Understanding Fraud Tree Concepts: A Practical Guide to Occupational Fraud

May 21, 2025
by Team Govarix Inc.
Topics # Internal Controls, Risk Management

Introduction

Occupational fraud poses a significant threat to organizations worldwide, leading to substantial financial losses and reputational damage. To effectively combat this issue, it’s essential to understand the various forms fraud can take within an organization. The Association of Certified Fraud Examiners (ACFE) developed the “Fraud Tree” as a comprehensive classification system to categorize and understand occupational fraud schemes. This guide delves into the Fraud Tree’s structure, providing practical insights and real-world examples to help organizations identify and prevent fraudulent activities.

The Fraud Tree: An Overview

The Fraud Tree categorizes occupational fraud into three primary branches:

Asset Misappropriation
Corruption
Financial Statement Fraud

Each branch encompasses various schemes that employees might use to defraud their organizations.

Asset Misappropriation

Asset misappropriation involves employees stealing or misusing an organization’s resources. It’s the most common type of occupational fraud, accounting for approximately 83.5% of cases, with a median loss of $125,000 per incident

Common Schemes:

Skimming: Stealing cash before it’s recorded in the accounting system.
Cash Larceny: Stealing cash after it’s been recorded.
Billing Schemes: Submitting false invoices for goods or services not received.
Payroll Schemes: Creating fake employees or inflating hours worked.
Expense Reimbursement Schemes: Submitting fictitious or inflated expense reports.
Check Tampering: Altering or forging checks to divert funds.

Real-World Example:

An employee at a retail store created a fictitious vendor and submitted invoices for non-existent services. Over time, they embezzled over $100,000 before the scheme was uncovered during an internal audit.

Corruption

Corruption involves employees misusing their influence in business transactions for personal gain. This category accounts for about 35.4% of occupational fraud cases, with a median loss of $200,000.

Common Schemes:

Bribery: Offering or accepting payments to influence decisions.
Conflict of Interest: Undisclosed relationships influencing business decisions.
Illegal Gratuities: Gifts given to influence future decisions.
Economic Extortion: Demanding payments to prevent adverse actions.

Real-World Example:

A procurement manager accepted kickbacks from a supplier in exchange for awarding contracts. This led to inflated prices and subpar goods, costing the company significant losses.

Financial Statement Fraud

Financial statement fraud involves deliberate misrepresentation of financial information to deceive stakeholders. Though less common, it results in the highest median loss of $975,000 per case.

Common Schemes:

Fictitious Revenues: Recording sales that never occurred.
Timing Differences: Recognizing revenue or expenses in incorrect periods.
Concealed Liabilities: Failing to record or disclose liabilities.
Improper Asset Valuations: Inflating asset values beyond their true worth.

Real-World Example:

An executive manipulated financial statement to meet earnings targets, leading to a significant stock price drop once the fraud was discovered, and resulting in legal consequences for the company.

Preventing Occupational Fraud

Understanding the Fraud Tree helps organizations implement effective anti-fraud measures:

Establish Strong Internal Controls: Implement checks and balances to prevent unauthorized transactions.
Conduct Regular Audits: Periodic reviews can detect irregularities early.
Promote Ethical Culture: Encourage ethical behavior through training and leadership.
Implement Whistleblower Policies: Provide safe channels for reporting suspicious activities.
Segregate Duties: Divide responsibilities to reduce the risk of collusion.

Conclusion

The Fraud Tree framework offers a structured approach to understanding and combating occupational fraud. By recognizing the various schemes under asset misappropriation, corruption, and financial statement fraud, organizations can proactively implement measures to detect and prevent fraudulent activities. Staying informed and vigilant is key to safeguarding assets and maintaining stakeholder trust.

References

Association of Certified Fraud Examiners (ACFE). (2016). Report to the Nations on Occupational Fraud and Abuse.
ACFE. (n.d.). Fraud 101: What is Fraud?.
Financial Crime Academy. (2025). Types of Frauds Discussion.

Team Govarix Inc.

Group of GRC Professionals, Internal Auditors and Risk Assurance Providers working together to curate a singular platform to share experience and knowledge. Our aim is to slowly PIVOT into SaaS but in a phased manner. Currently, we are serving blogs, articles and write ups to our readers.