Fraud Schemes - 6 Main Types Of Occupational Fraud

Occupational Fraud: The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets. -The key to occupational fraud is that the activity:
a. Is clandestine
b. Violates the employee's fiduciary duties to the organization
c. Is committed for the purpose of direct or indirect financial benefit to the employee


1. Employee Embezzlement
-Most common type of occupational fraud (more than 80% of frauds)
-Employees deceive their employer by taking company assets.
-Cash most targeted asset, taken 90% of the time


Occupational Fraud can be either direct or indirect
-Direct Fraud: employee steals company cash, inventory, tools, supplies, or other assets, or establishes dummy companies and have employers pay for goods that are not actually delivered Does not use a 3rd party, the money goes straight to perpetrator's pockets.


-Indirect Fraud: employees take bribes or kickbacks from vendors, customers, or others outside the company to allow for lower sales prices, higher purchase prices, nondelivery of goods, or the delivery of inferior goods. Usually payment to employees is made by organizations that deal with the perpetrator's employer, not the employer itself.


2. Management Fraud
-Usually fraud by top management's deceptive manipulation of financial statements


3. Investment Fraud
-Closely related to management fraud
-Fraudulent and usually worthless investments are sold to unsuspecting investors.
-Charles Ponzi is father of investment scams
-In 2000, more than $5 billion lost from telemarketing fraud
-Recent mutual fund frauds were investment scams using market timing and late trading
-Illegal market timing is an investment technique that involves short term in-and-out trading of mutual fund shares. This technique has caused losses to long term mutual fund investors of approximately $5 billion per year.
-Late trading allowed selected investors to purchase mutual funds after 4 pm using that days Net Asset Value (NAV) rather than the next day's NAV that is required under law. Investors would capitalize on positive earnings news and then were allowed to immediately reap the benefit of the stocks upward movement the following day.


4. Vendor Fraud - 2 types
a. Fraud perpetrated by vendors acting alone
b. Fraud perpetrated through collusion between buyers and vendors
Usually results in either overcharge for purchased goods, shipment of inferior goods, or nonshipment of goods even though payment is made

5. Customer Fraud
-Customers either do not pay full price for goods purchased, they get something for nothing, or they deceive organizations into giving them something they should not have.

6. Miscellaneous Fraud
-Fraud that doesn't fit into first five types and may have been committed for reasons other than financial gain.