posted August 6, 2015

Understanding the Types of Fraud in Order to Prevent Fraud

by Anthony St. George, CPA, Senior Associate

     Fraud is a common term among any organization. However, it is sometimes used when it is too late. The key in preventing fraud is to understand the types of fraud and to implement controls within your organization to reduce the risk of fraud occurring.

     Two types of fraud include fraudulent financial reporting and the misappropriation of assets. Misappropriation of assets is the intentional theft or misuse of entity owned assets for personal benefits. Misappropriation of assets is usually the more common type of fraud that occurs. Fraudulent financial reporting occurs when there is an intentional misstatement to the financial statements. This could be an overstatement of revenues or an understatement of expenses to remain within budget constraints. While it is not as common, fraudulent financial reporting can be just as, if not more devastating than the misappropriation of assets.

     The most notorious cases of fraudulent financial reporting include the cases of Enron and WorldCom. However, any misstatement of financial statements can have an impact on the stakeholders in the organization whether they are monetary stakeholders or simply losing the trust of the public. The misappropriation of assets is usually theft of cash collected. The likelihood of this occurring increases with decentralized operations and less oversight.

     The best way to prevent fraud is to understand that it can occur to any entity at any level and also to be vigilant in implementing internal controls. The most common control is segregation of duties which ensures that one employee does not have the ability to execute an entire transaction whether it is a cash disbursement, cash collection, or adjustments made directly to the system. While there is not a way to completely eliminate the risk of fraud occurring, understanding how and when fraud occurs can be beneficial in deterring such activity.


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