Author: Alysson Rodrigues

In our complex and sophisticated business environment, fraud is an ongoing risk and concern for businesses. New scams and patterns emerge as new opportunities present themselves and fraudsters find ways around detection and prevention measures.

However, there are known fraud schemes that occur again and again, across different geographies, business types, and industry sectors. These schemes are often simple, but the impact on your business can be significant. Sadly, these fraud schemes are most often perpetrated internally by the organisation. These cases are known as internal fraud, the most common type of which is embezzlement.

At Bishop Collins, we specialise in audit and assurance services designed to protect your business against internal and external fraud. This guide will explore what embezzlement entails, red flags to watch out for, and strategies you can use to help combat internal fraud in your organisation.

Internal vs External Fraud

Business fraud can occur internally and externally in an organisation. Internal fraud is any criminal act committed by someone associated with a business. This could be a staff member, a member of management or a member of governance. For example, an employee making deposits into their account or paying personal expenses on the corporate account.

External fraud is committed against an organisation from the outside. This might be technological threats courtesy of hackers, suppliers who lie about the work they did or services provided, and sadly, customers who attempt to return imitated or stolen products.

Types of Internal Fraud

Internal, or occupational, fraud generally falls into three categories:

• Asset misappropriation: Involves an employee stealing or misusing the employer’s resources.
• Financial statement fraud schemes: Where the perpetrator intentionally causes a material misstatement or omission in the organisation’s financial statements.
• Corruption: This includes offences such as bribery, conflicts of interest, and extortion.

In this article, we’ll focus on the widespread issue of embezzlement as a main type of asset misappropriation fraud. This type of internal fraud is also known as occupational fraud.

Asset Misappropriation Fraud: The Prevalence of Embezzlement

Embezzlement is among the most damaging types of asset misappropriation fraud businesses face. Employees can exploit their position within a company to commit acts of theft which, in many cases, goes undetected for long periods.

Embezzlement usually falls within two distinct categories: physical cash (including receipts or disbursements) and inventory or other assets.

Physical Cash, such as petty cash, can be simply taken by a perpetrator. Cash receipts fraud includes taking amounts received from customers which should, ordinarily, be banked. This includes schemes such as ‘skimming’ and cash larceny.

Disbursement fraud is becoming more commonplace in our technologically connected and complex business environment. This includes billing schemes, payroll schemes, expense reimbursement schemes, payment tampering, and register (or point-of-sale) disbursements.

Inventory and other assets frauds involve the misuse of employer assets as well as larceny. Larceny of other assets includes asset requisitions and transfers, fabricated sales and shipping, and purchasing and receiving schemes.

Embezzlement vs Larceny

Interestingly, there are subtle legal differences between embezzlement and larceny. These differences depend on the jurisdiction of the offence that occurred (as well as the specific circumstances).

In broad terms, the main difference is based on who had possession of the asset when it was taken. If the property was in the possession of the perpetrator, then it would be treated as embezzlement. If the asset was taken when in possession of the employer, however, then the matter will potentially be treated as larceny.

Who is at Risk of Internal Fraud?

All organisations have a susceptibility to internal and external fraud. Businesses with fewer than 100 employees are at much higher risk for employee fraud and embezzlement than larger corporations are.

Moreover, organisations with the fewest employees have a higher median loss in employee fraud cases. Small businesses also struggle more heavily to recover from these losses compared with larger businesses.

Fraud arising from dishonest behaviour not only undermines profits, operating efficiencies and reliability, but it can also severely damage an organisation’s reputation.

How Does Internal Fraud Occur?

In nearly 50% of internal fraud that occurs, the opportunity for fraud to be perpetrated was a result of either inadequate internal controls or internal controls simply being bypassed.

Interestingly, there is an inverse relationship between the internal control weakness and the character of the perpetrator. For example, employees perpetrating fraud do so through a lack of internal control or override of existing controls.

In contrast, executives largely override existing controls or there is an inadequate ethical culture (i.e. ‘tone at the top’) rather than there being a lack of internal control. For executives, it’s often their level of influence, authority and access within an organisation that affects how they can perpetrate fraud in this manner.

Unsurprisingly, the frequency of embezzlements committed by executives was less than by employees; although the financial loss incurred was markedly greater by about six times.

The Red Flags of Embezzlement

When a person is engaged in internal fraud, particularly embezzlement, that person will often display certain behavioural traits that tend to be associated with fraudulent conduct. It’s important to watch out for these red flags in efforts to identify, manage, and ultimately prevent employee fraud from occurring at your workplace.

Organisations with potentially greater exposure to internal fraud might have employees exhibiting the following characteristics, at least one of which has been exhibited by over 80% of reported fraudsters:

• Unwilling to share duties, or avoid having others assist or relieve them.
• Work long hours, including returning to work after hours and days off (including weekends).
• Resist taking annual, long service or sick leave.
• Resign or leave suddenly.
• Have a large number of void transactions, or conversely, have a low number of transactions.
• Replacing existing suppliers with suppliers that they have a close connection with.
• Refusal to implement, or adhere to, internal controls (e.g. skipping approvals, failing to keep appropriate or accurate records or receipts).
• Are unusually or overly inquisitive about the company’s payment system, or seek access to areas which they should not be able to access.
• Exhibiting financial hardship, such as always appearing unable to meet financial liabilities, or seeking loans and pay advances.
• Having past legal and/or compliance problems.

In addition, employees engaging in embezzlement may start to exhibit other unusual behaviours or attitudes. Look out for people who seem to live a lifestyle above their means, or who start to lavish expensive gifts on their colleagues.

You might also see bullying of other employees, a fraudster being affected by significant personal stress, displaying a strong sense of entitlement, or simply being openly unhappy with their employer (such as complaints about pay or leave entitlements).

How You Can Combat Embezzlement

As we often say at Bishop Collins about issues like fraud, prevention is always better than a cure. Every process, especially those involving cash and assets, should have checks and balances in place to identify and prevent fraud.

Our experts offer practical tips on how to reduce the risk of internal fraud within your business, which can go a long way in safeguarding your assets, finances, and reputation.

Promote an Ethical Culture in Your Entity

This is often referred to as the ‘tone at the top’. A good ethical culture also includes having clear policies and protocols relating to fraud prevention and detection, embezzlement awareness training (including refresher training), conflicts of interest, related party transactions and secondary employment.

Establish Strong Human Resource Management

This includes employee screening, implementing an equitable remuneration system, and providing job descriptions that segregate duties. It can also be beneficial to provide adequate training and education for your employees in the areas of fraud detection and management.

It’s important to effectively communicate policies and expectations of compliance to your team so they understand the far-reaching negative effects of embezzlement, which goes a long way in deterring unwanted behaviours. Finally, ensure your company understands things like audit regimes and the consequences of non-compliance.

Separate Duties and Delegations

As the old saying goes, be wary of putting all your eggs in one basket. Having only one or two employees responsible for key areas of finances and reporting can be risky.

Instead, delegate various tasks to more people within the business to ensure an even, safer spread of responsibilities. This includes appropriate and independent management oversight as well as restricted thresholds for transaction processing.

Review and Update IT Accesses and Transaction Processing

Access privileges should be assigned with care and due diligence and make a note of who controls what. This is also referred to as access on a need-to-know basis.

You may also want to consider restricting access to transaction processing or placing dollar value limits on transactions. This can help to keep larger processing amounts away from potential fraudsters, reducing the risk of fraud temptation and occurrence.

Invest in Strong Security Measures

Oftentimes, embezzlement and internal fraud can be caught at the very first instance (or even, ideally, prevented due to recognising red flags) thanks to good quality security measures within a workplace.

Invest in physical security like safes, CCTV, and physical access restrictions to ensure the safety of your business assets.

It’s also a good idea to actively and regularly test existing internal controls and fraud countermeasures, which may involve security and other measures you implement in your organisation. Watch for gaps, failures, or anything that doesn’t have the desired effect, and make changes where necessary.

Actively Monitor Employee Functions and Leave

No company wants to be overbearing, but there is a way to actively and supportively monitor your employees’ movements without being ‘that boss’. Ensure you’re up to date with your staff members’ functions and leave balances by taking an active approach to management.

Consider regularly rotating staff in high-risk positions and establishing requirements for staff to take annual leave regularly. Check in with your team via routine meetings and progress reports, and take a vested interest in their wellbeing. This not only allows you to stay close to goings-on in the business but also positions you as an attentive boss – one who cares, and one who won’t miss potential embezzlement attempts.

Regularly Audit Your Business

Regular accounts auditing is one of the most effective ways to spot anomalies that could signal fraud is taking place. External audits are mandatorily required by many businesses, but others elect to undertake these voluntarily. An internal audit can also help identify anomalies and irregularities.

At Bishop Collins, we specialise in conducting audits for a wide range of organisations. If you require assistance with your audit, get in touch with our team.

The Bottom Line: Develop a Fraud Risk Management Framework

A fraud risk management framework, encompassing internal and external audits, offers greater protection for a business against fraud. This kind of comprehensive fraud risk management encompasses awareness, prevention, and detection, making it a crucial prevention strategy to understand and recognise red flags.

The secret to creating a good fraud risk management framework lies in investing in regular fraud awareness education for your employees. These training sessions help educate your employees on what constitutes internal fraud, corruption, and employee misconduct, as well as the common red flags that are exhibited by those committing fraud.

Early detection, and encouraging employees to speak up and report concerns, allow your business to limit your losses due to internal fraud.

Protect Yourself Against Fraud With Bishop Collins

Internal fraud and embezzlement can come at a serious cost to your business, both financially and in terms of reputation. It’s something that can get out of hand very quickly if the proper safeguards are not in place.

Internal fraud management can seem daunting – with so many moving pieces and important strategy aspects to consider, it can feel like a full-time job. This is where the team at Bishop Collins can help.

We can chat through your concerns and pinpoint areas of improvement within your business, as well as conduct thorough audits and training to ensure you’re protected against embezzlement.

If you’re interested in learning more about internal and external audit, fraud risk management, and awareness training, get in touch with us for an obligation-free chat or simply call us on (02) 4353 2333.

The threat of fraud in a complex and sophisticated business environment is real. Financial systems become more complex over time to fulfil the quest for information from their owners.

Accordingly, opportunities are inherently created for fraudsters to thrive. For this reason, fraud is constantly evolving: new scams and patterns evolve as new opportunities emerge and fraudsters find ways around detection and prevention measures.

Still, many types of fraud and schemes occur again and again, across different geographies, business types, and industry sectors. In this blog, we’ll cover:

• Internal fraud, including embezzlement and fraudulent payments, and
• External fraud, such as hackers, supplier fraud, and customer fraud.

Let’s delve a little deeper into the most common types of fraudsters and how best to respond to them with internal or external audits to help protect you and your business.

Fraudsters From Within

Internal fraud is any criminal act committed by someone associated with a business. This could be a staff member, a member of management, or a member of governance. Also known as occupational fraud, this could look like an employee making deposits into their account, or paying personal expenses on the corporate account.

This type of internal fraud is also referred to as ‘occupational fraud’. It’s among the most damaging types of fraud businesses face since employees can exploit their position within a company to commit acts of theft and embezzlement. In many cases, this kind of fraud goes undetected for long periods.

To better understand internal fraud, we can categorise it into four distinct types.

Embezzlement

Embezzlement is when someone connected to a business steals funds, typically money or amounts in the corporate bank account.

Importantly, embezzlement is not as straightforward as theft. This is because there is usually a manner in which the fraud is concealed in order to avoid detection.

Fraudulent Payments

Fraudulent payments fraud is when someone connected to a business establishes a payment to themselves or a third party.

Typically, this type of fraud takes three forms:

• Invoice fraud: When an employee sets up fake invoices to pay themselves or a third party from the company’s accounts.
• Wage fraud: When an employee creates ‘ghost employees’ on a company’s payroll, listing them as offering ‘third-party services’ when in reality they’re fake and the employee can access the monies paid.
• Expenses fraud: When an employee manipulates expense documents, forging declarations and signatures to receive reimbursement for fabricated expense requests.

As you might expect, fraudulent payments are difficult to detect since they’re often carefully masterminded and concealed in genuine payment and invoice requests.

Data Violations

Data is one of the most valuable assets of a business, and data fraud is quickly becoming one of the biggest threats to modern companies. Certain major Australian companies may spring to mind when thinking about recent data breaches, some of which were nationwide, affecting millions of people and businesses.

Data theft by staff can potentially be on-sold or used as leverage, for instance, in a bribery scenario. Businesses face the risk of severe reputational damage when their data and assets are improperly used by current or outgoing employees.

In efforts to keep track of data breaches and respond to them swiftly, the Notifiable Data Breach (NDB) scheme was instated in 2018. The scheme dictates that data breaches occurring to Australian companies with an annual turnover of $3 million or more report such breaches to the Australian Information Commissioner (OAIC).

Financial Statement Fraud Schemes

Financial statement fraud schemes involve intentional actions by individuals to cause material misstatements or omissions in an organisation’s financial statements. These schemes are a form of white-collar crime where the perpetrating party manipulates financial records for personal gain or to deceive stakeholders.

The motives behind financial statement fraud can vary, ranging from inflating profits to meet financial targets, concealing poor performance, or attempting to boost stock prices. Perpetrators may employ various techniques, such as inflating revenues, understating expenses, or manipulating accounting entries to present a false financial picture.

This type of fraud can have severe consequences for investors, creditors, and other stakeholders, eroding trust and damaging the financial health of the affected organisation.

Responding to Internal Fraud

When it comes to internal fraud, prevention is better than cure. At Bishop Collins, we offer clients practical tips on how to reduce their risk of internal fraud – check them out below:

Segregation of Duties

It’s rarely a good idea to leave one person in charge of your business’ accounting and finances. Instead, split management between two or more parties to improve accountability and make things more difficult for would-be fraudsters.

We also recommend segregating the initiation, review, approval, recording, and disbursement functions between different roles to not only promote transparency and accountability but also to lessen the likelihood of collusion.

Review and Update Access Controls

Who has access to what systems and platforms within your business? Access privileges should be assigned with care and due diligence and make a note of who controls what. This is also referred to as access on a need-to-know basis.

Regularly Audit Your Accounts

Regular accounts auditing is one of the most effective ways to spot anomalies that could signal fraud is taking place.

External audits are mandatorily required by many businesses, but others elect to undertake these voluntarily. Importantly, an internal audit can also help identify anomalies and irregularities.

At Bishop Collins, we specialise in conducting industry-customised company audits to help you identify pain points and safeguard your company.

Screen Your Employees

Business owners need to vet all prospective employees to reduce the risk of falling victim to internal fraud. That means always following through on references, conducting background checks, reviewing social media, and a comprehensive interview process.

External Fraudsters

External fraud is when a business is the victim of someone outside of its organisation. We commonly hear of hackers sending phishing emails, suppliers who lie about the work they did or services provided, and sadly, customers who attempt to return imitated or stolen products.

We can categorise external fraudsters into three main types.

Hackers

Unless you’ve been living under a rock, you will not need an introduction to hackers and the effect they have on businesses. Hackers target not only large, listed entities but also smaller enterprises and government agencies.

Recent examples include an Australian personal loan and financial service provider, affected by a data breach that impacted 14 million customers in Australia and New Zealand. The data breach was initiated after the credentials of an employee were stolen.

Similarly, a large telecommunications company and health insurance company fell victim to hackers through ineffective credential management of users and multi-factor authentication.

In both of these cases, the hackers sought a ransom from the companies that fell victim to the theft of customer data. For this reason, keeping up with strict and active cybersecurity efforts is paramount.

Supplier Fraud

Another type of fraudster from outside the business can be in the form of a supplier (vendor) to the business. This applies to new and existing suppliers of the business.

Vendor fraud is a type of malpractice used by fraudsters to scam a company’s accounts payable department into paying a vendor, or sometimes multiple vendors, for amounts not rightfully earned.

Sometimes, the fraudulent activity is orchestrated by a vendor acting alone. Other times, sadly, it is carried out with the assistance of an employee.

Supplier fraud takes many forms, some of the most common including:

• Fictitious supplier: In this arrangement, an employee submits a payment request from a non-existent supplier or an actual supplier that never delivered any goods or services.
• Duplicate invoice payments: This happens when an employee duplicates invoices from a legitimate vendor, with the plan of diverting payments to an account under their control.
• Over-billing: An over-billing fraud scheme occurs when a vendor inflates the price or quantity of items on an invoice by adding items they never delivered or higher prices of delivered goods.
• Bid-rigging: Bid rigging is a fraud scheme that involves a supplier offering compensation (or financial benefit) to an employee with a strong influence to secure a contract and supplier payment.
• Price-fixing: Price-fixing happens when two or more vendors conspire to fix the cost of a contract at a price higher than normal. The business is left with no choice but to work with an inflated cost.

Customer Fraud

One of the most common types of fraudsters, and one you may have seen in day-to-day life, are customer fraudsters. When a customer returns an item to a business to get a refund or credit, this is referred to as return fraud.

Return fraud encompasses a variety of fraudulent return practices, such as wardrobing or renting, counterfeit returns, price tag flipping, and returning stolen goods.

• When a buyer buys something with the idea of using it just once and then returning it for a refund, this is known as wardrobing or renting.
• Exchanging price tags is considered as returning counterfeit goods while returning fake products falls under the returning counterfeit commodities category.
• Returning items that have been stolen from a retailer is referred to as returning stolen goods.

These frauds have a significant financial cost to businesses, particularly those in the retail sector. While customer fraud can often be easier to catch or detect than other types of fraud, it’s still a sticky situation when dealing with Australian Consumer Law and the old adage of ‘the customer is always right’!

Responding to External Fraud

Concerning external fraud, the emphasis lies on proactive prevention rather than reactive solutions – the same as internal fraud. Luckily, we have several actionable insights to minimise your susceptibility to external fraudulent activities.

Supplier Management

Implement a supplier management platform or protocol. Supplier management is the process of supporting and empowering vendors through establishing and nurturing long-term relationships.

This includes finding and choosing the right vendor for the company’s needs, controlling the costs and supplier risks, and paying for the services and goods consumed.

Delegate Duties

We said it before, and we’ll say it again – it’s rarely a good idea to leave one person in charge of your business’ internal controls. Segregate the initiation, review, approval, recording, and disbursement functions between different roles.

Importantly, implementing supplier matching protocols reduces the likelihood of fraud. This is achieved by matching supplier invoices to other documents such as purchase orders, payment receipts, inspection slips, delivery dockets, and so on. This is also referred to as ‘the three-way match’.

Screen Employees and Conduct Employee Training

It’s important to run background checks to identify relationships between employers and suppliers. Similarly, businesses should ensure employees are aware of policies, procedures, and protocols.

Ensuring documentation is produced and reviewed and not entering into transactions with incomplete or inconsistent information. This applies to both working with suppliers and serving clients and customers.

Protect Your Business Against Fraud

Fraud arising from dishonest behaviour not only undermines profits, operating efficiencies and reliability, but it can also severely damage an organisation’s reputation. Fraud may be on the increase, but with the right management and approach, you can reduce the likelihood of your business falling prey to fraudsters.

An external or internal audit certainly helps deter fraudsters. Used in conjunction with a carefully designed and effectively operating internal control environment offers greater protection for a business against fraud.

For an obligation-free chat, get in touch with the Bishop Collins team. We can assist you with audit and assurance services, during which our experts will provide advice and guidance on how to protect your business against fraud, or how to deal with any fraudulent activity you suspect.

Remember, prevention is key – don’t wait to safeguard your company until it’s too late!