Corporate Fraud Handbook: Prevention and Detection, 4th Edition

CHAPTER 1

Introduction

In the world of commerce, organizations incur costs to produce and sell their products or services. These costs run the gamut: labor, taxes, advertising, occupancy, raw materials, research and development—and, yes, fraud and abuse. The latter cost, however, is fundamentally different from the former: The true expense of fraud and abuse is hidden, even if it is reflected in the profit and loss figures.

For example, suppose the advertising expense of a company is $1.2 million. But unknown to the company, its marketing manager is in collusion with an outside ad agency and has accepted $300, 000 in kickbacks to steer business to that firm. That means the true advertising expense is overstated by at least the amount of the kickback—if not more. The result, of course, is that $300, 000 comes directly off the bottom line, out of the pockets of the investors and the workforce.

DEFINING “OCCUPATIONAL FRAUD AND ABUSE”

The example just given is clear-cut, but much about occupational fraud and abuse is not so well defined, as we will see. Indeed, there is widespread disagreement on what exactly constitutes these offenses.

For purposes of this book, “occupational fraud and abuse” is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”1

This definition’s breadth ...