Occupational fraud is fraud committed against an organization by its own officers, directors, or employees. This type of fraud is the most prevalent type of fraud against an organization and its assets. Data gathered shows that occupational fraud occurred in 125 different countries and in 23 different industries from their employees and top executives. Victim organizations range from large, multinational corporations to small, family-owned businesses. Perpetrators range from entry-level employees to top executives.
The Association of Certified Fraud Examiners recently published its annual Report to the Nations (2018 Global Study on Occupational Fraud and Abuse), which illuminated certain aspects of occupational fraud and abuse that should be understood and reacted-to, if needed.
The Cost of Occupational Fraud
Quantifying the amount of loss from fraud will never be exact but estimating the losses from studies and investigations reveals that there are billions in damages in the United States. Aside from the direct losses due to fraud, there are lingering effects such as a tarnished reputation and loss of business if the fraud is made public.
How Occupational Fraud is Committed
The three primary categories of occupational fraud include asset misappropriations, corruption schemes, and financial statement fraud. People committing fraud may even engage in more than one type of occupational fraud.
- Asset misappropriation risks: check and payment tampering, billing, theft of non-cash assets, cash on hand, expense reimbursements, etc.
- Corruption risks: conflicts of interest, illegal gratuities, kickbacks, bid rigging, etc. Some corruption scheme red flags include living beyond your means or having a close association with vendors or customers. The highest proportion of corruption schemes are from the energy, manufacturing, and government/public administration industries.
- Financial statement fraud risks: understated or overstated revenue, understated or overstated net worth, improper asset valuations, etc.
Fraud can start small and grow into a larger corruption scheme over the course of years – it is best to have fraud detection mechanisms implemented within the company to detect potential fraud as quickly as possible.
- Received tips from hotlines or complaints are the biggest means of fraud detection, followed by internal audit and management review.
- Employees are the most common to report acts of occupational fraud within the organization. However, customers, vendors, and even stockholders have reported suspicious acts in efforts to cease fraud.
- The dollar amount of loss detected by proactive detection methods (IT, monitoring, internal audit, document examination, etc.) was significantly less than the dollar amount of loss detected by passive detection methods (by accident, confession, police, etc.). This is a critical reason why organizations should implement strong internal controls within their departments so that potential fraud can be detected more easily and quickly, reducing the amount of damage.
- The types of organizations that are victimized by occupational fraud include private companies, public companies, government, and not-for-profit. Private and public companies have experienced the most cases of fraud. Not-for-profits are on the lower spectrum of noted fraud cases with a median loss of $75,000; however, financial resources within these types of organizations are limited, so a loss of this amount could significantly impact this industry.
- The size of an organization also plays a role in the opportunity for fraud to surface. Smaller organizations (less than 100 employees) may not have enough resources to implement certain anti-fraud mechanisms and require more trust among the employees. Contrarily, larger firms do have more financial resources to enact or enhance these mechanisms and can separate duties more easily, compared to that of a smaller organization. However, a higher number of employees a company has increases the risk of dishonest people trying to engage in fraudulent schemes.
- The most common anti-fraud controls implemented among various organizations include:
- Having a code of conduct
- Undergoing an external audit of financial statements
- Having an internal audit department
- Management certification of financial statements
- Undergoing an external audit of internal controls over financial reporting
- Management review
- Independent audit committee
- Anti-fraud policies and training for employees and executives
Characteristics of Perpetrators
- Position: There is a distinct correlation between the level of authority and fraud loss. Employees and managers engage in most of the fraudulent acts, but executives commit fraud that generates the highest dollar amount of loss.
- Tenure: The length of time an employee works for an organization can relate to the likelihood of fraud. The correlation between tenure and loss could be explained by employee promotions; the longer they are with the organization and moving up the ladder increases their level of authority.
- Department: Accounting, operations, sales, and executive/upper management are among the most common departments that pose the greatest risk for occupational fraud.
- Gender: The majority of “fraudsters” are men, who also caused much larger median losses compared to women.
- Age: The highest number of fraud acts are committed by those aged 36-45. However, the highest dollar amount of loss from fraud acts were committed by those aged 56 and older.
- Education Level: The highest median loss was committed by those with a postgraduate degree, compared to those with a high school diploma or university degree. This could indicate that the person’s level of technical skills, educational experience, and level of authority can play a role in concealing their acts more slyly.
- Criminal Background: People who commit occupational fraud typically have no prior history of criminal fraud convictions, which suggests they are first-time offenders.
- Employment History: Similar to the criminal background check, most perpetrators were never punished or terminated from their prior positions at other organizations.
Case Results when Occupational Fraud Occurs
- It goes without saying that most perpetrators of fraud are terminated from their positions, although other options for organizations to take against them include settlement agreements or requiring resignation, probation, or suspension.
- Sometimes organizations will not refer fraud cases to law enforcement because they fear it could bring bad publicity and harm their reputation. They also believe that their own internal disciplinary measures are sufficient enough to punish perpetrators, plus it is very costly to report to law enforcement.
- Unfortunately, victim organizations are not likely to make a full recovery from the losses incurred from the “fraudsters,” but there is a small percentage of cases that did recover all losses.
Reference: Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse – Association of Certified Fraud Examiners
Mahnaz Cavalluzzi, CPA
Mahnaz has been a member of Cerini & Associates’ audit and consulting practice area for over 8 years where she focuses on serving nonprofit organizations, education, and healthcare clientele. Mahnaz has experience in financial statement audits, financial statement reviews, tax return preparation, cost report filing, and other consulting. Mahnaz brings her expertise, diversified background, and helpful approach to all of her engagements.
Matthew Hecker, MS
Matthew is a member of Cerini & Associates’ audit staff where he works with our nonprofit and school district clients. Matthew has experience in internal claims auditing and external auditing, including financial statement audits and pension plan audits. Matthew’s knowledge and experience allow him to provide specific services including systems testing and analysis, internal and external audit functions, and claims audit functions.