Protect Your Business from the Top Perpetrators of Occupational Fraud

When it comes to occupational fraud, small businesses (those with less than 100 employees) are hit disproportionately hard, suffering a median annual loss of $154,000, according to the Association of Certified Fraud Examiners (ACFE). That’s a significant chunk of many small business budgets, and many owners find it difficult to bounce back from such a devastating financial setback.

Fortunately, it is possible to figure out who in your organization is most at risk of committing fraud —valuable information that can then be used to more effectively guide your anti-fraud initiatives. Here’s what you need to know:

Most frauds are committed by those at the lowest (employee) level
According to the ACFE’s 2014 Global Fraud Study, which analyzed some 1,483 cases of occupational fraud in more than 100 countries, just under half of all frauds (42 percent) were committed by employees, while 36 percent were committed by managers and approximately 19 percent were committed by owners/executives.

The higher the level of the employee, the greater the loss and time it goes undetected
Because owners and executives are typically in the best position to circumvent anti-fraud controls, their schemes typically go unnoticed for much longer periods — a median of two years, vs. the one-year median for those at the employee level, according to the ACFE. Moreover, the median loss in a case perpetrated by an owner/executive is $500,000 — that’s nearly seven times higher than the median loss caused by an employee and four times that caused by managers.

Small businesses are prone to particular types of occupational fraud
Check tampering leads the list, accounting for 22 percent of small business fraud cases (but only 7 percent of larger organizations), according to the ACFE report. Payroll and cash larceny schemes occur twice as often in small businesses as they do in larger companies. Small business owners should also be on the lookout for skimming (17 percent) and expense reimbursement fraud (16.5 percent).

Lack of internal controls puts small businesses at greater risk
In its survey, the ACFE found that a lack of internal controls was the primary weakness linked to fraud — accounting for more than 41 percent of small business fraud cases. Overall, an estimated one-fifth of occupational frauds could have been averted, according to those surveyed, if managers had done a better job of reviewing transactions, accounts or processes.

Age matters
While you might assume that your youngest employees — who are less experienced and more prone to youthful indiscretion — would be most at risk for committing fraud, the data doesn’t bear that. In fact, it’s those ages 31 to 45 who account for a little over half of all occupational fraud cases, notes the ACFE. While older employees (over 60) are least apt to commit fraud (accounting for just 3.4 percent of cases), their crimes result in significantly more financial damage — a median loss of $450,000, which is about three times the median loss associated with fraudsters in their 30s and 40s. Interestingly, in the United States, occupational fraud breaks down fairly evenly along gender lines (53.9 percent male vs. 46.1 percent female), but the division is much wider in other regions around the world. In Southern Asia, for example, women account for just 5.6 percent of all occupational fraud cases.

Some departments are more apt to house fraudsters
Based on the results of the ACFE global study, just seven business departments were responsible for three quarters of all occupational fraud. Leading that list are accounting (17 percent), operations (15.3 percent), sales (12.5 percent) and executive/upper management (11.8 percent).

The vast majority of fraudsters in the workplace are first-time offenders
While it’s important to be careful in screening new employees, it’s also valuable to know that 81.7 percent of those convicted of workplace fraud had never been charged or convicted of committing fraud, according to the ACFE.

There are red flags that can help you to head off fraud before it happens
Over the years that the ACFE has been conducting its global survey, the behavioral red flags of fraud have remained consistent. Be on the lookout for: employees who suddenly start living beyond their means (evident in 43.3 percent of cases), as well as those having financial difficulties (33 percent). Other common red flags include having an unusually close relationship with a vendor or customer, an unwillingness to share duties and displaying a “wheeler-dealer” attitude.

To learn more about which employees are most at risk for committing occupational fraud, read the ACFE’s 2014 Global Fraud Study and read about management’s impact on a business’ ethics overall.For information about other security breaches and steps you can take to help prevent them, get educated about breaches and scams.

The views and opinions expressed in this article are those of EZShield Inc. alone and do not necessarily reflect the opinions of any other person or entity, including specifically any person or entity affiliated with the distribution or display of this content.

John is General Counsel and Chief Privacy Officer of Sontiq, the parent company of the EZShield and IdentityForce brands. He is a Certified Compliance...
Read more about John Burcham.

Leave a Comment.