Types of Fraud
Fraud is classed into two main different types,
Misappropriation of Company Assets
Misappropriation of company assets is a kind of fraud that is mostly committed at the staff level by stealing a company’s assets, for example, cash, inventories, care, or other assets for personal use or sale.
Such kind of fraud could be prevented by setting up strong internal control, segregation of duty or job rotation.
Creating the fake customer’s name or account in order to get the commission, creating the fake suppliers’ accounts or making payment to the fake supplier is also the common type of misappropriation of assets. We will talk about its prevention in detail in this article.
Fraud over Financial Reporting
Fraud Over the Financial Statements is done by management manipulating the financial figure in the financial statements. This type of fraud is committed at the management level.
There are many ways that management could manipulate the figure in the Financial Statements.
For example, management could improve the Net Profit for the year by decreasing depreciation expenses through depreciation policies.
Normally, deprecation policies are decided by the management and yes they could affect the net profit by this.
Preparing the Financial Statements is significantly affected by many assumptions and judgments made by management. Somehow, management could help them make sure the Financial Statements look like they want to be.
Another example of how management could commit it through Financial Statements is revenue recognition. The management team will be awarded the bonus if the revenue reach target says USD 100,000,000 at the end of the year, 31 December 2016.
Right now, on 25 December 2016, and the sale revenue is USD 98,000,000. See, by this figure, management almost reaches its target.
In such a case, management could manipulate the sale revenue that not exists to make sure the sale revenue reaches 100M. Then they take the bonus.
Here is how,
Let say that management knows that in January 2017, there will be a big contract with new customers. They then sign the contract with customers and recognize part of the revenue in 2017 as the revenue in 2016 through manipulation of accounting treatments.
In this case, if external audit and internal audit could found or figure out any error in the revenue recognition, then management could get their bonus easily.
This is how frauds happen through Financial Statements; however, it is just a simple example.
There are many types and ways to manipulate the financial figure in real practice, especially when management has the incentive to do it.