Internal fraud is not something a company can guard against 100%, but when it does occur, it has significant financial repercussions and undesirable reputational consequences that can even put an end to business activities.
According to the findings of the study ” Occupational Fraud 2022: A report to the Nations ” published by the Association of Certified Fraud Examiners (hereafter ” ACFE “), an organization dedicated to the study of fraud, companies would lose around 5% of their revenues in costs related to internal fraud. Worldwide, more than US$3.6 billion is estimated to have been lost in the fraud cases covered by the study.
The ACFE study follows the analysis of over 2,000 cases of workplace fraud in which ACFE members have worked. These cases, which occurred between January 2020 and September 2021, affected companies operating in over twenty industries in 133 countries. Around 36% of these cases occurred in Canada and the United States.
How can your company be a victim?
Types of corporate fraud
According to the study, the three main types of internal fraud are embezzlement, corruption and financial statement fraud.
1. Misappropriation of funds or assets
Internal embezzlement by employees is often a type of fraud caused by poor segregation of duties and/or deficient controls, and is known as asset misappropriation.
For example:
False supplier
Your company receives an invoice that resembles an official supplier invoice or one from your usual supplier. This invoice is actually falsified or fictitious, and includes a charge for products or goods you never ordered or even received. This invoice is processed and paid by your finance team. Even if the amounts are small, you’ll still experience losses from time to time, which can become significant. Remember, it’s recurrence that pays off for fraudsters, who will certainly want to do it again. The best ways to avoid this? Be vigilant and apply controls.
False expense allowance
Let’s go with another scenario. Once upon a time, there was a fast-growing company… The investigation begins with a trivial irregularity presented in a normal business context and which seemed to have no major impact. However, several expense allowances were submitted, and depending on the scope of work, hundreds of transactions were not supported by original receipts or official proof of credit card payment. The supporting documents were reservations that had not been honored. And as misfortune rarely comes alone, the practice became widespread. The reality is that our employees are increasingly mobile, and managing expense allocations can become a headache. Analyzing and approving expense accounts can be time-consuming and risky, as well as increasing your risk of asset misappropriation and fraud.
Falsification of sales data at the end of the fiscal year for higher commissions or bonuses
Your marketing team is your direct link with your customers. So you need to find a compensation program that helps you attract and retain your best people. Bonuses paid for performance must be clear and defined by a policy approved by management. We can’t deal with this subject without mentioning the importance of thepay equity within the same sales team, as disparities or non-transparency in remuneration methods can be motives for inflating sales before the bonus period, sales that will be cancelled or prove unprofitable at the next financial review.
Whatever the size of your organization, we can help you proactively counter these fraud risks.
2. Corruption
Unfortunately, this activity is still going on in 2023. Corruption is a complex phenomenon involving a wide range of behaviors. It is one of a series of reprehensible acts designated by the Anti-Corruption Act.
Corruption occurs when, through an action or omission, a holder of a public office, such as an elected official or civil servant, fails in his or her duties and responsibilities in exchange for an advantage, reward or any other benefit offered by a citizen.
Various channels have been established for reporting wrongdoing, including corruption, to government agencies or to the Québec Ombudsman. Consult our whistle-blowing guidelines.
3. Falsification of financial statements
Financial statements are a benchmark for our executives, financial institutions, stakeholders, business partners and governments.
According to the ACFE, fraud is defined as “the deliberate misrepresentation of a company’s financial position by intentionally misstating or omitting amounts or disclosures in financial statements in order to deceive users”. These errors consist not only of inaccurate information presented in the statements, but also of the absence of certain information.
The objectives are sometimes to make the company look better by falsely increasing sales, assets and profits with a view, for example, to selling the company; or to undervalue these same elements to reduce the amount of taxes to be paid, or to pay less in rebates or other remuneration to a business partner; or quite simply to fail to disclose information to avoid having to comply with compliance rules or a clause in a contract.
The two accounting items that worry specialists, since they are often used as collateral for your financial commitments, are :
- Accounts receivable: to compensate for lower sales, a common practice is to overvalue accounts receivable. That’s why it’s important to make sure you receive your due for the work you’ve done. Have you received balance confirmations?
- inventory: inventory obsolescence in an inflationary market can be an issue. Keeping your inventory up to date with the real market value of current conditions is essential for your long-term survival, as well as your credibility with your business partners and financial backers.
Often, elements identified in this type of fraud reveal that internal controls were weak or non-existent, and that there was little monitoring activity. In addition, users were sometimes unfamiliar with basic rules and accounting principles. It’s important to straighten out the controls and monitoring activities within your company.
The impact of financial statement fraud is to alter the accuracy of financial information. Financial statements are essential to keep your business running smoothly. It’s about numbers, but beyond the content, it’s a beacon for the continuity of your business.
Corporate fraud: Demers Beaulne’s consulting services
The points raised in this article on fraud month are far from exhaustive. If you have any suspicions of fraud in your organization, don’t hesitate to get in touch with our investigations team to guide you through the process. For other prevention and detection tools, or for other services such as litigation, we’re also here to support you.
