Corporate Fraud Detection: Investigating Fraud in Your Company

Unfortunately, corporate fraud detection is something that business owners must seriously consider, because the consequences of inaction can be dire for an organization. In its 2012 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) stated that, among its survey participants, the typical organization loses 5% of its revenues to fraud each year.  While that 5% is certainly a scary average, consider that the median losses from a fraud for a businesses with less than 100 employees came in at $147,000 – a staggering sum that could be the difference in the survival of a small or mid-size business.

Corporate fraud schemes often fall into one of three categories:

  • Asset misappropriation schemes, in which the employee steals or misuses the organization’s resources (e.g. theft of company cash, false billing or inflated expense reports)
  • Corruption schemes, in which the employee misuses his or her influence in a business transaction in a way that violates his or her duty to an employer in order to gain direct or indirect benefit (e.g. schemes involving bribery or conflicts of interest)
  • Financial statement fraud schemes, in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial statements (e.g. recording fictitious revenues, understating expenses or artificially inflating assets)

Let’s consider a typical fraud scheme:

Whitney, a bookkeeper for a small trucking company, embezzled $550,000 from her employer.  Whitney spent a great deal of the illegal cash on a new Mercedes, luxury vacations and jewelry.  Of course, Whitney had to have a new house to store all her finery.

Surprisingly, it wasn’t her excessive lifestyle that made her employer suspicious.  The owner was going over the trucking company’s budget and noticed Whitney’s salary was listed at $38,000 a year.  But the owner was sure he had set her salary at $35,000.  The owner pulled Whitney’s personnel file and discovered that someone had altered her pay record.  It was obvious to him that no one but Whitney would have been motivated to falsely increase her salary.  Investigating further, he noticed suspicious-looking wire transfers from the company’s bank account.

Not unlike many small companies with limited accounting controls, Whitney could post entries, authorize wire transfers and reconcile the checking account.  Her scheme was simple.  After wiring money from the company bank account to her own, Whitney would charge the funds transferred to one or more expense accounts, reconcile the bank account and simply tear up the evidence.

So, what is a business owner to do once a corporate fraud scheme has been detected? More importantly, what are steps an owner can take to reduce the chances of corporate fraud happening to them?

We’ll cover those and other important questions in future blog posts, so be sure to check back often.

If you suspect fraud  or have questions for a forensic accountant, please contact Michael J. Stevenson, CPA, CFF, CFE, ABV at or 614-545-9100 x12.

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