The Daily Record, January 2014

The definition of Occupational Fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

The facts

According to the Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse, a typical organization loses 5 percent of its revenue to fraud each year. The median loss caused by occupational fraud cases in 2012 was $140,000. What does this mean? Fraud is occurring more often than we think, having a significant impact on businesses all around us. Think about your local bakery, favorite clothing store or even your own company. Fraud can occur anywhere. That is why we need to be more conscious about the warning signs and how to mitigate the risks of fraud.

How is it done?

According to the ACFE, the vast majority (77 percent) of all frauds were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service and purchasing. This is not to say that fraud doesn’t occur in other areas, but these departments have a considerable amount of decision making authority directly affecting the financial position of a company. The majority of fraud falls into three primary categories:

• Asset misappropriation is when an employee steals or misuses company resources. An example of asset misappropriation would be theft of cash.
• Corruption schemes include employees using their authority to influence a business transaction in a way that violates his or her duty to the employer in order to gain direct or indirect benefit. An example of a corruption scheme would be a bribe with a customer/vendor.
• Financial statement fraud involves an employee intentionally misstating or omitting material information in the financial reports. An example of financial statement fraud could be someone inflating revenues on the financial statements to meet strategic goals, or understating expenses.

Who is doing it?

What does the typical perpetrator look like? When we think of fraud, we think of Kenneth Lay of Enron or Bernie Madoff. We assume the people committing fraud are top executives with significant power and decision making abilities. While this is where some fraud occurs, it is certainly not the only place. According to the ACFE, approximately 42 percent of perpetrators were employees, 38 percent were managers and 18 percent were owners/executives. This demonstrates that there is no stereotype for a perpetrator. It could be anyone. Upstate New York isn’t immune to occupational fraud. A story recently published profiled a local church treasurer and his wife who embezzled over $400,000 in a 5-year period. The couple wrote unauthorized checks and transferred money from the church account to their personal account. As you can see, this was not a very sophisticated scheme. However, due to a lack of controls, the couple was able to get away with it for five years.

What are some warning signs?

Now that we know fraud can occur anywhere and by anyone, how do we detect it? There are several behavioral traits that perpetrators exhibit which can serve as a red flag for fraud. The following are a few traits to look out for:

• Someone living beyond their means;
• Someone facing financial difficulties;
• Unusually close relationships with vendors/customers;
• Someone exhibiting excessive control issues; and
• Refusal to take vacations.

According to the ACFE, in 81 percent of cases, the perpetrator displayed one or more of these behavioral traits.

How to mitigate risk

How do we prevent fraud from affecting us? Most businesses tend to take a corrective approach to fraud. Once fraud occurs, they implement controls to prevent it from happening again. Why not be proactive in protecting your business and have controls in place from the beginning? Start with the tone at the top. Management should ensure that the business and its employees encourage ethical conduct. If those in charge don’t make honesty and integrity a priority, why would anyone else? It’s also important to provide employees with anti-fraud training. Explain to employees what constitutes fraud, and the financial impact fraud has on the company. Make certain that employees know there is a zero-tolerance policy for fraud. There should also be some sort of reporting mechanism in place for employees to anonymously report suspected wrongdoing. All employees should be aware of how to report, and feel comfortable doing so without fear of retaliation. The business should also have basic anti-fraud controls in place for day-to-day operations. These will assist in preventing someone from having too much control, allowing them the opportunity to potentially commit fraud. The following are a list of a few common internal controls:

• Proper segregation of duties;
• Use of authorizations;
• Physical safeguards (locked areas, surveillance cameras,
• etc.);
• Job rotations; and
• Mandatory vacations

A company should assess their risks of fraud and use these controls to mitigate the risks in a cost effective manner.

Conclusion

There is no way to eliminate fraud. Even with the strongest internal controls, a business is still at risk. We can only be aware of the warning signs, and implement sound policies to educate employees on fraud and the negative impact it can have on a business. Working together with employees to create an open and honest environment is the key to prevention.