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Occupational Fraud: What You Need to Know

05.31.2018

According to the 2018 Report to the Nations released by the Association of Certified Fraud Examiners, occupational fraud is the largest and most prevalent fraud threat organizations may face. Millions of businesses and government organizations across the world are vulnerable to fraud committed from within by their own employees.

In order for organizations to be proactive against preventing fraud, it’s important for business leaders to first understand what occupational fraud looks like and how much is at stake as they examine risks and decide where to devote resources.

Categories of occupational fraud schemes

Occupational fraud – fraud committed against an organization by its own officers, directors, or employees – can be classified into one of three categories: asset misappropriation, corruption, and financial statement fraud.

Asset misappropriation schemes occur when an employee steals or misuses an organization’s resources. This could include theft of cash, inflated expense reports, false billing schemes, payroll schemes, skimming, cash larceny and more.

Corruption schemes occur when employees misuse their influence in business transactions in ways that violate their duty to the employer for direct or indirect benefit. Corrupt acts include things like bribery, conflicts of interest, kickbacks and extortion.

Financial statement fraud includes schemes in which employees intentionally cause a misstatement or omission of information in an organization’s financial reports. Financial statement fraud can include overstatements and understatements of income or revenues, improper disclosures, improper asset valuations and more.

Costs of fraud to organizations

Measuring the total cost of fraud is difficult, given the amount of frauds that go undetected or unreported. However, it’s estimated that trillions of dollars of revenue are lost to fraud worldwide each year. This year’s study estimates that organizations lose up to 5 percent of their annual revenues to fraud. When applied to the gross world product, that amounts to a potential loss of up to $4 trillion annually worldwide. 

Asset misappropriations were the most common but least costly form of occupational fraud identified in the study, occurring in 89 percent of cases with a median loss of $114,000. Corruption schemes are the next most common form of occupational fraud, occurring in 38 percent of cases in this study with a median loss of $250,000 to victim organizations. Financial statement fraud was the least common but most costly fraud scheme, occurring in 10 percent of all fraud cases, with a median loss of $800,000.

While it’s unlikely that the true total cost of fraud may ever be fully accounted for, the total estimated loss is significant and provides a strong case for organizations to more closely assess their fraud risk and how to implement effective fraud prevention strategies.

For more detailed information on the findings, download a copy of the ACFE report here. This article is the second in a series devoted to fraud prevention and awareness. Stay tuned for the next article in this series that will cover fraud schemes by industry and organization size in more detail, as well as some fraud detection methods.

To discuss fraud prevention or establishing a fraud risk management program in your organization, submit the form above to schedule a meeting with Ron Steinkamp.

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