Occupational Fraud

By Baker Newman Noyes October 1, 2015

Evaluating your risk

All companies should evaluate their operations in order to understand the risks and preventative measures required to help prevent and detect their exposure to occupational fraud. In reality, occupational fraud is a pervasive risk to all companies, small and large, and proper steps need to be taken in order to protect corporate assets.

As defined by the Association of Certified Fraud Examiners (ACFE), “occupational fraud consists of any fraud scheme in which a person defrauds his or her employing organization. By its very nature, occupational fraud is a threat to all organizations that employ individuals to perform their business functions”. The three primary categories of occupational fraud consist of 1) asset misappropriation, 2) corruption, and 3) financial statement fraud.

Every two years the ACFE performs and publishes a comprehensive occupational fraud study, The Report to the Nations on Occupational Fraud and Abuse, related to occupational fraud in the workplace. In the most recent study from 2014, the ACFE collected data from 1483 cases of occupational fraud, and certain highlights from the report are detailed as follows:

• The typical organization loses 5% of gross revenues each year to occupational fraud
• The median loss caused by occupational fraud was $145,000
• The median duration of fraud cases was 18 months (from when the fraud commenced to when the fraud was detected)
• Majority of cases involve more than one category of occupational fraud
• Organizations with fraud hotlines were much more likely to catch a fraud by a tip
• Tips account for 40% of all fraud detections
• Smaller organizations suffer disproportionality large financial losses due to occupational fraud
• Frauds caused by collusion amongst employees cause significantly increased losses, as follows:

Fraud Committed by	Median Loss
One person	$80,000
Two perpetrators	$200,000
Three perpetrators	$335,000
Four or more perpetrators	> $500,000

• Approximately 77% of all frauds were committed by individuals in the following departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance.

While these statistics are rather daunting, the good news is that there are certain steps that can be taken in an effort to help prevent and detect occupational fraud. As part of an ongoing BNN writer’s series, we will feature common fraud schemes and specific steps that can be taken in an effort to help prevent and detect against them. The first upcoming article in the series will feature fraud schemes related to misappropriation of cash, as well as detective and preventive controls companies can employ to help protect against these schemes.

Until then, I would encourage you to step back and assess your company’s fraud risks.

Ask yourself:

1. What balances and classes of transactions are susceptible to fraud within my company?
2. Do I have proper internal controls in place over significant operating cycles (cash receipts/cash disbursements/payroll/inventory etc.)?
3. Where are we susceptible to the risk of loss?

It is crucial to understand your control environment, as well as the accounts and transactions that are susceptible to risk of loss.

If you would like to discuss this article, or any other internal control matters, contact your BNN advisor at 1.800.244.7444.