Articles

Occupational Fraud, An Injection of Reality

By Abigail Grenfell, president of Internal Control and Anti-Fraud Experts, LLC

Every two years, the Association of Certified Fraud Examiners (“ACFE”) queries its members on cases of occupational fraud that they investigated during the prior two years. Outcome for the period ending February 2008 resulted in estimated losses to US companies due to occupation fraud at a staggering 7% of annual revenues. Extrapolated out to the U.S. Gross Domestic Product of $14.2 trillion, we are looking at an annual loss of $994 billion last year alone.

Familiarity with occupational fraud, understanding how it can affect your company, and implementing anti-fraud controls are your greatest protection against occupational fraud and its related costs to your organization.

So what is occupational fraud? Occupational fraud, as defined by the ACFE, is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” The three distinct areas of occupational fraud are: 1) corruption and bribery (giving or receiving of something of value to influence an official act); 2) asset misappropriation (theft or embezzlement); and 3) financial statement misstatement (intentionally misstating the company’s financial statements).

Startling figures from the ACFE’s current report show that occupational fraud is on the upswing, due in part to the current economic conditions. As mentioned above, experts estimate that U.S. companies lost 7% of their annual revenues to fraud each of last two years compared to the 5% estimated for the prior two-year reporting period.

So what does this mean to your company? More than 25% of the cases investigated during the last two years resulted in losses in excess of $1 million, with the typical fraud scheme underway at least two years prior to its detection. Of those cases investigated and reported, 39% occurred in private companies (median loss of $278,000), 29% in public companies (median loss of $142,000), 18% in governmental agencies (median loss of $100,000) and 14% in not-for-profit organizations (median loss of $109,000). Small businesses are particularly vulnerable and realize a median loss of $200,000.

Anti-fraud measures and internal controls can and should be designed and customized for each individual business based on specific risks faced by your organization and its operations. There are, however, some fairly standard controls that can be easily tailored and implemented quickly and cost-effectively to help companies reduce their risk of fraud. Five are outlined below.

Risk Reduction #1 - One of the most important anti-fraud controls is the company’s Code of Business Conduct and Ethics (“Code”). Companies should establish their Code and disseminate it to all employees annually for review and signoff. The purpose of a strong Code is to promote honesty, ethics and integrity within the organization, with demonstrated action by the senior officials and modeled by each and every employee. Please consult with your legal counsel before releasing your company Code as they are in the best position to provide guidance on your Code’s contents as well as ensuring your Code complies with applicable federal and state laws.

Risk Reduction #2 – Another preventive control is the company’s employee handbook. The handbook provides written guidance to all employees of the company’s policies on such things as computer and internet usage, intellectual property, time reporting and requests for time off. Handbooks may also contain methods to report violations of company policies. Please consult with your legal counsel as you develop or modify an employee handbook to ensure federal and state employment laws are considered.

Risk Reduction #3 – Background checks are another tool companies can implement at a reasonable cost. Management should consider verification of an applicant’s prior employment history and education as well as involvement in any criminal and civil action. Oftentimes individuals who have committed fraudulent actions at a prior employer were not criminally prosecuted, however, they may have been sued in a civil action for damages.

Risk Reduction #4 – Fraud awareness training for managers and executives is an important method of raising your management team’s awareness of your company’s specific fraud risks. Robust fraud awareness training will include discussion on fraud trends and patterns as well as information on the typical fraudster and red flags to watch for. This training should be conducted by a certified fraud examiner because they are trained experts and best equipped to assist you.

Risk Reduction # 5 – Job rotation and mandatory vacations is one of the most impactful anti-fraud controls a company can implement. Most asset misappropriation fraud schemes occur for a considerable period of time prior to detection, generally 18 to 24 months, and need constant attention from the perpetrator to avoid discovery. If you believe fraud is occurring in your organization, consult with your legal counsel and/or an experienced certified fraud examiner immediately; working together, they are best equipped to ensure that a professional, independent assessment and investigation are performed.

In closing, consider the risks and exposure to your company if fraud were to occur. Business owners think it will never happen in their company, and when it does, it can be devastating, both financially and through violation of trust. Oftentimes the fraudster is in a position of trust and has been with the company for many years. A proactive approach of fraud prevention reduces your risk, protects your investment and conveys a high standard of ethics and integrity within your organization. When seeking assistance with fraud prevention and internal control design and assessment select a professional experienced with your size and type of organization as well as your product or service, it’s worth the investment.

Abigail Grenfell is president of Internal Control & Anti-Fraud Experts, LLC, a certified fraud examiner and certified internal auditor, an active member of the Association of Certified Fraud Examiners and Institute of Internal Auditors. She specializes in fraud prevention, detection and investigation, development of anti-fraud programs, and design and assessment of internal controls. She can be reached at 612-865-7750, via email at abby.grenfell@icafemn.com, or through her company’s website at www.icafemn.com.