Hi there. My name is Blair. This is Karen and today we're going to talk about fraud. Karen, can you tell us what do you think stealing is? Yes. What kind of people steal robbers?

Uh huh. And how do you think we could stop people from stealing? Uh huh. Is there anything we could do to stop them from stealing? That's what we do after they steal. But what can we do beforehand?

In this lesson, we're going to talk about fraud. And fraud is a broad concept unnecessarily So, but at its core, it's a breach of trust by an employee, which raises Ulsan an unauthorized misappropriation of assets or a misrepresentation of information. And these criminal actions result in either a direct or indirect benefit to the employee. Now, that's a mouthful just to say. So let's see if we can slim this down some employees who lie, steal or use their jobs for their own personal gains or committing fraud. I'm going to break the discussion into three different lessons.

In the first lesson, we're going to talk about the types of fraud. Next, we'll talk about why and how fraud happens. And then finally, we'll do something about it either to prevent or detect it. So to begin with, to engage in a discussion about the types of fraud you need a lot of time and mental capacity. Why? Because there's fraud has so many variations.

It's far more sinister than simply stealing cash out of the register or stealing inventory from the warehouse. Let's see if we can bring some structure to our understanding of fraud. First, let's only deal with employee fraud in this module, that is fraud arising from an inside job. There are other types of fraud that can be committed by those outside the organization. But that's a separate discussion. Next, let's break employee fraud into three different categories.

First, the misappropriation of assets which you can think of as theft. Secondly, corruption, which happens when an employee abuses their position within the organization. Thirdly, reporting fraud, which comes from lying about what has really happened. Asset misappropriation is by far the most common type of fraud. In fact, it may be a bit presumptuous in such a statement, but I believe that this sort of fraud happens in just about every organization that exists. And let me explain what it includes and then you decide for yourself whether I'm overstating the risk.

As we said earlier, think of theft and stealing when we talk about asset misappropriation schemes. Let me identify some of the most common schemes to give you an idea of what I'm talking about. And let's look at this on an asset by asset basis. Cash is obviously the most susceptible to theft, and one such scheme relating to the theft of cash is called skimming. And skimming is a fraud whereby it applies receives in pockets cash from a customer before it's ever recorded by the company. Employees can also steal cash after it's been wrung into the register by reversing the sale or by recording a fraudulent return.

Cash can also be stolen later in the process through a scheme called laughing. Here an employee receives customer payments in pockets to cash. The employee conceals the theft because they have the ability to also adjust the receivable subledger. They may choose to write the account off directly to an expense account like a bad debt expense, or wait for the next customer to make a ribbons and applied that payment to the previous customers whose payment they pocketed. Cash can also be stolen through payment schemes to fictitious suppliers, or payments for fictitious invoices. fraudulent payroll schemes can also extract cash from the company by paying fictitious employees or by paying a bona fide employee for hours that haven't been worked or an incorrect rate.

Check tampering techniques are aware of it extracting cash directly from the bank account by intercepting or forging checks to the company. Finally, we have expense claim fraud, which is extremely common with a lot of variations. Though often they involve small amounts of money. employees may pad their expenses by submitting fictitious expenses, or duplicate claims, or fictitious mileage, you get the idea that there's many different variations of cash misappropriation schemes. Let's move on and spend a moment talking about inventory fraud, and inventory may have value on its own or be readily sold to realize cash. Inventory theft happens in a variety of ways.

It's the cover up that gets tricky. If a thief has access to adjust the inventory records that makes it easier for certain entities like retail stores. Theft simply gets accumulated with the other shrinkage and maybe impossible to attribute to a particular individual. fixed assets can also be susceptible to theft, particularly small items like laptop computers and other technologies. devices little attention is often paid to old equipment and equipment that has been fully depreciated. intangible lessons are often not considered in the context of fraud, but poses significant risks to many organizations.

Confidential information of the company may have significant value, and employees with access can exploit this value for personal gain. misappropriation schemes also involve the unauthorized use of employee assets. So for example, they may be using telephones to steal long distance time, they may be using computers for their own personal use, or they may be using or stealing company stationery. And while it's not fraud per se, skipping work or reporting vacation days is still wrong in any context of the ethical code of behavior. This appropriation schemes collectively are the least material and the most common types of fraud schemes, but they can still add up to a substantial loss over a long period of time. Now, obviously reading an article the other day where a Comptroller of a small US city managed to steal $30 million from the city in the state over the course of three decades before getting detected.

The second group of fraud schemes I will discuss are those under the banner of corruption and bribes need legal gratuities or monies or payments unkind received by the employee, from customers or suppliers for special consideration in the world today there are over $1 trillion in bribes paid out each year. And while this practice is less prominent in the developed countries, in the third world countries paying bribes to conduct business is considered normal practice. This obviously raises ethical issues for multinational companies. Now, extortion is so different than abroad and that the employee will approach the vendor or the customer and threaten them with losing the business of the company if they don't pay them off. a conflict of interest arises when an employee does not dealing with a customer or supplier on an arm's length basis. Perhaps they have a direct or indirect financial interest in the customer or supplier.

The problem is When this happens, the company is not likely to extract best value from the terms of the relationship. And lastly, the third category of fraud scheme is the financial reporting fraud. And this is the most complex type of fraud and is also results in the greatest loss in value to the organization. Now, financial reporting fraud can be driven by either individuals or corporate interests. Individuals may have performance bonuses or stock options or share interests that are driven by corporate results. Individuals may also feel pressured to conjure up fraudulent reporting for the corporate purposes of meeting analysts expectations, maintaining the corporate reputation, or complying with lending covenants.

These schemes are often perpetrated by senior management. Senior management uses its authority and its access to override the processes and controls. They may adjust revenues for inventories or underreport liabilities by posting journal entries already. Engaging in transactions designed to Window dress the financial statements. For example, senior management may ship product to customers just prior to year and to bolster sales with an unwritten arrangement with the customers, allowing them to return the unsold products at a later date. This is a scheme called channel stuffing.

Some reporting schemes don't involve the accounting numbers at all, but instead fraudulently report other important information to stakeholders. For example, three X was a Canadian gold mining company that reported the discovery of substantial gold reserves that were later found out to be a hoax, causing the shareholders to lose billions of dollars. I leave our discussion to the types of fraud at that for now. But as you can appreciate, there are a lot of different ways fraud can happen. And if you're still doubtful that a fraud can be happening in your organization, consider the words that I heard from one fraud expert and he called it the 20 6020 rule which goes as follows. He said the 20% of the people in the organization We'll be honest, no matter what and 20% of the people in your organization can be expected to exploit any weakness the organization has for their own personal gain.

However, the real list for the company lies with the 60% of the folks in the middle. These people are generally honest, but under the right circumstances would perpetrate a fraud. In our next lesson, we're going to understand what those circumstances are. So until then, don't start to get to the top and get to the top. Don't stop.