Occupational fraud – the misuse of a business’s resources (including money) to benefit an individual employee’s personal gain – is almost inevitable when you are a business owner. The truth is, it’s going to happen to you, perhaps even several times, sooner or later – and whether you know it or not.
Your head would spin if you knew all of the ways employees can commit fraud. As a Certified Fraud Examiner, I find it very interesting – and insightful – working on fraud cases; however, I often find that the business owner usually feels shocked, hurt, angry, embarrassed and betrayed, as you might expect.
Occupational Fraud Trends
To best understand how to manage the risk of occupational fraud, let’s look at some trends. The Association of Certified Fraud Examiners (ACFE) did a survey of 1,388 cases of occupational fraud in 2011 and 2012, and issued its 2012 Global Fraud Study. Here is a brief overview of its findings:
- It was estimated that the average organization loses 5 percent of its annual revenue to fraud each year.
- $140,000 was the average that companies lost due to occupational fraud.
- The average length of time reported fraud cases lasted before being detected was a year and a half.
- The most common form of fraud was asset misappropriation schemes (87 percent of reported cases).
- Occupational fraud is a significant threat to small businesses. The study showed that fraud occurred more often at small businesses, which also suffered greater financial losses than larger businesses.
- The longer a fraudster has worked for an organization, the higher fraud losses tend to be. This is especially troublesome as business owners tend to trust and rely on employees that have been with them for a longer period of time.
- Living beyond means, financial difficulties, close association with vendors or customers and excess control issues, were all “red flags” exhibited by the fraudster in 81 percent of the reported cases.
Combating Occupational Fraud
So how can you combat occupational fraud at your business? The first step is accepting that it could be happening in your company. After accepting it, you may find that a fraud risk assessment would be a helpful tool in identifying where your fraud risks lie and how you can strengthen your internal controls.
The ACFE’s report also found that fraud is most likely to be found through a tip. That said, does your business have any fraud reporting mechanisms in place for your employees? If one of your employees suspects or knows about fraudulent activity, do they have a place where they can anonymously report it? If not, consider implementing a confidential fraud reporting hotline.
The keys to combating occupational fraud are 1.) Understanding that it can exist in your organization, and 2.) Being proactive in your approach to the risk.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 4/9/2014.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.