Minimising the risk of common frauds

This article was originally published 20 February 2020.

While numerous types of frauds exist, the BDO Forensic team often see a number of ‘common’ frauds, including asset misappropriation and financial statement fraud.

Asset misappropriation can cover a range of frauds including, but not limited to:

  • Cash theft (the theft of cash receipts and fraudulent disbursements via payroll or creditor schemes)
  • Inventory and other assets (theft of stock, or misuse of company assets)

On the other hand, financial statement fraud can include a variety of techniques such as the overstating or understating of income, expenses, assets or liabilities. The end result is that financial statements are deliberately misstated to achieve a specific outcome.

The BDO Forensic team have outlined three recent case studies to raise awareness of common frauds, as well as techniques which can be used to help reduce the risk of fraud occurring.

Case studies:

  • Cash theft

The team investigated an individual who processed hundreds of unauthorised payments. To help conceal the fraud, the individual processed fake expenses to known and approved suppliers. The investigation identified that the individual forged the approval process and there was no supporting documentation for the ‘fake expenses’ processed. Further, the individual used their system login to process the fake expenses which were often processed outside of normal business hours from a remote location. 

  • Misuse of company assets

An individual was investigated who was using a company vehicle for private purposes. Specifically, the individual was using the vehicle on weekends for their side business. While the misuse of a company vehicle may seem ‘harmless’, it was not only against company policy but also resulted in additional fuel and running costs. This activity resulted in a breach of the client's insurance policy, exposing the client to a significant claim in the event the vehicle or individual was involved in an accident during the private, unauthorised weekend use. 

  • Financial statement fraud

An investigation was carried out on an individual that overstated income for three years proceeding the sale of their business. The overstated income resulted in the business appearing more profitable than it actually was. Data Analytics was used to help identify a large number of fraudulent sales including duplicated sales, fictitious customers, services not performed, unexplained fee increases and services that were performed outside normal business hours or geographical constraints. 

What can be done?

Minimising the risk of fraud involves a three-staged approached:

  1. Prevention: This starts with governance and culture, encompassing aspects like the company's code of conduct, fraud control policy, training and awareness programmes and employment screening.
  2. Detection: Including post-transactional reviews, data analytics, reconciliation and, where appropriate, having external and internal audits. Implementing a whistleblower programme is also important.
  3. Response: This involves creating a fraud recovery plan, conducting investigations, taking disciplinary action, obtaining civil recovery and taking corrective action.

Fraud is in many places, but with the right fraud prevention and detection programme, you can greatly reduce the risk of fraud occurring at your organisation.

For more information, please contact your local BDO Forensic adviser.