Fraud Perpetrators in the Office Have More Knowledge to Get Away with Costly Schemes

Author: Patrick J Clancy, CPA, CFE

In its 2012 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) estimates that the typical organization loses 5% of its revenues to occupational fraud every year. The median loss in the ACFE’s survey of almost 1,400 fraud cases was $140,000, and more than 20% of these cases resulted in losses of at least $1 million.

The numbers are alarming, as are some of the ACFE’s other findings — such as those related to fraud perpetrators. You and your clients may be surprised to learn just who is behind the most costly schemes.

Fraud in the corner office

Rank-and-file staff aren’t the only ones who commit fraud. While 42% of the perpetrators in the ACFE survey were nonmanagement, 38% were managers and 18% were owners or executives.

The higher the thief’s position, the more costly the fraud. Owners and executives rang up losses that were approximately three times higher than managers instigated, and managers caused losses about three times higher than regular employees caused. The ACFE attributes this to the fact that those with more authority have greater access to their company’s assets and can more easily override internal controls. Not surprisingly, the study also finds that the amount of fraud losses increases with perpetrators’ tenure and education — which typically are associated with higher positions and greater trust.

The majority of fraud schemes surveyed were committed by individuals in the accounting, operations, sales, executive / upper management, customer service and purchasing areas. Together, these groups accounted for 77% of cases.

It’s worth noting, too, that most occupational thieves aren’t career criminals. Of the 860 cases in the ACFE study with such information available, only 6% involved a perpetrator who had previously been convicted of a fraud-related offense. And of 695 cases with information on the perpetrator’s employment history, 84% of them had never been punished or terminated by an employer for a fraud-related offense.

What’s my motivation?

Most individuals who commit occupational fraud do so because they’re experiencing some type of pressure. It could be financial — stemming from debt, addiction, gambling losses, poor investments, medical bills, divorce or an extravagant lifestyle. Pressure also can come from supervisors with unreasonable sales targets or other performance goals or from the company’s shareholders with high earnings expectations.

Frequently, occupational thieves are also motivated by anger and dissatisfaction with their manager or the company’s leadership — particularly when they perceive management’s own ethics and integrity to be lacking. In rare cases, perpetrators draw personal satisfaction from outsmarting their boss or the system.

Shut it down

The report makes several recommendations to employers that want to prevent fraud before employees get a toehold:

  1. Set up fraud reporting mechanisms, such as confidential hotlines, so that both internal and external sources can report suspicious activities. As in previous surveys, the ACFE report found that hotlines were one of the most effective methods of catching occupational thieves.
  2. Provide targeted fraud-awareness training not only to managers but also employees. At a minimum, a qualified fraud expert should explain the actions that constitute fraud, how fraud harms everyone in the organization and how employees can safely voice their suspicions. ACFE research shows that organizations with antifraud training programs experience lower losses and schemes of shorter duration than those without.
  3. Educate managers and employees on the characteristics of fraud perpetrators and their behavioral red flags. See the sidebar “Hey, I’m a thief!” for details. It’s also important to encourage all workers to keep an eye out for potential fraud — and report it.

No program can prevent all fraud; the goal is to reduce its incidence. These measures can help employers detect schemes more promptly and thereby reduce their overall losses. In addition, potential perpetrators may be more hesitant to try a scheme if they know that management and co-workers are trained to be on the lookout for fraud and have the means to report it.

Don’t go it alone

Of course, employers can get themselves in trouble by acting too hastily on mere suspicions of fraud. Encourage your clients to retain fraud experts to perform thorough and comprehensive investigations and, if necessary, testify.

If you have any questions about fraud, give us a call at 716.847.2651, or you may contact us here.

occupational fraud and forensic accounting