Fraud occurs when assets are stolen or financial statements are intentionally misstated. The Association of Certified Fraud Examiners (ACFE) estimates that companies, on average, lose 5% of revenues to fraud annually. The ACFE categorizes fraud in three categories: (1) asset misappropriation, (2) corruption, and (3) financial statement.
Asset misappropriation is a scheme whereby an employee steals. These schemes include the skimming of cash receipts, theft of physical assets, fictitious vendors, and tampering with checks.
This is the most common form of fraud but is usually the least costly.
Corruption is the misuse of an employee's influence to derive personal benefit. An example is an employee's receipt of a bribe from a vendor.
While corruption is less common than asset misappropriation, it is usually more costly.
Fraud also occurs when companies intentionally misstate their financial statements (sometimes called "cooking the books"). In doing so, stock prices might increase and owners and management can sell their stock for fraudulent gains.
This the least common fraud, but, on average, is the most costly.
Get my free accounting and auditing digest with the latest content.