6 Potential Types of Frauds in Accounting

Fraud happens every day at companies both large and small and has serious consequences. Let’s start by defining accounting fraud. Accounting fraud takes place when an employee steals, misappropriates or embezzles money or other resources. The six types of accounting fraud are payroll fraud, invoice fraud, accounts payable fraud, accounts receivable fraud, financial statement fraud, and tax fraud.

Ultimately, the losses from accounting fraud will outweigh the costs of hiring a private investigator to expose the truth. It is worthwhile for organizations to learn more about these different types of frauds in accounting. In the following blog post, we’ll go over each fraud in more detail.

1. Payroll Accounting Fraud

The accounts payable department is a prime target for fraud. Payroll fraud is characterized by the theft of cash from a business via the payroll processing system. This type of fraud is committed by employees, and there are many ways in which they can do this. The most common form is unauthorized hours. This is where timesheets are padded by employees to make it look like they worked more hours than they actually did.

For these types of fraud in accounting, the employee will usually do this in small enough amounts in an effort for the fraud to go undetected. This can become a serious problem if managers overseeing these employees do no do a thorough enough check of everyone’s hours. Small amounts can lead to large amounts and cheat the company out of thousands of dollars over time.

Some other forms of payroll fraud are paycheck diversion (this is where employees will take the cheque of another employee who is perhaps absent and cash it for themselves) and pay rate alteration (this is where employees collude with the individual in charge of payroll to increase their salary by altering their hourly pay rate).

2. Invoice Accounting Fraud

With invoice fraud, an employee will submit a fake invoice to the accounts receivable department for payment. If the employee who is in charge of reviewing these invoices does not do their job thoroughly, this type of fraud can go undetected and add up to lots of money cheated out of a company. The best way to catch this type of fraud is to match each invoice to a purchase order and receipt of goods. It’s also a good idea to be on the lookout for clues that can lead to the fraud. For example, if the company has a policy where invoices over a certain amount need additional review, they should be on the lookout for invoices that come in right under this amount. Having a few fail-safes in place will make this type of fraud less likely to pass without detection.

3. Accounts Payable Fraud

Accounts payable fraud is an extension of invoice fraud. For these types of frauds in accounting, employees will fabricate a fake company and make claims for payment of goods and services that were not delivered. This type of fraud is one of the easiest frauds to commit and is quite common.

4. Accounts Receivable Fraud

In this type of fraud, employees divert funds from the company account into their own personal account and will use any concealing technique they can think of to hide the fraud. This includes applying discounts, applying payments to the wrong account, stealing paper statements and more.

Accounts receivable fraud can be broken down into further categories such as lapping fraud (this is a practice that involves altering accounts receivables to hide a stolen receivables payment), skimming fraud (this is where cash is taken off the top of the daily receipts and then reporting a lower total), and more.

5. Financial Statement Fraud

This type of fraud is less common. Even though it doesn’t happen a lot, when it does it can do serious damage to a company and is often referred to as “high-level fraud”. These types of frauds in accounting are usually committed by top management staff. Usually, the motive here is to show the company as failing, yet profitable, so managers will still get some type of incentive.

What does financial statement fraud look like? The most common activities with this type of fraud are usually overstating revenue, earnings, and assets. Another common activity with this type of fraud is understating or concealing liabilities.

6. Tax Accounting Fraud

Tax fraud happens quite often and cheats the government out of millions of dollars each year. Tax fraud occurs when “an individual or business entity willfully and intentionally falsifies information on a tax return to limit the amount of tax liability.” Essentially when this type of fraud is committed, an individual has cheated on a tax return. The motive for this type of fraud is to avoid paying tax obligations.

What does tax fraud look like? It can take many forms: claiming personal expenses as business expenses, claiming false deductions, failing to file payroll tax reports, failing to report cash payments made to employees, failing to report and pay any withheld payroll taxes, and much more. This crime is taken very seriously and is punishable by fines, or even time in prison.

All of these types of fraud should be taken very seriously, and measures should be put into place to try and catch it at all levels.