Meaning of Fraud

The term "fraud" can be used for several sins and offences including:
(a) fraud, involves the use of deception to obtain an unjust or illegal financial benefit.
(b) intentional misstatements, or omissions of amounts or disclosures from an entry's
accounting records or financial statements.
(c) theft, whether or not accompanied by misstatements of accounting records or
financial statements.
Fraud is the 'misrepresentation by a person of a material fact known by that person to be
untrue or made with reckless indifference as to whether the fact is true, with the intention of
deceiving the other party and with the result that the other party is injured'.

Categories of Fraud
i. management fraud
ii. non-management fraud
Management Fraud
This type of fraud occurs when the top management of an organisation deceives shareholders,
creditors and external auditors for the purpose of issuing misleading financial statements. The
situations which give room for management frauds to occur are as follows:
(i) Affairs of the business are dominated by one man;
(ii) Lack of sufficient competent staff to run the accounts department;
(iii) Weakness in the internal control system;
(iv) Related party transactions, this is, transactions between the firm's management and
its officers;
(v) When the board of directors do not get effectively involved in the supervision of the
affairs of the organisation.

Non-Management Frauds
These types of fraud are rampant in the day-to-day affairs of the business, and they include
the following:
i. Defalcations
ii. Embezzlement
iii. Erasures
iv. Alterations
v. errors

i. Defalcation
This is the act or instance of embezzling, and is caused by non-segregation of duties.
Areas in which defalcation could occur include:

a. if the chief cashier cashes a debtor's cheque and fails to record the receipt;
b. assets and goods may be intercepted and may not be on record;
c. assets may also be taken out after they have been properly recorded.
These circumstances will lead to either temporary or permanent concealment.

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i. Embezzlement
This speaks of the act of appropriating money fraudulently to one's own use.
iii. Erasures
The act of instant erasing from the books of records.
iv. Alterations
The act or process of modification to defraud the employer.
v. Errors
The act of ignorance or imprudent deviation from a code or usual practice.

Types of Fraud
There are three types of fraud that are present in fraudulent financial reporting situations.
These are the 3Ms of financial reporting fraud:
i. Manipulation, falsification or alteration of accounting records or supporting
documents from which financial statements are prepared;
ii. Misrepresentation in, or intentional omission from the financial statements of
events, transactions, or other significant information;
iii. Intentional misapplication of accounting principles relating to amounts,
classification, manner of presentation, or disclosure (Crumbley et al, 2007).

Categories of Errors
a. Original errors - errors emanating from the original or source document. They are
made in copying the source document into the books of original entry.
b. Errors of omission - errors made when the whole documents or transactions are
completely omitted or overlooked from the record.
c. Errors of principle - these can occur when the recording clerk fails to abide by the
rules of double entry system or where item of expense is treated as revenue or where
revenue is treated as capital.
d. Errors of commission

Fraud Detection and Prevention in Selected Accounts

Here, we shall highlight the different accounts and the most frequent frauds associated with
them. The list is not exhaustive.

a. Salaries and wages

i. Ghost/dummy/fictitious names;
ii. Overstatement of gross pay;
iii. Time card fraud;
iv. Understatement of deductions
b. Sales
i. Teeming and lading;
ii. Understatement of sales invoices;
iii. Misappropriation of cash as a result of delays in banking
c. Purchases
i. Submission of false invoices;
ii. False charges from suppliers;
iii. Unauthorised purchases and payment

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d. Petty cash
i. Overloading of receipts
ii. Fake invoices
iii. Corroboration with the cashier

e. Fixed assets
i. Theft
ii. Misappropriation
iii. Manipulation of records
iv. Private use of company assets

These fraudulent acts can be prevented where:

i. Adequate precautionary measures are adopted by the internal auditor to strengthen

the internal control of the organisation;
ii. There are adequate checks on the system;
iii. There are separation of duties.

Fraud, theft, defalcation, irregularities, white-collar crime and embezzlement are some of
the terms often used interchangeably. However, these terms often convey different senses
under the law:
i. Theft is referred to as larceny - the taking and carrying away of the property of
another with the intention of permanently depriving the owners of its possession;
ii. Embezzlement describes a process whereby a perpetrator who has fiduciary duty
to care for and to protect a property, then converts it to his own use. It is usually
theft from an employer by an employee, and involves a breach of fiduciary duty.
Three elements are involved here:
a. there must be a relationship of employment or agency,
b. the asset embezzled must have been possessed by the fraudster by virtue
of that relationship,
c. there must be an intentional and fraudulent appropriation or conversion
of the asset;
iii. Conversion is the unauthorized assumption and exercise of the right of ownership
over goods or personal chattels belonging to another, to the exclusion of the
owner's rights. The elements are again three:
a. absence of authorization from the rightful owner of the asset,
b. the exercise of dominion and control and rights of ownership over the
property,
c. exclusion of the rights of the true owner;
iv. White-collar crime is a term first used by Sutherland, to describe a crime
committed by a person of respectability and high social status in the course of his
occupation;

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 v. Corporate crime refers to criminal acts of omission or commission arising from
deliberate decision making (or culpable negligence) of those who occupy
structural positions within the organization as corporate executives or managers.
These decisions are organizationally-based, made in accordance with the firm's
normative goals, standard operating procedures, and cultural norms, and are
intended to benefit the corporation itself.
Occupational Fraud and Abuse
Wells (2006) defines occupational fraud and abuse as the use of one's occupation for
personal enrichment through the deliberate misuse or misapplication of the employing
organization's resources or assets. It involves a wide variety of conduct by executives,
employees, managers, and principals of organizations, ranging from sophisticated investment
swindles to petty theft. Common violations include asset misappropriation, fraudulent
statements, corruption, pilferage and petty theft, false overtime, using company property for
personal benefit, and payroll and sick time abuses.
Elements Occupational Fraud and Abuse
i. The activity is clandestine and secret;
ii. It violates the employee's fiduciary duties to the organization;
iii. The act is committed for the purpose of direct or indirect financial benefit to
the employee;
iv. There are costs for the employing organization in terms of assets, revenues or
reserves.