10 Different Types of Frauds in Accounting

Large or small, businesses need to employ preventative measures to ensure they are not the victims of accounting fraud. You might think that your company is too tiny or that your enterprise is run like a tight ship, but you could easily slip through the cracks and see your finite resources get abused and stolen.

And, according to government statistics, the median loss for the owner and executive is around $850,000. This suggests businesses are not doing enough to ensure they are not being victims of fraudsters. A lot of these crimes are discovered by a third-party auditor or a law enforcement officer. Once caught, the severity of the crime is often very serious, and will require the help of a criminal lawyer to fight the charges.

Unsure what to look for? Every business should be aware of these ten different types of accounting frauds:

Type #1: Embezzlement Frauds

Embezzlement is the dirtiest word you can utter to an accountant. If you are in the company of such a professional, do not utter the E-word.

This type of accounting fraud describes stealing or misappropriating funds that have been placed in one person’s trust that belongs to an employer. For instance, a bank teller might keep a portion of the deposits. Or, as another example, a bookkeeper refrains from writing down a correct amount of payroll tax and chooses to keep a percentage to him or herself. An accountant could also temporarily take money from his or her employer and then return it without anyone noticing.

Type #2: Accounts Payable Frauds

Accounts payable is when funds are owed by a company to its suppliers identified as a liability on the firm’s balance sheet. This is a common type of fraud in accounting. With the expertise, the fraud is easy to carry out. The perpetrator can utilise all sorts of clever techniques, from rounding amounts on invoices to above-average payments to invoices that are just below the approval sums.

Type #3: Personal Purchases Frauds

This is another prevalent type of fraud in accounting easy enough to complete. However, companies are doing a better job of exposing these frauds.

It works like this: The employee purchases something personal using corporate funds and then records the transactions as legitimate business expenses in the accounting system. This could consist of new technology, lavish business lunches, or five-star hotel stays during business trips.

Type #4: Fake Supplier Frauds

It can be easy to establish a bogus supplier. All you need to do is come up with a legitimate name and then perhaps design a website. The staff member can then use this fake supplier and bill the non-existent company for goods or services not provided.

Type #5: Double-Cheque Frauds

Since cheques are becoming a thing of the past, this fraud is not as ubiquitous as it was years ago. However, since the public is still slightly relying on cheques, you could find an unscrupulous employee write a cheque to pay an invoice and then draft a second cheque to him or herself and lists the disbursement in the accounting database as a payment to the same source.

Type #6: Ghost Employees Frauds

Here is a clever trick that does require some legwork: Add a ghost employee – a fake one or a former worker – to the payroll and the earnings are transferred to the fraudster.

Type #7: Advance Frauds

Obviously, a new hire will not be afforded this privilege, but a seasoned veteran could submit a request for an advance on his or her pay. So, the firm grants the request and gives the employee payroll in advance. But here is the kicker: The funds are not paid back with this type of fraud in accounting.

Type #8: Timesheet Fiction Frauds

For employers who had adopted an automated payroll system, you do not need to worry too much about this fraud. However, if you rely on a paper system, then you could be concerned about timesheet fiction. This is when an employee inflates hours, the staff member does not put an accurate representation of his or her breaks, or colleagues clock in and out for other employees in their absence.

Type #9: Skimming Frauds

A little bit here and a little bit there – that is how you can describe skimming. To be a bit more specific, skimming takes place when personnel take money from receipts and refrain from recording the revenue on the books. This type of fraud may seem minor, but can carry significant consequences once the numbers begin to accumulate.

Type #10: Payoffs and Kickbacks Frauds

Quid pro quo? Kickbacks and payoffs? Something for something?

This fraud requires multiple people. Employees accept remuneration in exchange for accessing the company’s business. The firm, unfortunately, pays more for goods or services than what is required. These additional funds are then transferred to employees’ pockets because they allowed access to take place.

Indeed, there are numerous ways to prevent and detect accounting fraud. Every quarter, you can reconcile balance sheets and payroll accounts. You might force payroll employees to take their mandatory vacations. You could even institute data analytics to pinpoint irregularities on payroll records. Yes, businesses can take advantage of all sorts of mechanisms to identify accounting fraud.