Occupational Fraud Series

November 04, 2018

By Marc LaVine

Part 2 of 3: Corruption Schemes

What is it?

Corruption, also known as “cheating,” can be defined as using your occupation for personal gain through deliberate misuse of the organization’s resources and/or assets. The four main categories of corruption are: conflicts of interest, bribery, illegal gifts/gratuities/payments and money laundering. Corruption can result in massive financial losses, falsify fair competition, negatively impact an organization’s reputation or their products/services, damage business ethics, and even steer a company away from making productive business decisions. Corruption can occur to all sizes and types of organizations, being particularly detrimental to the smaller businesses. Lastly, corruption activities are most often seen occurring in tandem rather than as individual schemes.

Who commits it?

All levels of personnel are guilty of committing corruption; however, accounting departments are the most common groups of people who perpetrate the fraud due to their access to funds and accounting records. Executives and upper-management employees are the most frequent offenders due to their level of power within the organization. Mining, transportation and warehousing, oil and gas, and manufacturing industries are the most susceptible to corruption.

Why do they do it?

Same as for asset misappropriation, the three main motives for individuals turning to corruption are pressures/incentives (personal financial struggles, negative relationships in/with the company), opportunity (cash available, easy access) and rationalizations (‘they’re not even watching!’ ‘they owe me!’).

What are the warning signs?

There are many red flags to assist with the identification of corruption such as location, industry, payments, unnecessary third parties and anonymous whistleblower reports. For example, payments can become a warning sign when they are received in cash. Cash payments have no paper trail resulting in a lack of reliable explanation. Rumors can be another warning sign as many cases of corruption were identified following the implementation of a whistleblower hotline by an employee.

How do you prevent/detect it?

As with asset misappropriation, the risk for the all of these motives can be significantly controlled by the implementation of adequate internal controls.  Controls should also be implemented to prevent and detect corruption beginning with the development and institution of anti-fraud/anti-corruptions policies and procedures. Management should consider an outside assessment of these policies and procedures and programs to ensure proper compliance, as well as a whistleblower program or “hotline” in order to encourage individuals to report fraudulent activity. Detection of corruption occurs most frequently through tips, internal audit and management review. When the fraud is committed by executive level management, internal control is found to not be as effective at preventing / detecting fraud, as these individuals are in positions to override controls. In these instances, external audit identified a greater percentage of fraudulent cases. Internal auditors should be inquiring about management override of controls and be looking for instances of such during testing.

This is part 2 of a 3-part series on Occupational Fraud. To read more, please click on the links below.

Occupational Fraud Series Part 1 of 3: Asset Misappropriation

Occupational Fraud Series Part 2 of 3: Corruption Schemes

Occupational Fraud Series Part 3 of 3: Financial Statement Fraud

About Marc LaVine

Mr. LaVine specializes in Process Risk and Technology Solutions. He assists clients in various industries, providing a host of internal audit and risk services.