious complaints with merit it’s time to move on. Interview your financial advisor. Of course they should be knowledgeable about the investment market place, asset class allocation, as well as specific financial products. They should also be able to explain their firm’s practices with regard to the money flow from their firm to their broker dealers and clearinghouse (see below). They should also be able to clearly explain their fee structure. Is your broker/advisor knowledgeable about theses practices? Or are they more of a salesperson, trying to steer you towards their own firm’s products? Of course, that doesn’t means there is fraud going on, but the less credible the information on these topics is, the more likely you’d be better off investing your money someplace else.

You should be able to track your reported investment returns relative to the returns observable in the market for a similar class of investments. For example, if your funds are being invested in value stocks (stable steady growth profile), and your financial statements claim to be beating the S &P 500 by leaps and bounds, you might want to wonder how your investment company is doing it. They may well have beaten the market. But it is worth investigating. They should be able to provide you with a list of securities in which they had your money for a given period, or a list comprising any given fund. You can check one by one what the performance of those securities was, and if it roughly matches (in aggregate) what they are telling you. It’s a big red flag if the numbers aren’t close. And a bigger red flag if your company tries to avoid providing any of this information.

The size of your investment company is not necessarily an indicator of quality, but I believe it is true that the larger companies are monitored more closely and less likely to foster systemic fraud. Of course, Bernard Madoff controlled and stole many billions of dollars, but the biggest problem there, besides lax SEC oversight, was that there was only a tiny core of people who truly knew where the money was invested. There was not adequate (or no) separation between the investment advisory function, the actual securities trading, the movement and reconciliation of the underlying money. This is much less likely to happen in a large publicly traded and audited firm.

As touched on above, all securities purchases on your behalf should be cleared through an independent custodian/clearinghouse. A of the financial statements sent to you should be periodically be examined by an independent auditor. If you don’t know who these institutions are for your investment company, you need to find out.

Many people invest their money with specific brokers based on references from friends and family. While this is generally a good thing, your broker still needs to pass the above tests. Don’t be afraid to ask. Remember, many of Madoff’s victims fell into this trap by being referred by those they knew. Those others, in turn, based their judgment based on fraudulent investment statements. In addition, most of these people did not ask the underlying questions. If they had, they wouldn’t have gotten adequate answers, and could have moved on before it was too late.

Lastly, it is always advisable to spread your money among a number of different advisors / investment companies, in case there is a problem with any one of them. This is outside of the normal diversification of actual asset classes, which can be done within one firm. I recommend splitting your funds among at least three different, unaffiliated advisory/investment companies, depending on how much money you have.

Once you’ve taken the necessary steps to protect yourself, you can concentrate on the much more interesting and primary task at hand. That is, putting your money to its best use through the proper identification of your investment goals, and identifying and making the best investments!