Occupational Fraud – A Workplace Hazard
Occupational Fraud, little understood but potentially a crippling problem costs business hundreds of billions of dollars globally each year. As the world’s major economies slow it is crucial to understand the risks, know what to look for and to implement strategies that uncover and decrease vulnerability.
In 2008, the Association of Certified Fraud Examiners released its 5th “Report to the Nation on Occupational Fraud and Abuse”. The Report based on the results of a survey sent to 16,606 Certified Fraud Examiners (CFE’s) looks at almost 1,000 cases of the single largest occupational frauds dealt with by each respondent; the means by which it occurred and the effectiveness of anti-fraud controls. This article reviews the significant findings made in the Report.
Firstly, what is Occupational Fraud?
The Report defines it as:
“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisation’s resources or assets.”
It can be loosely divided into three categories:
- Corruption - Encompassing bribery, conflicts of interest, economic extortion and illegal gratuities. It accounted for over 27% of the frauds investigated. The average loss due to corruption was $375,000*.
- Asset misappropriation - Asset misappropriation is the most frequently employed method used by occupational fraudsters. It includes stealing, skimming or misusing cash/assets and was an element of 87% of all frauds considered in the Report. On average, $150,000 was reported as being lost in each instance through this type of fraud.
- Fraudulent statements - Fraudulent statements are the most expensive category of occupation fraud, costing an average of $2 million per fraud. This, however, is the least frequent type of fraud, accounting for only 10.3% of cases. Fraudulent statements may be financial in nature [such as revenue statements] or non-financial [such as employee credentials].
Who is most affected?
Although occupational fraud exists in every industry, some experience a higher incidence than others. Fraud is most prevalent in the:
Banking and financial services sectors - 15% of the cases
Government (12%)
Healthcare (8%).
The telecommunications industry looses the most per fraud with an average loss of $800,000.
Significant losses are also experienced in the agriculture industry ($450,000) and manufacturing ($441,000).
The Report showed the private companies sustained the highest average loss, losing $278,000 per fraud, compared to $142,000 for public companies, $100,000 for government and $109,000 for not-for-profit organisations.
Small Businesses are particularly vulnerable with the average loss for businesses with less than 100 employees. Small businesses are particularly susceptible to fraudulent billing, cheque tampering and corruption.
Who commits the frauds?
The Report found that the most frequent offenders of occupational fraud are personnel in the accounting department and higher level management. Frauds committed by executives and upper management tend to cost organisation more, with the average loss being $853,000. Nearly two thirds of frauds are committed by one perpetrator, however, frauds involving two or more people tend to be nearly five times as costly. The majority of frauds were carried out by 41-50 year olds.
Importantly, the Report showed that many of the frauds were committed by first time offenders. This means that organisations which rely on criminal history checks for their employees may be given a false sense of security by a negative result. It is therefore important to have anti-fraud controls in place to ensure that it is difficult for the fraud to be committed and likely that it would be detected in a timely manner.
How is the fraud carried out?
There are numerous mechanisms employed by occupational fraudsters. These include:
- pilfering basic supplies to which the employee is not entitled
- tampering with cheques to adjust the amount or beneficiary
- billing the company for fictitious services or by businesses created by the employee
- adjusting financial statements to show impressive results or to conceal misused funds
How are frauds discovered?
Contrary to common belief, auditing a business is not the most effective or probable means of detecting fraud.
The Report revealed that:
- 46% of frauds were detected as a result of information provided by other employees, customers or vendors;
- 19.4% being detected by internal audit; and
- 9.1% by external audit.
Alarmingly, more of the frauds the Report examined were detected by accident (20%) than by internal or external audit.
Understanding what constitutes occupational fraud and the means by which it occurs is the first step in safe guarding an organisation against potential loss. There are many anti-fraud controls which can be implemented within an organisation to decrease its vulnerability and increase chances of detection. These controls will be the subject of our next article.
* All amounts are in US$
