Corruption, misappropriation and false reporting
The three main categories of fraud ACCA describes, what each looks like in a small business client, and which tests suit each one.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
"Fraud" covers a lot of ground. A storeman taking stock home, a buyer accepting a holiday from a supplier, and a managing director inflating year-end sales to meet a bank covenant are all committing fraud, but they are doing very different things, leaving very different traces and harming different people.
For a firm advising small and medium clients, sorting suspected fraud into categories is more than tidy labelling. The category decides where to look, which records matter, who is likely to be involved and which tests will find it. It also helps when explaining risk to a client's owners, who often picture only one kind of fraud.
The three categories
ACCA's article on forensic accounting groups the frauds a forensic accountant may investigate into three categories: corruption, asset misappropriation and financial statement fraud. Each is described below with examples of how it appears in a smaller business.
Corruption: someone's judgement is bought
ACCA identifies three types of corruption fraud: conflicts of interest, bribery and extortion. It describes bribery as offering money or something else of value to influence a situation, and extortion as demanding money to secure a particular outcome.
In a small business client, corruption often looks like:
- A conflict of interest: the operations manager's brother-in-law owns the transport company that wins every delivery contract.
- Bribery: a supplier pays the buyer a "commission" for each order placed, recovered through higher prices.
- Extortion: a staff member responsible for approving supplier payments demands a payment before releasing them.
The common sign is a decision that does not make commercial sense on its face: the expensive supplier chosen repeatedly, the contract extended without competition, the payment delayed without reason. The money usually changes hands outside the client's books, so the evidence is in the decisions, not the ledger.
Asset misappropriation: the most common
ACCA states that asset misappropriation frauds are by far the most common. It describes fraudulent disbursements, one form of misappropriation, as using company funds to make fraudulent payments, with billing schemes paying a fictitious supplier and payroll schemes paying fictitious, or "ghost", employees as common examples.
In smaller clients, misappropriation also includes:
- cash taken from the till or from deposits before banking;
- stock or equipment removed;
- personal expenses claimed as business costs;
- customer payments diverted to a personal account;
- company credit cards used for private purchases.
These frauds usually involve one person, or a small group, using a gap in controls. The amounts per transaction are often small; the total over time is not.
Financial statement fraud: the numbers themselves
ACCA describes financial statement fraud, also called fraudulent financial reporting, as fraud causing a material misstatement in the financial statements. It can include deliberate falsification of accounting records, omission of transactions, balances or disclosures, and misapplication of financial reporting standards.
In a small or medium client, the motive is usually external pressure: a bank covenant, a tender requirement, a sale of the business, a bonus tied to profit. Typical forms:
- sales recorded before goods are delivered, or invoices raised for orders not yet received;
- year-end stock overstated;
- expenses held back into the next year;
- liabilities or commitments left out of the notes;
- a policy applied in a way the standard does not allow.
The people involved are usually senior, because they control the year-end figures. That also makes it the category where an auditor's professional scepticism matters most.
Matching tests to categories
| Category | Where the evidence is | Useful tests |
|---|---|---|
| Corruption | Decisions, supplier relationships, declarations | Supplier ownership checks, quotation history, comparison of prices with market, interviews |
| Asset misappropriation | Payments, cash, stock, payroll | Bank file to master file matching, cash counts, stock counts, payroll to HR vouching |
| Financial statement fraud | Year-end entries, estimates, disclosures | Journal entry testing, cut-off tests, analytical review, review of estimates |
Journal entry testing is a good example of matching a tool to a category. In Achekam, staff load a whole-population journal extract as CSV and map its columns, and Achekam flags entries such as manual, weekend, after-hours and post-close postings for staff to select and test. The CSV itself is not stored; its hash and row count are, so keep the original extract on file. Those flags point towards the entries most associated with financial statement fraud: manual adjustments made late, outside normal hours, by people who do not usually post.
For structure, Achekam ships working-paper template packs written in its own words, including packs for forensic work and internal audit, for a firm to adopt and approve. The catalogue is marked unapproved platform content until the firm adopts it; check the packs are in your workspace before relying on them.
Explaining the categories to a client's board
Owners and directors of smaller businesses often think of fraud as theft by junior staff. A short conversation built around the three categories widens that view:
- Corruption asks: are our buying and contracting decisions made on merit?
- Misappropriation asks: could someone take cash, stock or payments without being noticed?
- Financial statement fraud asks: could pressure on results lead someone, possibly a senior person, to adjust the numbers?
Each question points to a control the board can own: declarations of interest and competitive quotes; segregation of duties and reconciliations; independent review of year-end entries and estimates.
For how forensic work fits beside a firm's other services, see internal audit and forensic assignments, and for auditors the revenue side of financial statement fraud is covered in responding to revenue fraud risk. Use the three questions at the next planning meeting with a client's board.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
