Occupational Fraud Costs Organizations 5% of Annual Revenue
It seems that not a day goes by without a media report of occupational fraud being committed by a trusted employee at a St. Louis-area business, government or non-profit organization. An organization’s typical occupational fraud loss is 5 percent of its annual revenue. Many cases of fraud go undetected for several years, costing the victim organization not only lost revenue, but exacting a heavy toll on the organization’s reputation and employees.
The Cost of Fraud
The Association of Certified Fraud Examiners (ACFE) recently released the “Report to the Nations on Occupational Fraud and Abuse” based on its 2014 Global Fraud Study. Asset misappropriation (theft by an employee of cash, inventory or assets) is the most common type of fraud, with a median loss of $130,000, followed by corruption at $200,000 and financial statement fraud at $1,000,000. The ACFE study found that about 60 percent of victim organizations impacted by organizational fraud do not recover any of their losses. Every industry is impacted by occupational fraud. However, the ACFE study results show that the industries that are most victimized include:
- Banking and Financial Services
- Government and Public Administration
- Health care
Who Commits Occupational Fraud
The ACFE found that more than 86 percent of perpetrators had no previous charges or criminal convictions. Our neighbors and coworkers could be committing occupational fraud. There are certain behavioral red flags to look for in potential perpetrators and the ACFE listed the top five as:
- Living beyond their means
- Experiencing financial difficulties
- Unusually close association with a vendor or customer
- Control issues such as an unwillingness to share duties
- Attitude of a “wheeler-dealer”
How to Prevent and Detect Occupational Fraud
Tips are the most common way organizations find out about occupational fraud. Most of these tips come from employees. In addition, the ACFE found that having a robust management review as well as an experienced internal audit function helps detect occupational fraud.
Occupational fraud schemes are endless and continually changing, which is why organizations should create an environment that reduces their exposure to fraud. Preventive approaches are key to helping an organization protect itself and reduce the risk of occupational fraud.
The key is to create an anti-fraud culture, which begins by setting the tone at the top. Leaders must set the example by behaving ethically and openly communicating expectations to employees. Preventing occupational fraud before it occurs involves implementing a formal company code of conduct that emphasizes prohibited behaviors and actions and outlines employees’ responsibilities in the prevention and detection of fraud. In addition, many organizations establish anti-fraud policies and educate employees appropriately on what is acceptable and how to recognize and report occupational fraud.
The best way to detect when and where occupational fraud occurs is to create a fraud hotline through which employees, vendors and customers can anonymously report suspicions. Additionally, an occupational fraud prevention checkup can help identify how well your organization is prepared to prevent and detect occupational fraud. A more detailed occupational fraud risk assessment can identify the critical processes in which fraud could occur and the people who are in a position to commit it.
By creating an environment where fraud is not tolerated and attempts at fraud are identified and promptly dealt with through the discipline process, an organization sends the message to employees, vendors and clients that dishonest behavior will not be tolerated.
Plus, fill out the adjacent form to request a Fraud Prevention Self Assessment and schedule a meeting with Ron Steinkamp to discuss your level of risk.