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Do You Trust Your Employees?

Occupational fraud can cost companies big money, but is preventable

Modus Operandi

When workers consider committing fraud, Ratley says they must first have the opportunity. Many have financial need as a motive, as well as the ability to rationalize the crime.

But Ratley says it usually comes down to negligence on the part of management for not paying attention or having adequate controls or oversight in place. “Smaller companies— organizations with fewer than 100 employees—are twice as likely to be victimized by fraud,” he says, due in large part because managers know their people, may be friends with or socialize with them, and do not believe their employees are capable of stealing or taking advantage of them or the company.

Financial statement fraud generally involves high-level employees, and in some cases the company’s management itself. It can range from falsifying sales, profits, or assets to securing loans, or in the case of public companies, to increase earnings per share. It happens far less often than other types of fraud, but can result in huge losses.

The Canadian controller says his company has implemented many controls to prevent financial fraud, but collusion can be difficult to uncover or document. One example is kickbacks from a customer who receives preferential pricing, but due to the volatility of the perishables market, such discrepancies can be very difficult to detect and nearly impossible to prove.

Types Of Victims And Perpetrators

The most common victims of fraud are smaller organizations (under 100 employees), which reported 31.8 percent of 2012’s fraud cases and had a median loss of $147,000. Next highest were companies with 1,000 to 9,999 employees, at 28.1 per- cent of fraud cases, but with a median loss of $100,000.

The fewest reported cases (19.5 percent) came from organizations with 100 to 999 employees, though this category suffered the highest losses at an average of $150,000 per occurrence. Lastly, firms with over 10,000 employees reported 20.6 percent of cases with a median loss of $140,000.

In most schemes reported by ACFE, the smallest companies had the highest number of cases compared to firms with over 100 employees, but not all. For example, in billing fraud, smaller firms accounted for 32.2 percent of cases compared to the larger firms’ 22.2 percent, but  in corruption, smaller companies comprised 27.9 percent of cases compared to 34.9 percent for the larger organizations.

Ratley divides perpetrators into two major types: predators and opportunists. Predators, he says, will “steal no matter what” but most employees fall into the second group, seizing an opportunity because they have financial problems and are unhappy—with the company, their boss(es), or life in general—or feel they have a right to the assets for any number of reasons.

By position within a company, most occupational fraud is committed by regular employees and managers, though 17.6 percent is attributed to owners and/or executives.

Median losses, however, were higher at the top: $573,000 per case by owners or key executives compared to $182,000 by managers, and only $60,000 by employees. Tenure, and by extension trust, had a direct impact: those with more than 10 years service were responsible for 25.3 per- cent of cases, but with the most substantial losses (averaging $229,000 per case), while workers with one to 10 years of service perpetrated the vast majority of cases at 66.8 per cent, with median losses at  $100,000 per occurrence.

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