Fraud and corruption schemes: an overview

Last updated November 20268 sectionsabout 5 min read

Key takeaways

Fraud is an intentional act or omission designed to deceive, leaving the victim with a loss or the perpetrator with a gain; intent is what separates it from an honest error.
Corruption is the abuse of entrusted power or position for private gain, covering bribery, extortion, conflicts of interest and illegal gratuities.
Occupational fraud is committed against the employer for personal enrichment; organisational fraud is committed by or on behalf of the organisation, for the organisation's own benefit.
The ACFE Fraud Tree has three branches: asset misappropriation, corruption and financial statement fraud. Place any scenario in its branch before analysing it further.
Red flags come in three groups: behavioural (living beyond means), situational (weak controls, management override) and organisational (high turnover, poor tone at the top, aggressive earnings targets).

Definition of fraud

Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain, distinguished from an honest error by the presence of intent.

Definition of corruption

Corruption is the abuse of entrusted power or position for private gain, covering bribery, extortion, conflicts of interest and illegal gratuities, a category the fraud tree treats as distinct from both asset misappropriation and financial statement fraud.

Occupational fraud

Occupational fraud is the use of one's own occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisation's resources or assets, the ACFE's foundational definition underlying this entire paper's scheme catalogue.

Organisation fraud/crime

Organisational (or corporate) fraud is committed by or on behalf of the organisation itself, for the organisation's benefit rather than an individual's, financial statement fraud committed to inflate a company's reported performance being the clearest example, distinct from occupational fraud committed against the organisation for personal gain.

The fraud tree

The ACFE's Fraud Tree classifies occupational fraud into three main branches: asset misappropriation (theft or misuse of an organisation's resources), corruption (abuse of position for private gain), and financial statement fraud (intentional misstatement of financial results). This paper's remaining chapters largely follow that same structural map, one branch or scheme family per chapter.

The red flags/indicators of fraud

Behavioural red flags

Living beyond means, financial difficulties, unusually close association with a vendor, control issues, unwillingness to share duties.

Situational red flags

Weak internal controls, override of controls by management, unexplained accounting anomalies.

Organisational red flags

High turnover, poor tone at the top, aggressive earnings targets.

Current trends of fraud schemes

Increasing use of technology and digital payment channels to commit and conceal fraud
Remote work expanding opportunities for collusion and reduced oversight
Growth in vendor and third-party fraud as supply chains lengthen
Rising sophistication of financial statement fraud using complex off-balance-sheet structures

The ACFE Fraud Tree's three branches

Every scheme this paper covers files under exactly one of the three top branches, most often asset misappropriation, the most frequent branch by incident count even though it typically carries a smaller median loss than the other two. Placing a described scenario into its correct branch before analysing it further is exactly the discipline the exam tip above asks for.

Emerging fraud/corruption schemes

Cryptocurrency and digital-asset-based fraud
Deepfake and AI-enabled social engineering
Business email compromise targeting payment approval chains
Cross-border corruption schemes exploiting weak regulatory coordination

Exam tip

The fraud tree (asset misappropriation, corruption, financial statement fraud) is the organising skeleton for this entire paper and for much of the diploma, memorise the three branches and be ready to place any described scenario into the correct branch before analysing it further.

Self-check

(a) State the three main branches of the ACFE Fraud Tree. (3 marks)

(b) Distinguish occupational fraud from organisational fraud, with an example of each. (4 marks)

(c) Classify each red flag as behavioural, situational or organisational: (i) an employee living visibly beyond their means; (ii) management consistently overriding a control; (iii) aggressive, unrealistic earnings targets set for a division. (3 marks)

Show worked answer

(a) Asset misappropriation; corruption; financial statement fraud (3 marks).

(b) Occupational fraud uses one's own position for personal enrichment against the employer, for example an employee skimming cash; organisational fraud is committed by or on behalf of the organisation itself, for the organisation's own benefit, for example inflating reported earnings to meet analyst expectations (4 marks).