Every year the Association of Certified Fraud Examiners (http://www.acfe.com/) performs a study on occupational fraud and abuse. The 2014 study contained an analysis of 1,483 cases of occupational fraud in over 100 countries. This article focuses on the findings in this study, what occupational fraud is, the characteristics of those who commit fraud, and how you can detect and stop occupational fraud from happening.
What is occupational fraud? To put it simply, occupational fraud occurs when a person uses their occupation to defraud his or her employing organization for his or her own personal enrichment. Any type of organization that employs individuals should see this as a threat. This threat can be very costly for organizations. Many times these fraud schemes can last a long time before they are detected, which means that an organization could be losing money and be completely unaware of it. The costs of occupational fraud can be equivalent to an iceberg; some of the direct losses can be plainly visible on the surface, but there may be a large mass of hidden harm below the surface that cannot be seen.
How is occupational fraud committed? There are three categories of occupational fraud: asset misappropriation, corruption and financial statement fraud. According to the study, asset misappropriation is the most common category (85 percent of cases), but it is also the least costly. In contrast to that, financial statement fraud is the second most common category (9 percent of cases), but it has the largest median loss ($1 million). More than half of frauds are committed by one individual. However, when two or more individuals are involved the losses and the duration of the fraud increase. The correlation between the losses and the duration of the fraud scheme can be seen in Figure 9 below from the Association of Certified Fraud Examiners.
How can you tell if someone is committing fraud? Most fraud in organizations is committed by individuals at the employee and manager level. A little more than half of perpetrators are between the ages of 31 and 45. It is also interesting to note that the older the perpetrator, the larger the losses. Most perpetrators have been employed for one year to five years before committing the fraud. If a perpetrator has committed fraud within their first year of employment, they are three times more likely to have a prior fraud-related conviction. While a background check for new employees is critical, most perpetrators have never been charged or convicted of previous offenses. Should prior employers not provide references or a prospective employee has a gap in his or her employment history, careful scrutiny and inquiries should be made. Once employed, an individual living beyond their means is a red flag for fraud. Another indicator of fraud is an employee experiencing financial difficulties.
What can be done to stop or prevent occupational fraud? The duration of an occupational fraud scheme is important because the longer the scheme lasts, the larger the losses. It is important to stop occupational fraud in its tracks. Tips continue to be the most common way to detect fraud, but oftentimes when a tip is received the damage has already been done. The quickest ways to detect fraud include surveillance/monitoring, account reconciliation, IT controls, internal audit and routine management review of financial statements. These methods help limit both the duration of schemes and the amount of losses incurred. Internal controls are also an important aspect to consider. In one-third of fraud cases, a lack of internal controls is a weakness that contributes to the fraud. See Figure 39 below below for important factors within an organization that contribute to fraud occurring.
What could happen if fraud occurs within an organization? When fraud is found, the majority of cases are reported to law enforcement. For cases referred to law enforcement, the median losses are higher than those cases that are not referred to law enforcement. Most organizations that don’t refer the fraud to law enforcement fail to do so because of the fear of bad publicity. Many organizations also believe that internal punishment is sufficient. While the losses from fraud can be significant, unfortunately more than half of fraud cases result in no monetary recovery. Since recovery of losses is so rare, it is very important to catch fraud early.
In summary, occupational fraud can happen to any organization. It is important to look for possible weaknesses in the structure of an organization and its employees, while also recognizing where fraud is most likely to occur. While the very nature of fraud makes detection difficult, when the proper steps are taken the likelihood that occupational fraud will occur in an organization is reduced, scheme durations and losses curtailed, and good reputations better maintained. Gil Miller