Who Commits Occupational Fraud? You May Be Surprised

Occupational fraud in the workplace is an unfortunate fact of life, leading to more than $100,000 in median losses among small businesses and twice that much among larger organizations, according to a 2018 study by the Association of Certified Fraud Examiners.

Who Commits Occupational Fraud?

Often, the impact of occupational fraud – measured in dollars lost – is in direct proportion to the perpetrator’s level of authority. While rank-and-file employees committed 44 percent of fraudulent activities examined in the study, median losses caused by this group were $50,000.

However, while it accounted for only 19 percent of fraudulent activities, financial wrongdoing committed by owners or executives resulted in median losses of $850,000 to the businesses and non-profits involved.

Owners and higher-level employees have greater access to an organization’s assets than lower-level workers and, therefore, have more opportunity for wrongdoing and greater financial impact when they do commit fraud. They also are more likely to collude with others, and may have more knowledge about how to conceal their fraudulent activities, according to the study.

The Association’s 2018 Global Study on Occupational Fraud and Abuse examined nearly 2,700 cases of occupational fraud committed in businesses and non-profit organizations around the world.

Tenure of Employees

Fraud losses increase significantly the longer employees have worked for an organization, the study showed. While occupational fraudsters with less than one year of employment caused median losses of $40,000, those with more than 10 years yielded median losses six times higher – $241,000 – possibly because their activities go on for longer periods of time before detection.

It’s natural for businesses and non-profits to place a lot of trust in long-term employees, but certain red flags should be dealt with, such as employees who appear to be living beyond their means, express anxiety or anger over financial difficulties, or who are unusually close to a vendor or customer of the organization – the three most common behavioral characteristics of fraud perpetrators. Organizations also should take note of employees who insist on working independently with little oversight or who never take vacation.

Role Within the Organization

Certain departments within organizations are more susceptible to occupational fraud than others, as measured in the impact of median dollar losses. The executive suite (losses of $729,000), IT ($225,000) and accounting/finance ($212,000) are the three departments where fraud is most damaging, according to the study.

Prevent Fraud Within Your Organization

The Human Resources Department has a meaningful role to play in helping to prevent occupational fraud in your organization.

Surprisingly, only about half of the businesses and non-profits studied ran background checks of any type on their new hires. Of those that did, 10 percent went ahead and hired employees despite finding red flags in their backgrounds.

Every organization – whether a business, a non-profit or a school – can take basic steps to protect itself against internal fraud:

• Hiring policies – Do background checks on all new hires, from top executives to the part-time mailroom worker. These can include criminal background screens, verification of previous employment and education, and contacting references.
• Financial controls – Implement checks and balances in your finance department, including an internal audit and/or management review function.
• Ongoing anti-fraud training – Educate your workforce about what fraud looks like and make clear that you have a zero-tolerance policy. Make clear what “zero-tolerance” means – termination and criminal charges when warranted.
• Effective fraud reporting tools – Create a fraud hotline, which can be a phone number, an email address or a web-based tool. The study showed that fraud hotlines were very effective in catching fraud earlier and minimizing financial damage.

If you would like help implementing fraud prevention measures, contact our advisors today or personally email me at lag@barneswendling.com.