Occupational fraud and abuse is defined as “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (2012 Report To Nations On Occupation Fraud And Abuse, 2012). Occupational fraud entails deceiving employing organization to obtain resources or assets for personal gain and abuse involves misapplication of the resources provided by the employer. Occupational fraud is typically for three types:
1. Corruption
2. Asset Misappropriation
3. Fraudulent Statement.
Amount these three categories, asset misappropriation, and corruption are the most common types of fraud and abuse. In 2012 total number of median loss of occupational fraud and abuses of all the reported cases was $140,000, and one-fifth of the cases involved losses of least $1 million (2012 Report To Nations On Occupation Fraud And Abuse, 2012).
On an average United States organizations incurred 6% of revenue loss every year due to occupational fraud and abuse (Scott, A, 2002). Victim organizations not only bear the revenue loss but these types of frauds can also damage its goodwill in the community as well. Large organizations with multimillion turnovers can bear these losses but can have a devastating effect on small organizations. U.S. governmental oversight of accounting fraud and abuse and its effect on the company In the past many companies used the flexibly in accounting framework to modify its financial statements to present the perfect picture to the investors.
Security and Exchange Commission (SEC) finally than introduced some detailed changes in the accounting framework. In addition, it introduced processes to enhance outside auditing, made recommendation to strengthen the audit committee, and encouraged cultural change. SEC’s Division of Corporate Finance is responsible to review critically the financial statements of the targeted companies to ensure that it is new and existing accounting rules are being followed and to minimize fraud and abuse using fraudulent statements. Additionally, SEC’s Division of Enforcement is responsible to bring civil cases and penalties against the companies that attempts to conduct fraud or violets the security acts. Because of this oversight by SEC and government, companies are providing detail disclosures, more transparent financial statements to the investors and users of financial statements.
Potential corruption schemes to be aware of in the company
Corruption means misusing the entrusted power or authority against the official duty to obtain benefits. Corruption schemes can be broken down into four categories: 1. Bribery- This entails offering, giving, and receiving anything of value to influence the decision. Official bribery involves providing or offering anything of value to influence the decision of government agent or employee. Commercial bribery deals with providing something of value to influence a business decision rather than decision of government employee or agent. Generally, there are two types of schemes involve in bribery: •Kickback Schemes: These schemes are possible because of collusion between employee of the victim company and outside party, typically vendors. In this, vendor submits either inflation or fraudulent invoices to the victim company, and the employee in the victim company makes sure that the payment is made on those invoices.
After the payment, employee gets his or her share of payment that is known as kickback. In some cases, employee receives payment just by diverting excessive business to vendor. 2. Illegal Gratuities- In this corruption scheme, something of value is given to the employee to reward the decision. This is different from kickback schemes because benefits are provided as a reward for the decision made not to influence the decision. 3. Economic Extortion- This scheme is different from bribery and illegal gratuities, as in this case employee of the victim company demands something of value from outside party, and refusal to pay by outside party may causes loss of business.
4. Conflicts of Interest – This occurs when employee has an undisclosed economic or personal interest in a transaction that makes the employee not to think in the best interest of the victim company that ultimately adversely affects the company. Recommendation of types of accounting evidence and methods of gathering such evidence to support the financial status review It is of great importance that every fraud examiner or forensic accountant to have good knowledge of the rules of the court, legal system, and evidence for successful competition of the investigation. In order to be accepted as evidence, it must be relevant, material, and competent. “Relevant evidence means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence” (“Rule 401: Relevant Evidence- TN Court”, 2013).
Materiality requires that evidence must prove a point and competency entails that evidence must be sufficient, reliable, and relevant to the case (WELLS, 2011). There are two types of evidence can be used to support the financial status review: 1. Primary evidence: This type of evidence is regarded as the best evidence because of its authenticity, credibility, and existence to prove a point and can value to a case. In addition, it provides direct evidence on the topic under review. These include original documents, accounting records, account statements, interviews, hand-written statements, etc. 2. Secondary evidence: This type of evidence is typically used and acceptable when the primary evidence is not available or destroyed.
Every effort should be made to introduce and use primary evidence for better and credible representation of facts. These can include photocopies of the original documents, testimony of witness, etc. While doing full financial status review we can obtain information using various sources, such as emails, operating systems, database, accounting records, interviews with different personnel, bank statements, etc. We can also deploy audit techniques such as testing controls, analytical procedures, using substantive procedures, computer assisted audit techniques to obtain sufficient and reliable evidence to support financial review.