Occupational Fraud is often “the most costly and most common form of financial crime in the world” (ACFE, 2022 Occupational Fraud Report). Occupational Fraud refers to frauds committed by individuals or employees against businesses or employers.
Using the office internet and the office computer on Cyber Monday might not be a big deal; but utilization of company credit cards for personal expenses, padding expense accounts or giving kick-backs to vendors or suppliers is truly a big deal and companies lose hundreds of thousands of dollars every year.
One reason that Occupational Fraud is so prevalent is due to employers, out of necessity, entrusting employees with access to control of assets (keeping books, managing bank accounts, or having access to business credit cards). This trust often leads to vulnerabilities in fraud. Another reason for this is the simple fact that in the U.S. alone, 160 million people are in the labor force at any given time. Obviously, a large portion of these employees never steal or abuse their employer’s trust, however even a small minority that does can create major costs.
You may believe that Occupational Fraud only happens in large companies and it is not something to worry about. But, did you know that Small Businesses (defined as 100 or fewer employees) have the highest median loss across all organizations of $150,000 per incident and account for 22% of reported fraud cases?
And, worrying about fraud is not going to stop it. Employers will not be able to prevent fraud in 100% of cases. However, having a means of detection is the best step you can take to prevent substantial impacts on your business. 42% of fraud is detected by tip in which case 55% of the time it is another employee that is reporting that fraud.
Creating and maintaining a hotline or internal reporting mechanism is the single greatest way to detect fraud. This can be as simple as having a conversation with employees – asking if they see anything that seems suspicious to come talk to you or send a private email. Fraud losses were 2X higher in cases where these mechanisms were not in place. Having a fraud reporting standard or policy in your business may also prevent someone from beginning fraud in the first place; as they may be worried that they will get caught sooner.
For larger businesses where bookkeeping and accounting are handled by an employee, you should be aware of and implement internal controls. Employees should not have access to banking or credit card processing as well as the reconciliations of those accounts. Allowing both processing and reconciliation to be done by the same person will make it easier for the employee to make purchases, as well as find ways to hide them inside of accounts that go undetected.
Fraud is committed by every level of employee from the bottom to the top of an organization. Some examples of the most common types of fraud are found in Corruption (maintaining 2 sets of books, or kickbacks to contractors), Billing, Noncash (currently cryptocurrency is suspect), expense reimbursements, and payroll.
Most fraud is detected (in order of prevalence) through a tip from another employee (32%), internal audit (18%), management review (16%), and by accident (7%). You can see how important it is to have a fraud reporting protocol in place and ensure that it is communicated to every employee.
If you believe you are a victim of Occupational Fraud, we suggest receiving legal counsel depending on your situation. However, many times owners/ employers will simply terminate the employee without pushing for civil or criminal punishments. This often leads these individuals to just find a new job and start fraud all over again. By pushing for harsher punishment, we can help prevent future fraud.
If you want to learn more and garner some very eye opening statistics and Occupational Fraud Prevention tips – We would suggest reading the Association of Certified Fraud Examiners 2022 Occupation Fraud Report from which we gathered information for this blog.