No small business owner or manager thinks that occupational fraud can or will happen to them. Guess what? Business fraud happens all the time…every day in every city, small or large, and to any size and type of business. And what is occupational fraud? As defined by the Association of Certified Fraud Examiners, occupational fraud is a fraud that is committed by individuals against the organizations that employ them.
Global Study
The Association of Certified Fraud Examiners (ACFE®) in its latest REPORT TO THE NATIONS® 2020 GLOBAL STUDY ON OCCUPATIONAL FRAUD AND ABUSE (first published in 1996) covered 2,504 cases from 125 countries causing total losses of more than $3.6 billion. Some of the more interesting statistics are:
• The typical fraud case lasted 14 months before detection and caused a loss of $8,300 per month
• Asset misappropriation schemes were the most common and least costly (86% of cases with a medium loss of $100,000)
• Corruption accounted for 43% of the cases with a medium loss of $200,000
• Financial statement fraud schemes were the least common and most costly (10% of cases with a medium loss of $954,000)
• Owners/executives committed only 20% of occupational frauds but caused the largest losses (owner/executive $600,000 in losses; manager $150,000 in losses; employee $60,000 in losses)
• 43% of the schemes were detected by tip and half of those tips came from employees (15% detected by internal audit and 12% detected by management review)
• 64% of victim organizations had hotlines and the medium losses were nearly doubled at organizations without hotlines ($100,000 with hotlines vs. $198,000 without hotlines)
• Organizations with hotlines detected fraud more quickly than those without hotlines (12 months medium duration with hotlines, 18 months medium duration without hotlines)
• Organizations with fraud awareness training for employees were more likely to gather tips through form reporting mechanisms (56% of tips with training, 37% of tips without training)
• A lack of internal controls contributed to nearly 1/3 of fraud cases
• 40% of occupational fraud was concealed by creating fraudulent physical documents, 36% concealed by altering physical documents, 27% concealed by altering electronic documents or files, and 26% concealed by creating fraudulent electronic documents or files (12% did not make any attempts to conceal the fraud)
• Occupational fraudsters who had been with their organizations at least 6 years caused twice the loss of less-tenured employees (median loss $100,000 employees 5 years of less vs. median loss $200,000 employees with 6 years or more)
• 64% of occupational fraudsters had a university degree or higher (no university degree $100,000 median loss vs. university degree or higher $195,000 median loss)
For clarity, asset misappropriation involves an employee stealing or misusing the employing organization’s resources. Financial statement fraud is when the perpetrator intentionally causes a material misstatement or omission in the organization’s financial statements. Corruption includes offenses such as bribery, conflicts of interest, illegal gratuities, and extortion.
Small Businesses
Oftentimes, it is thought that occupational fraud only exists in larger types of businesses; however, the Report to the Nations clearly shows that small businesses (those with fewer than 100 employees) are not immune.
Some statistics specifically in the area of small businesses are:
• Small businesses had the highest median loss of $150,00 compared to organizations with 100-999 employees (median loss $120,00), organizations with 1,000-9,999 employees (median loss $100,00), and organizations with more than 10,000 employees (median loss $140,000)
• Certain fraud risks were more likely in small businesses than in large organizations (billing fraud 2 times higher, payroll 2 times higher, check and payment tampering 4 times higher)
• Some of the more frequent fraud schemes for organizations with less than 100 employees involves corruption, billing, check and payment tampering, expense reimbursements, and payroll
Be Aware
As noted in the Association of Certified Fraud Examiners study, occupational fraud is costly and prevalent. No business is immune. Behavioral red flags must be recognized as clues displayed by many fraudsters. Eighty-five percent of all fraudsters in the above study displayed at least one of the following warning signs while committing their crimes.
• 42% living beyond means
• 26% financial difficulties
• 19% unusually close association with vendor/customer
• 15% control issues, unwillingness to share duties
• 13% irritability, suspiciousness, or defensiveness
• 13% “wheeler-dealer” attitude
• 12% divorce/family problems
Understand that occupational fraud can happen in any business. It can happen in your business committed by a long-term, loyal employee. Be observant and be aware of red flags that could be a warning that something might be amiss in your business. Better to be overly cautious than under-prepared.
