The 2012 Bi-Annual Report to the Nations on Occupational Fraud and Abuse has just been published.
It is an illuminating and an alarming report based on fraud cases investigated Worldwide.
Occupational Fraud is defined by the Association of Certified Fraud Examiners as:
‘The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisation’s resources or assets’.
Within that general title, fraud schemes fall into 3 categories:
Asset misappropriation schemes – When an employee steals or misuses the organisation’s resources;
Corruption schemes – When an employee misuses his or her influience in a business transaction in a way that violates his/her duty to the employer in order to gain a direct/indirect benefit;
Financial Statement Fraud schemes – When an employee intentionally causes a misstatement or omission of material information in the organisation’s financial reports.
Unsurprisingly, the figures have increased…
I find it hard to reconcile a global trend as to accuracy of figures stated in this report, as anything other than illustrative, for a number of reasons:
It was based on 1,388 fraud cases investigated Worldwide by Certified Fraud Examiners. In the grand scheme of things, this represents, less than a straw-poll, and more a show of hands, as to the state of things, albeit that those cases are very extensively broken down and analysed.
We do not know the size of those organisations, but we are alerted to the geographical location of those individuals reported. The most number of cases reported was from the United States of America amounting to 778 cases reported, with a median loss of $120,000, as opposed to 38 cases reported in Latin America and the Caribbean, with a median loss of $325,000.
Corruption and asset misappropriation schemes from billing, were the largest schemes complained of, globally.
Patterns of fraud considered
That being said, I find the report enormously helpful in helping define various key-elements and ‘red flags’ that all businesses should understand and be alerted to.
A small business that becomnes a victim of fraud, could be financially ruined. A larger organisation may by size alone, withstand fraud, dependant of course upon the size of the fraud involved proportionate to the cash-flow, turnover, and reserves of the organisation.
The main findings are as follows
1. Fraud on average, took some 18 months to be discovered;
2. Just over one-third of cases reported, related to corruption;
3. Occupational Fraud was more likely to be discovered by a tip from an employee of the victim organisation;
4. Occupational Fraud was more likely to hit small businesses;
5. There is a positive correlation between anti-fraud controls and a decrease in the cost and duration of occupational fraud;
6. The higher the authority of a perpetrator, the larger the loss;
7. The longer a perpetrator has worked for an organisation, the higher the loss;
8. The vast majority of frauds committed were by individuals from accounting, operations, sales, executive/upper management, customer service, and purchasing.
9. Most occupational fraudsters are first-time offenders with clean employment histories;
10. In 81% of cases, the perpetrator displayed one or more behavioural red flags often associated with fraudulent conduct. 36% were living beyond their means; 27% were in financial difficulties; 19% had unusually close relationships with sellers or customers.
Some ways to combat occupational fraud
1. Employee tips featured as most prominent, followed by management reviews, and internal audits, to discover fraud in an organisation.
2. In organisations that had ‘hotlines’, there was an increase in fraud reporting by both employees and customers.
3. Clearly, creating a work environment where there are systems and checks in place, had a significant bearing upon fraud being commited. This goes back to the ‘Fraud Triangle’ theory, that if you lessen the risk of opportunity to commit fraud, and create an open environment where, good and bad are properly defined, with serious consequences, then the cost of fraud, and the time in which a fraud is discovered, diminishes.
4. It is not just ‘box-ticking’ checks and controls in place. These controls of anti-fraud must be taken and imposed seriously upon employees, and to that end, there should be Fraud Training for senior management.
5. Anti-fraud policies and a Code of Conduct should be discussed openly, with full consultation across the organisation. It should then be put in place and imposed, rather than shelved because it was a job half- done (This is a problem I encounter amongst small businesses, who went through the motions, and whose intentions were good, but failed to complete the task).
6. Such policies and codes of conduct, should be tested by way of an external audit, and surprise audits.
7. Fraud training should be brought in, not just to prevent suppliers or customers from taking advantage of an organisation, but also to teach employees that anti-fraud is taken very seriously in the organisation.
8. There should be formal risk assessments, and reviews of employees by employees and senior management. Equally, there should be a review of senior management by perhaps an external board, or professionals, to see that all is at it should be.
Professor Rosen is a Solicitor-Advocate, Partner and head of Litigation at Darlingtons Solicitors. He is Certified Fraud Examiner, and a working member of the Fraud Advisory Panel. He is a visiting associate Professor of Law at Brunel University, and a member of The Society of Legal Scholars.
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