Occupational fraud is the use of one’s occupation for unauthorized personal gain through deliberate misuse of the employing entity’s resources or assets.
Fraud schemes have the following characteristics:
- They are covert.
- They violate the perpetrator's fiduciary duty to the victim entity.
- They are performed for personal gain.
- They result in financial loss to the victim entity.
The Association of Certified Fraud Examiners (ACFE) estimates in its 2006 ACFE Report to the Nation on Occupational Fraud & Abuse that United States organizations lose 5 percent of their annual revenues to fraud (visit www.acfe.com for the full report).
How Does Fraud Occur?
Occupational fraud predominantly occurs as
- asset misappropriation (comprising 90 percent of all cases reported to the ACFE and mostly involving cash theft);
- corruption (e.g., kickbacks or bribes);
- fraudulent financial statement reporting (the least common fraud category—but having the greatest loss impact).
Which Industries are Most at Risk of Fraud and by Whom?
Industries with the highest median losses caused by fraud are wholesale trade, construction, and manufacturing. The ACFE has studied and trended fraud cases since 1996 and found most of the loss caused by fraud schemes involved accounting personnel and upper management. Typically the fraudsters had no prior history of fraud. Only 8 percent of the fraudsters for cases included in the ACFE study had prior convictions.
How Can Businesses Minimize the Risk of Fraud?
In the cases reported to the ACFE for its study, the following methods revealed the frauds:
In larger entities, the most common method of detecting fraud was by tip. Internal controls, which are finance and accounting-related best practices designed to reduce the risk of loss, were often found to be ineffective at deterring fraud committed by large-business owners and executives. Personnel at these levels often have the authority to bypass internal controls.
Small business fraud was often discovered by accident, because small businesses often do not invest in anti-fraud measures. Common fraud schemes in small businesses include fraudulent check writing, revenue skimming, fraudulent invoicing, and expense report abuse.
Are Losses Caused by Fraud Recovered?
The ACFE study reports that less than 20 percent of victim entities recouped 100 percent of their losses caused by fraud and more than 40 percent of victim entities failed to recover any of the loss.
What Should be Done When Fraud is Suspected?
If you suspect fraud or have received information that alleges fraud has occurred, contact legal counsel for your company, notify the local authorities, and review your insurance policy to fully understand the benefits of your coverage. Many company owners do not realize their insurance may cover a portion of the loss and in some cases, the cost to investigate the loss event and establish the loss amount.
If you decide it is in the best interests of the entity to follow up the alleged fraud, contact a forensic accountant to perform an independent investigation, quantify the loss, and professionally document the loss event.