Posts Tagged ‘occupational fraud’

New Insights on Occupational Fraud

Amber HooverBy Amber Hoover, CPA/ABV
Senior Valuation Analyst

Occupational fraud continues to be a serious problem for many businesses across a wide range of industries. Asset misappropriation is a common type, often involving cash schemes — skimming, larceny and fraudulent disbursements.

The Association of Certified Fraud Examiners submitted their most recent findings in their 2016 Global Fraud Study. It includes many insights on who, when and how occupational fraud is most likely to occur.

Small organizations (under 100 employees) were the most common victims in this study, at approximately 30 percent. The median loss for all cases was $150,000, according to the study.

The best way to deal with occupational fraud is to avoid it. While no system is perfect, taking preventative steps with a robust set of oversight measures is the best defense.

It’s also prudent to conduct periodic audits and other types of in-depth financial analysis to detect when fraud has occurred.

Based on this new data, occupational fraud is most often committed by perpetrators with the following demographics:

  • Gender — Males account for 55.7% of total cases of occupational fraud cases that occurred in the United States.
  • Age — According to the study, approximately 55% of perpetrators were between the ages of 31 and 45.
  • Education — Approximately 60 percent of perpetrators have a college degree or higher.
  • Position of Perpetrator (cases that occurred in the United States) — Occupational fraud is committed most frequently by the rank-and-file employees of a company, but losses by managers/executives result in much higher median losses.
    • Employee — 45.3% of cases; median loss of $54,000
    • Manager — 31.1% of cases; median loss of $150,000
    • Owner/Executive — 19.9% of cases; median loss of $500,000
  • Perpetrator’s tenure with the business — The longer an employee works for a company, the more trust they can build with their supervisors and co-workers.
    • Less than 1 year — 8.2% of cases; median loss of $49,000
    • 1-5 years — 42.4% of cases; median loss of $100,000
    • 6-10 years — 26.5% of cases; median loss of $210,000
    • More than 10 years — 22.9% of cases; median loss of $250,000
  • Department within organization — Employees in the accounting department generated the highest number of occupational fraud cases according to the study, followed closely by operations and sales, respectively.
  • Prior criminal background or negative employment history — Approximately 88 percent of the cases with prior criminal background information available indicated that the perpetrator had not been previously convicted of a fraud-related offense. Of the cases with employment history available, approximately 83 percent indicated that the perpetrator had no prior termination or punishment for an occupational fraud.

Please keep in mind these demographics are not indicative of an employee who will commit occupational fraud, but are merely common demographics among occupational fraud perpetrators.

If you are concerned about occupational fraud in your organization, please call Amber Hoover at (317) 613-7844 or email ahoover@sponselcpagroup.com.

What Were the Craziest Business Expenses of 2015?

Jason ThompsonEver wonder what employees are trying to pass off as legitimate business expenses through the expense reimbursement process? Certify, Inc., a travel and expense software reporting company, has a list of their Top 10 most outlandish things people tried pass off in 2015.

These make for great stories. What’s really amazing is that some of these came not from the financial officer responsible for reviewing the expense report, but were actually sent in by the people who submitted the expense!

I particularly liked the $18,000 night in Las Vegas. That took a lot of guts to put on an expense report. I wonder if that included gambling losses?

Among the others:

  • $400 for a shotgun given to a customer as a gift
  • $85 for a separate hotel room for garlic samples, because the sales person couldn’t stand the smell
  • $1,000 for “adult entertainment”

Head over to the Certify website to read the rest.

All joking aside, occupational fraud is a serious problem, and expense reimbursement fraud is one of the sub-schemes within the asset misappropriation category. According to the Association of Certified Fraud Examiner (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, expense reimbursement fraud made up about 14 percent of all asset misappropriation cases, ranking fourth in overall frequency.

Another interesting stat from this survey is that about 50 percent of companies utilize a spreadsheet as the system for the expense reimbursement process. While that stat appears to be in line with what we see across our own client base, there are a number of issues to consider when using this basic system for expense reimbursements.

Generally speaking, a spreadsheet system for expense reimbursements should include/address the following:

  • Communication of the acceptable guidelines for when employees may utilize their own funds to pay for a business related expense. This should be done frequently – definitely more than once after an employee’s initial hire. Ideally, business-related expenses should be paid with business funds whenever possible.
  • A template spreadsheet for reporting the common types of expenditures acceptable for reimbursement.
  • A time limit for submitting an expense for reimbursement.
  • A requirement that expenses submitted for reimbursement be substantiated with an original receipt or appropriate documentation.
  • Independent approval of expenses submitted for reimbursement. This tends to be a critical factor in preventing fraud.
  • Comparison of expenses submitted for reimbursement to a budget or expectation for the expense.
  • Review of trends and ratios for expense categories that are typically reimbursed.
  • Surprise audits of employee’s expense reimbursement submissions and communication to the employee group that these audits occur.

Preventing occupational fraud is an ongoing process. In many instances, oversight or the fear of oversight is an important deterrent. Something as simple as another employee, supervisor or even business owner reviewing an expense report for approval can be enough of a deterrent to prevent fraud in the expense reimbursement process at your company.

If you want to learn more about occupational fraud deterrents, we would be happy to discuss how we can assist you. Please call Jason Thompson at (317) 608-6694 or email jthompson@sponselcpagroup.com.

Fraud 301: Why do perpetrators commit occupational fraud?

 (Final in a 3-part series)

Jason Thompson thumbIn the first part of our series, we dealt with popular occupational fraud schemes. In Fraud 201 we discussed who commits occupational fraud. This article delves into why employees may commit fraud and offers some suggestions on what you can do to keep it from happening.

Dr. Donald R. Cressey, a criminologist whose research focused on embezzlers, developed the following hypothesis:

“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply their own conduct in that situation, verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”

This hypothesis is the foundation for Cressey’s “Fraud Triangle,” a model for explaining the factors that cause someone to commit occupational fraud. The factors are Pressure, Opportunity and Rationalization. The existence of these three factors together can lead to fraudulent behavior.

Pressure is an incentive or reason for doing something. Pressure can be internal or external to the company. Internal pressures include perceived lack of appreciation, the perception of being under-compensated, being mistreated by a supervisor/boss/owner, etc. External pressures include addictions, unexpected financial difficulty, health concerns, family financial pressures, etc. In the context of occupational fraud, the pressure ultimately causes a financial problem for the employee. Thus they are forced to look for ways to solve their personal financial issue.

Identifying pressures is often a difficult task and one that may not provide a benefit in excess of the cost when trying to deter fraud. Keep in mind, however, that many convicted perpetrators were living beyond their means. So having knowledge about your employees’ activities outside of you business can prove to be a valuable fraud prevention technique.

Opportunity is any chance for advancement. Opportunities exist for employees when they have both access to an asset and access to the company records regarding that asset. For instance, when an employee has both the ability to authorize and record a cash disbursement.

Opportunities can be minimized with well-designed internal controls. Therefore, a review of your company’s processes, combined with periodic oversight and inquiry, will help in identifying opportunities and ways to eliminate them. Segregation of duties and authorization, along with avoiding conflicts of interest, are also strong preventive tools.

Rationalization is often considered the trigger for fraud to occur. Rationalization is the justification of the fraud as the solution to the pressure. In general, most people are good and want to do good things. Therefore rationalization is necessary in order for the good person to allow the pressure to coerce them into doing a bad thing.

The existence of all three fraud triangle factors in a particular instance causes the chances of fraud to skyrocket. Don’t get caught holding the triangle — know your critical employees, design and implement effective internal controls and watch for changes in employees attitudes, habits and activities.

If you are concerned about occupational fraud in your organization, call Jason Thompson at (317) 608-6694 or email jthompson@sponselcpagroup.com we would be happy to discuss how we could be of assistance and ideas for prevention that you can take advantage of.

Fraud 201: Who Commits Occupational Fraud?

(Second in a 3-part series)

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

Jason Thompson thumbOur Fraud 101 article last month dealt with common occupational fraud schemes that occur in privately held businesses. This knowledge can be helpful in designing internal controls to reduce the opportunity for fraud in your business. It’s also helpful to understand exactly who commits occupational fraud.

The Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations is their most recent study published on occupational fraud and abuse. This report includes demographic information about fraud perpetrators. Based on this data, occupational fraud is most often committed by perpetrators with the following characteristics:

Gender – Males account for approximately two-thirds of occupational fraud cases.

Age – According to the study, approximately 54 percent of the perpetrators were between the ages of 31 and 45.

Education – Approximately 54 percent of perpetrators have a college degree or above.

Position (level of authority) within the Company – Occupational fraud is committed most frequently by the rank and file employees of a company. While this level of authority constitutes the most frequent level of perpetrator, fraud at the owner/executive level of authority is approximately six times more costly than those of other employees.

Tenure with the Company – The longer an employee works for a company, the more trust they can build with supervisors and co-workers. They also have more experience and a better understanding of the company and its transactions. These factors contribute to employees with tenure of between one and five years being the most frequent perpetrators of occupational fraud.

Department at the Company – Employees in the accounting department generated the highest number of occupational fraud cases, according to the study. It was followed closely in second and third place by operations and sales, respectively.

Prior Criminal Background/Employment History – Approximately 87 percent of cases in which information about prior criminal background was available indicated the perpetrator had not been previously convicted of a fraud-related offense. Of the cases with employment history available, 84 percent showed the perpetrator had no prior termination or punishment for occupational fraud.

Keep in mind that just because an employee falls into one or more of these demographic patterns doesn’t mean they will commit occupational fraud; these are merely the common traits found among occupational fraud perpetrators.

Next month’s article will delve into “Why” a person may commit occupational fraud.

If you are concerned about occupational fraud in your organization, please call Jason Thompson at (317) 608-6694 or email jthompson@sponselcpagroup.com to discuss how we could be of assistance in finding or preventing fraud.

Fraud 101: What Does Occupational Fraud Look Like?

(First in a 3-part series)

Jason_ThomposnBy Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
jthompson@sponselcpagroup.com

Most people may think they know what “fraud” means, but for a business owner/manager it is especially important to understand how to find and prevent fraud in their operations. In a three-part series beginning this month, we’ll look at types of occupational fraud, learn who commits it and why.

The following is a basic discussion of fraud schemes that often occur in privately held businesses. Having a rudimentary knowledge of these schemes can help you design internal controls that reduce the opportunity for fraud in your business or organization.

Asset misappropriation is a common type of occupational fraud. It is simply a fancy word for theft. Asset misappropriation can happen either internally (committed inside the business by employees) or externally (committed outside the business by non-employees, i.e. customers, vendors, etc.).

Asset misappropriation comes in many different forms and can involve any number of business assets (cash, accounts receivable, inventory, etc.). Cash schemes tend to be the more popular types of asset misappropriation. These schemes include skimming, larceny and fraudulent disbursements.

Skimming in its simplest form is theft of cash before it is reported by the company. Not reporting or under-reporting a sale in the company’s records and keeping the payment is a typical skimming technique. Outright theft of a company’s incoming payment or swapping a payment made by check with company cash are two other methods.

Larceny is also theft. The primary difference between skimming and larceny is that while skimming happens “off the books” (before cash is reported by the company) larceny happens when funds “on the books” are stolen.

Fraudulent disbursement schemes include check tampering, register disbursement, billing, expense reimbursement and payroll schemes. These approaches tend to be the most common type of asset misappropriation.

These schemes are also “on the books” and involve an employee misdirecting company cash for their benefit – for example, an employee’s use of a company-issued credit card for personal transactions. Without appropriate internal controls, expense reimbursement schemes can be difficult to detect.

Most people believe that occupational fraud involves a complex conspiracy with lots of moving parts and many levels of deception. Our experience, however, indicates that this conception rarely aligns with real-world occurrences. In fact, in most cases, if basic safeguards had been in place and utilized, the occupational fraud that occurred could have easily been prevented.

In next month’s installment, we’ll look at what types of employees are most likely to engage in occupational fraud.

If you are concerned about occupational fraud in your organization, please call Jason Thompson at (317) 608-6694 or email jthompson@sponselcpagroup.com to discuss how we could be of assistance in finding or preventing fraud.

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