accounts for most, if not all, of the most common occupational fraud and abuse schemes. We tested the structure of the fraud tree against the cases in the 2002, 2004, and 2006 Na- tional Fraud Surveys to make sure that our classification system accounted for every scheme that was reported. Between the four studies, we have applied the Fraud Tree classi- fication system to well over 3,600 cases of fraud and have found that it has covered them all.
By classifying and categorizing occupational frauds, we are able to study these crimes in more detail. Instead of lumping every case under the general heading of “fraud,” we observe discrete groups of frauds with similar characteristics in order to learn what methods are most commonly used to commit occupational fraud and what schemes tend to cause the biggest losses. Also, by comparing schemes in well-defined categories, we can identify common methods used by the perpetrators and common vul- nerabilities in the victim organizations that allowed these frauds to succeed. This in turn should help in the development of better, more efficient antifraud tools.
According to the Fraud Tree, there are three major categories of occupational fraud:
Asset misappropriations, which involve the theft or misuse of an organization’s as- sets. (Common examples include skimming revenues, stealing inventory, and payroll fraud.)
Corruption, in which fraudsters wrongfully use their influence in a business transac- tion in order to procure some benefit for themselves or another person, contrary to their duty to their employer or the rights of another. (Common examples include ac- cepting kickbacks, and engaging in conflicts of interest.)
Fraudulent statements, which involve purposeful misreporting of financial informa- tion about the organization that is intended to mislead those who read it. (Common examples include overstating revenues and understating liabilities or expenses.) The data from our study on frequency and median loss for the three major occupa-
tional fraud categories are presented in Exhibit 1.34. Asset misappropriations made up over 90 percent of the cases encountered, but were by far the least costly in terms of median loss. Meanwhile, fraudulent statements were the least common, accounting for only 10 percent of cases, but they caused far greater harm, on average, than schemes in the other two categories. Corruption schemes were the “middle children” of the study; they were more common than fraudulent statements, and more costly than asset mis- appropriations.
Note: The sum of percentages in this chart exceeds 100% because some cases involved multiple fraud schemes that fell into more than one category. The same is true for every scheme classification chart in this book based on the 2006 National Fraud Surveys.
2006 National Fraud Survey: Major Occupational Fraud Categories
Percent of Cases