Can be channelled through the accounts in a number of ways

Company “A” wishes to record $100,000 in fictitious sales to a non-existing Fictious sales
customer. The initial accounting entry is debit (increase) accounts receivable and
credit (decrease) sales for $100,000

Failure to record all expenses accurately will inflate the reported profit figure Understanding expenses

Deliberate miscounting at inventory courts

Returns to suppliers may not be recorded Overvaluation of inventory

Deliveries to customers may be omitted from the books

Intentional misrepresentation

Cut- off dates

Manipulation of year-end events
Delaying the recording of pre-year-end purchases of goods not yet delivered can
achieve the same objective

Applying incorrect rates or inconsistent policies Manipulation of depreciation figures Distribute too much profits to shareholders

Write off aged receivables
Members of payroll department miscalculate selected payslips
Irrecoverable debt policy may not be enforced Retained profits will be lower than believed
Overstated results
Investors making decisions based on inaccurate information
Incorrect decisions will be made
Intentional misrepresentation Suppliers will extend credit without knowing the financial position of the company

External employees claiming overtime for hours which they did not really work Reduced to inverstors may be reduced unnecessary
Payroll fraud
The fraudster sets up a bank account in the bogus name and collects the extra cash Understated results The negative publicity can damage the business
themselves Systems for Legal consequences
Theft from petty cash What if fraud? detecting and
Lower profits
May easily go unnoticed Theft of cash prevent fraud
Small money taken at intervals Immediate financial implications Less cash or fewer asset Returns to shareholders are likely to fall
Employees may pilfer items of inventory Net asset position is weakened
Too insignificant to have any serious impact on results or long-term performance Theft of inventory Removal of funds or assets from a business
Ex: Employees taking office stationary Barings
Long-term effects on company performance
The theft of cash or checl receipts Reduction in working capital
Teeming and lading Must be an integral part of corporate strategy
Popular in the sales ledger area Priortising prevention
Key part of managing business risks in general
Bogus orders are set up, and goods are depatched on credit
Fictitious customers Emphasising ethics Ex: Having formal codes of ethics which employees are required to sign
The employee must have responsibilty for taking goods orders as well as the authority
to approve a new customer for credit Recruitment procedures Ex: Checking the information and referrences provided by applicants
Ex: a sale manager or director could reduce the price charged to a customer in
return for a cut of the saving Personnel controls
Collusion with customers
Ex: The employee suppress invoices or underrecord quantities of depatched goods Removal of funds or assets from a business Training and awareness
on delivery notes

Ex: Staff collude with suppliers, who issue invoices for larger quantities of goods than
Segregation of duties
were actually delivered
Paying for goods not received Implications
of fraud for Appropriate Ex: Seperate documents used to record sales order, despatch, delivery and invoice
Achieved by overdepreciating the relevant asset documentation sales
Disposal of assets to employees the
Ex: An employee arrange to buy a car as the company asset for personal use organisation Limitation controls
Quite difficult to prove
Bogus supply of goods and services Physical security Ex: Keeping tangible assets under lock and key
Ex: Senior staff falsely invoice the firm for the supply of consultancy services

Ailing companies may raid the pension fund and steal assets to use as collateral in
Authorisation policies Ex: Requiring written authorisation by a senior member of staff
obtaining loan finance Ex: Independent checks
Misuse of pension funds or other assets
Standard procedures
Company assets can be transferred to the fund at significant overvalueations Ex: Wages/payslips must be collected in person
Management teams will set budget and targets Ex: Access control
Meeting budgets/target performance measures Computer security
Ex: Emplyees siphon off and pocket any profits in excess of the target Ex: Segrgation of duties
Ex: Incorrect descriptions of items and use of compensating debits and credits
Manipulation of bank reconciliations and cash books
Fraudulent activities go undetected by make a reconciliation work frequently