Who Commits Fraud

So Who’s Committing Fraud in Your Organization?

Richard M. Potocek CPA, MBA, CFE

January 9, 2013


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The Association of Certified Fraud Examiners 2012 Report to the Nation

According to the report, theft of organizational assets, corruption/bribery and financial statement fraud worldwide cost companies an average of 5% of gross revenues each year.

©2012 Association of Certified Fraud Examiners, Inc. 3

Occupational Fraud and Abuse Classification System


Distribution of How Fraud is Committed

Occupational Frauds by Category — Frequency


The median loss for all cases reported in the 2011 - 2012 reporting period was $140,000. However, more than 20% of these cases involved losses of at least $1 million.

Asset Misappropriations were by far the most frequent fraud schemes reported to the ACFE, accounting for more than 86% of cases, yet these schemes also caused the lowest median loss at $120,000.

Financial Statement Fraud was involved in less than 8% of the cases studied, but caused the greatest median loss at $1 million.

Corruption Schemes fell in the middle in terms of both frequency (approximately one-third of the cases reported) and median loss ($250,000).

These loss figures do not include the costs in time and money spent to investigate each case, or the damage to organizational reputation in high profile cases.

Losses Associated with Internal Fraud


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Who Commits Fraud?

In two-thirds of the fraud schemes, the perpetrator acted alone.

A majority - 55 percent - attended college or graduated from college.

Approximately 14 percent obtained a postgraduate degree. The median loss increases from $100,000 for employees with a high school diploma to $300,000 for employees who obtained a postgraduate degree.


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They are likely to be male, aged 31-45. Males are 33 percent more likely to commit fraud than their female colleagues.

At the employee level, the amount of fraud committed is pretty much 50/50 between males and females. However, as you move up the level of authority in an organization, men start pulling away.

Who Commits Fraud? (cont.)


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At the manager/senior executive level, men are approximately 25 percent more likely to commit fraud.

At the owner/top executive level, men are approximately 40 percent more likely than females to commit fraud.

The median loss associated with males - $232,000 - was more than double the median loss associated with females at $100,000.



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More than half of the employees who committed fraud had more than five years' experience with their organizations.

The median loss increases as the number of years with an employer increases. The median loss for employees with less than one year of tenure was $47,000 and rose to $289,000 for employees with 10 or more years of tenure.



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Accounting

Operations

Sales

Customer Service

Purchasing

Upper Management


An employee who commits fraud usually works in one of the following departments:


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These six departments accounted for 80 percent of the cases examined in the report. Most, 22 percent, were employed in the accounting department where they had easier access to records and documents to conceal or perpetrate a fraud and over-ride internal controls.



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My Personal Experience:

Accounts Payable Clerk– Usually a modestly compensated employee whose only job is to cut checks to pay the organization’s bills that have been approved for payment. Without significant internal controls, it is easy to generate a fake bill from a fictitious vendor (a friend/relative), forge approval initials and cut the check.



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The presence of the following characteristics does not, in and of itself, signify that an employee is committing fraud or will in the future. These are just the common traits and characteristics of the average fraud perpetrator identified in the Association of Certified Fraud Examiners annual report.



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Divorce or other expensive family issues

Drug/gambling/sex/shopping addictions

Legal and tax problems

Strong feelings (usually verbalized to coworkers) about inadequate pay or being passed over for promotions ─ the “I deserve more” rationalization

Challenge – “I’m smarter than they are.”

Motivations to Commit Fraud


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Unusually close relationship with a vendor or customer – “kick-back scheme”

Defensiveness, irritability and suspiciousness – often the reaction from a management level employee

Refusal to take vacations or sick days – need to be present to cover up the fraud

No interest in seeking promotions out of current department

Volunteering to take all phone calls for the department or handle all customer complaints

Characteristics of an Employee Already Involved in a Fraud Scheme


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An overwhelming number of employees who commit fraud - 93 percent - have no prior criminal record or history of a fraud-related offense. This doesn’t mean they haven’t done it before. …



The reason so few fraud perpetrators are prosecuted is because many employers are too embarrassed to prosecute employees or don't want the publicity of the arrest of an employee who handled money or had access to someone's personal information.

Many employers believe that the personal and business costs of prosecution are not worth the benefits received or money recovered. In many incidences, the employer recovers only a small portion of the amount stolen.

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Secrecy is especially true in the nonprofit sector, in which organizations are dependent on pledges or contributions from the public. Think of the impact on contributions if the donating public discovered that a portion of their contributions had been stolen.



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My Personal Recommendations

If management chooses not to report to law enforcement, or even it does, file a lawsuit against the employee to put future employers (who do pre-employment background investigations) on notice

“Deterrent Effect” - If no action is taken against the employee, what message does that send to others in the organization?


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Always conduct a “quality” pre-employment or executive due diligence investigation for all new hires. In addition to identifying applicants with issues, it is a deterrent to those with “baggage” from applying in the first place.

Executive management should not get a pass. A due diligence investigation should be conducted to confirm credentials, education, degrees earned, experience, etc.



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Consider conducting employment re-investigation every three to five years. The “perfect” new employee at day one may have a bankruptcy, tax and other liens, multiple DUIs, lawsuits, a foreclosure, a conviction, etc.

Negative results may not be grounds for termination, but might be a reason to re-assess the employee’s role in the company.



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50.9% of internal frauds are discovered by a “tip” from another employee.

Provide employees with a way to report concerns of fraud, unethical practices, safety, etc. to management anonymously:

– Subscribe to a “Hot Line” telephone service or provide an anonymous email address. Employees can then report their concerns without worrying about retribution from coworkers, supervisors or management.

– Consider putting the Hot Line # on the website for vendors, customers and others to use.


4550 Montgomery Avenue, Suite 650N • Bethesda, MD 20814

Rick Potocek, Forensic Accounting and Dispute Services Principal

Email: [email protected] Telephone: (301) 951 – 9090Website: www.grfcpa.com

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Who Commits Fraud

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