Considering Red Flags of Occupational Fraud

Internal fraud, also called occupational fraud, is defined by the Association of Certified Fraud Examiners (ACFE) as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.” Included below are some interesting statistics related to Occupation Fraud as reported in the ACFE’s 2016 Global Fraud study.

Report to the Nation – 2016 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE)

  • The CFEs who participated in our survey estimated that the typical organization loses 5% of revenues in a given year as a result of fraud.
  • The median loss suffered by small organizations (those with fewer than 100 employees) was the same as that incurred by the largest organizations (those with more than 10,000 employees). However, this type of loss is likely to have a much greater impact on smaller organizations.
  • Organizations of different sizes tend to have different fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations as in larger organizations.
  • The presence of anti-fraud controls was correlated with both lower fraud losses and quicker detection. We compared organizations that had specific anti-fraud controls in place against organizations lacking those controls and found that where controls were present, fraud losses were 14.3%–54% lower and frauds were detected 33.3%–50% more quickly.
  • The perpetrator’s level of authority was strongly correlated with the size of the fraud. The median loss in a scheme committed by an owner/executive was $703,000. This was more than four times higher than the median loss caused by managers ($173,000) and nearly 11 times higher than the loss caused by employees ($65,000).

One of the biggest challenges for smaller companies are the costs and specialized skills associated with effective internal audit and fraud prevention/detection departments.

“The Fraud Triangle” originated by Donald Cressey explains factors causing an individual to commit occupational fraud and how it’s components could apply in the fictional illustration about “Chris” below:

  • Pressure – a financial need due to a distressed financial situation.
  • Opportunity – intimate knowledge of the systems; ability to override controls as a manager.
  • Rationalization – it will be paid back; feel under-appreciated and/or under compensated

Scenario

Chris never takes vacation, works late, comes in early, and has intimate knowledge of the business and accounting systems. He has never delegated any of his work as he likes to be in control. He feels it is “just easier for him to take care of it”. On the surface, Chris appears to be the ideal employee. Over a 20 year career with the same company, he has moved up through the ranks beginning as an accounts payable clerk and is currently the Vice President of Accounting & Finance. He recently went through a divorce and his current financial situation is distressed. In the past few years, Chris has grown increasingly unhappy with his salary and has asked for pay increases which were denied. Chris is a life-long friend of Joe, the sole owner of the business.

The behavioral red flags of perpetrators of occupational fraud identified above are:

  • Never takes vacation
  • Control issues
  • Divorce
  • Financial situation is distressed

Now let’s add to the situation, Joe (owner) has been confronted by an anonymous whistleblower alleging his life-long friend, Chris, is embezzling money from the company. What does Joe do?

Fraud isn’t easy to detect. When allegations are made or you suspect something might be going on it’s best to get a third party opinion. Joe needs the expertise of fraud professionals with the objectivity, expertise and training to investigate these types of allegations. Fraud professionals are equipped to navigate the investigation process and uncover what is truly going on and can assist in obtaining appropriate documentation for support in legal matters.

The education, training and expertise at TD&T can give you a clear understanding of the situation you are faced with and consult on internal controls to help mitigate the risk of a future event. As a full-service CPA firm, TD&T can not only assist you with the challenges related to potential internal fraud issues, but can also provide services related to your accounting and tax needs. For more information on our services, contact us today!

By | 2018-02-13T15:32:12+00:00 February 9th, 2018|Compliance, Forensic Accounting, Fraud, Internal Control, Investigation|

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