A fraud could take the form of misstatement of an information or misappropriation of the assets of the entity. Components in a fraudulent activity include dishonest intention, Use of deception (trick), Personal advantage or loss to a third person, Financial/asset loss to an organization and may involve financial misstatements.
A. Fraud for Personal Gain
Money, gift or other favours offered to procure for illegal or dishonest action or decision in favour.
2. Conflict of Interest
Circumstances wherein the officials are in a position of trust and in discharge of their duties face a competing professional or personal conflict of interest.
Such conflicting interest results in impartial discharge of his/ her duties.
B. Corporate Frauds/ Irregularities
1. Advance Billing
A situation where the company officials indulge in booking fictitious sales in anticipation of actual sales. This results in misrepresentation of revenue in the books thereby misleading financers and stakeholders.
2. Shell/ Dummy Company Schemes
A shell or dummy company represents a fictitious company or a ‘paper company’ to transfer profits or funds from the main company. This could involve fictitious bills (mostly for services rendered or consultancy charges that cannot be corroborated) which are used in the name of dummy companies diverting the funds taken from banks and financial institutions.
3. Money Laundering Activities
The person indulging in money laundering looks for avenues with weak banking controls for converting illegal money through the banking system.
This person indulging in activity looks for avenues to enter into ‘benami’ (could be called name lending) transactions. Companies with extensive cash handling and inadequate identification process of source of money are susceptible to money laundering activities.
C. Fraud at Operational Level by Employees
1. Tampering of Cheques
Tampering of cheques and in any digital mode of payment and activity that leads to misrepresentation such as payee name being altered, or preparation of cheques or payments in system without remittance or issue of the cheques to entitled payee, etc., are methods that may lead to falsification of accounts.
The name of the payee in the cheque or other digital mode of payments issued for payment could be fabricated to wrongly codify and book against an improper account head. A person draws cheque or payment voucher in system fraudulently in his name or converts a cheque drawn on a third party to his advantage.
2. Off Book Frauds – Skimming
In skimming the perpetrator misappropriates the cash before these are recorded in the books or before the sale. These frauds are difficult to detect as the cash or collection is taken off before the accounting entries are made in the books.
This situation arises especially in unorganized markets and in rural economies where banking habits are relatively underdeveloped. The process gaps allow an employee to divert the cash collected to his personal account under the pretext of safeguarding cash.
3. Cash Larceny
Cash or funds mis-appropriated after the accounting entries are already passed in the books is an age-old practice that has manifested into innovative means in the digital era.
When there are delays in accounting of cash collections and there are no laid down cash flow controls. The cash/ collection shortage is covered up by declaring and accounting the shortage as cash/ cheque in transit.
4. Teeming and Lading (Lapping)
Cash deposits or cheques collected from customers are overlapped with the collections from subsequent customers and the amount collected is diverted to a personal account.
5. Expense Reimbursement Schemes
Involve employees resorting to treating their personal expenses as incurred for business purposes and claiming reimbursement. For instances claiming medical or gift expenses that were not incurred or employees travelling together in a single cab but indulging in multiple claims individually.
6. Payroll Fraud
The payroll fraud could include payment to non-existent employees or in a contractual arrangement inflating the manpower resources than those deployed while billing the client.
It may include showing higher pay than actual disbursement to employees/ workers, etc.
7. Commission Schemes
Exaggerates the sales through fictitious billings to earn higher commission or alter the prices of the products sold from those stipulated by the company or share the sales volumes achieved with other employees to share higher commission.