A company’s success depends on its employees’ quality, motivation, and honesty. Unmotivated employees who feel neglected and under-appreciated may not hesitate to deceive their employer for their own personal benefit.
This type of fraud is known as occupational fraud, and it’s a growing concern for business leaders. So, how can employers detect and prevent this type of fraud from happening?
What is Occupational Fraud?
Occupational fraud is fraud committed by employees against their employer when it benefits them – whether it is financial or some material benefit, such as gaining a promotion. Key characteristics of occupational fraud include:
- Corruption.
- Financial statement fraud.
- Stealing company funds.
- Stealing company secrets after being bribed by a competitor.
- Issuing a false invoice for fictitious services performed.
These types of fraud aren’t limited to one particular level of the organization, such as upper management. Anyone at a company can commit occupational fraud, either alone or in a conspiracy with others. It can happen in private and public companies, small organizations, and larger organizations.
So what can be done to stop it? A proactive approach by management can reduce the chances of it happening. And it doesn’t have to be difficult – something as simple as anonymous reporting mechanisms can make all the difference.
Common types of occupational fraud
- Asset misappropriation: This can be small, such as stealing a few dollars from petty cash, or larger, such as misrepresenting company profits to shareholders or stealing a larger amount of money from company bank accounts.
- Corruption: Many companies, in a rush to get ahead of their rivals, may approach an employee from a competing company and pay for company proprietary information. If that employee feels under-appreciated by their bosses, they may decide it’s worth doing.
- Financial statement fraud: If an employee is going to steal money, effective concealment methods are necessary to hide the crime for as long as possible. This can include falsifying the books, which puts their employer in a precarious position with authorities. The IRS and various regulatory authorities will suspect tax avoidance, money laundering, and deceiving investors, among other things.
- Expense reimbursement: The classic trope of the employee wondering if they can get away with adding the huge hotel room bar tab to their personal expenses claim is also a form of occupational fraud. Falsifying legitimate business expenses is one of the most difficult types of fraud to detect because some expenses are difficult to disprove.
- Payroll fraud: These involve inventing ghost employees with inflated salaries, expenses, and fake documents, with the possible collusion of other payroll account employees who can generate payroll checks. This may be difficult to get away with in small companies, but in large corporations with many thousands of employees, slipping in a fake employee will likely go unnoticed.
- Fraudulent disbursements: This is a common form of fraud that generates false invoices for services not performed, using fictitious vendors (or conspiring with real vendors), or inflating the value of real invoices and pocketing the surplus. This is usually seen in money laundering cases.
Perpetrator profiles and motivations
So what kind of people do these things, and what are their motivations for defrauding their employers and breaking the law?
- The so-called “Fraud Triangle” consists of three factors. Opportunity is when the employee sees a chance to steal. Pressure is why they do it, whether it is financial difficulties or living above their means. Rationalization is when they justify their actions to themselves by saying that the employer deserves it or that the company won’t notice.
- Personal factors, such as heavy debt, expensive addictions, or making expensive personal purchases, such as luxury vacations, may likely impair their judgment. Some employees may be convinced that they are unappreciated and that their current earnings are, therefore, insufficient. So they tell themselves they are merely taking what they think they are entitled to.
- Then, there are organizational factors. For a type of fraud scheme like this to succeed, there have to be weak and inefficient internal controls at the company that won’t detect the fraud (at least not right away). This may feed into the perpetrator’s opinion that senior management deserves it because they did not notice it and stop it.
- The opportunities for fraud will also depend greatly on the organization’s culture and leadership. People usually look to their bosses for guidance on what behavior is tolerated in the workplace. If management is seen to be dishonest, then the employees may see that as tacit permission to act the same way.
The Cost and Impact of Occupational Fraud
When an employee commits theft of company assets and maxes out the company credit card, it becomes a lot more than just a simple theft of cash and misappropriation of assets. Fraud losses can have a devastating knock-on effect on other aspects of the business too, consequences that the perpetrator may not have anticipated.
Financial losses and potential consequences
First, the direct and indirect costs should be considered. Direct costs can encompass legal fees to fight court cases, and fines imposed by regulatory authorities for false payments, financial statement fraud schemes, and falsifying financial records or payroll records.
Indirect costs can include annual revenue losses leading to job cuts and low employee morale, as well as reputational damage due to a corruption accusation or deceptive financial reporting, which results in erosion of trust with stakeholders. Not all consequences are financial.
Regulatory implications and legal considerations
Crimes that fall under occupational fraud are covered by US laws such as the 2002 Sarbanes-Oxley Act and the 1977 Foreign Corrupt Practices Act. Both cover corporate responsibility and fraud in business. The two laws can lead to not only criminal charges but also civil liabilities from shareholders, and fines from the Securities and Exchange Commission (SEC).
Penalties such as these highlight the importance of companies having effective compliance teams, reporting obligations, and whistleblower protections to uncover crimes being committed. What’s the point of having laws to punish these types of crimes if they are not even being detected in the first place?
Detecting and Investigating Occupational Fraud
How can companies effectively detect and investigate occupational fraud? There are three distinct areas that must not be overlooked.
Fraud risk assessments and internal controls
Identifying the various vulnerabilities and high-risk areas that should be continually monitored is essential. Random audits and analyzing data analytics are two significant ways to make it more difficult to commit occupational fraud in these high-risk areas.
Implementing preventive and detective controls, such as segregation of duties and unannounced random audits) help to deter and detect crimes like payment tampering and common fraud schemes.
A risk-based approach to monitoring and testing means company resources can be efficiently allocated to areas with the highest fraud risk.
Red flags and warning signs
Occupational fraud can be stopped early on if people know what to look for. It can be:
- Behavioral factors such as an angry employee dramatically changing their lifestyle and spending more than they earn. If Bob in accounting suddenly starts driving a Porsche, people should ask why.
- Employees in Accounts Payable can look out for financial anomalies, irregularities, and unusual transactions.
- Suspicious activity can also include a lack of documentation or inadequate supporting records to justify making a payment. Where are the invoices for that alleged service?
- If persistent complaints, anonymous tips, or whistleblower reports point to one person, then senior management should join the dots and begin investigating.
Fraud investigation techniques and best practices
Gathering evidence and conducting interviews should always be the first step. Crimes of this type will always involve physical documents (or lack thereof). This means forensic accountants and data analysis will become important tools to prove that a fraudulent business transaction was committed in the first place.
In the interests of thoroughness and impartiality, it may become necessary to bring in external investigators with no axe to grind in the company. These could be law enforcement or regulatory authorities with the power to prosecute. However, this carries the risk that a potentially small issue escalates into an enormous issue that will impact staff morale and the company’s public image.
Preventing and Mitigating Occupational Fraud
Senior management can take various practical steps to try to prevent or mitigate financial discrepancies.
Fostering an ethical organizational culture
Everything starts at the top. The CEO and his team have to set the tone of what they expect regarding professionalism and behavior.
This means effective training and communication, as well as promoting a speak-up environment where concerned employees are able to report a suspicion without fear of retaliation.
A code of conduct and ethics must be established, but it won’t have teeth unless upper management establishes a track record of consistently enforcing those rules and consistently holding violators legally accountable.
Robust internal controls and monitoring
The company should also set up internal fraud controls and oversight mechanisms to close the loopholes that make organizational fraud crimeseasier to commit in the first place.
This can involve a surprise audit, job rotations, or a separation of duties so potential fraudsters have fewer opportunities or access to everything they need. Anti-fraud controls and prevention strategies can be as simple as commissioning third-party risk assessments so a second set of eyes can potentially see things that the company may be blind to.
Employee screening and background checks
Employee fraud happens when the wrong kind of employees are hired. Pre-employment and background checks must be performed to identify potential red flags such as criminal records.
Checks need to include verifying previous employment history, qualifications and credentials, credit checks, and financial background assessments.
These extra steps will ensure that only honest people are in positions of responsibility. But even after they are hired, background checks should still be done on a regular basis to make sure nothing has changed.
Building a Comprehensive Fraud Risk Management Program
There are three main areas to building a strong fraud risk management program:
- Prevention and detection.
- Collaboration and information sharing.
- Monitoring and evaluation.
Integrating prevention, detection, and response strategies
Aligning policies, procedures, and controls can go a long way to mitigating the risk of fraud.
Clear roles and responsibilities need to be established, as well as developing a coordinated approach of prevention, detection, and response.
This allows organizations to proactively identify and address vulnerabilities while consistent enforcement of procedures minimizes fraud opportunities.
Defining roles and responsibilities for management and internal audit and compliance teams will result in better collaboration and faster responses to incidents in its early stages.
Collaboration and Information Sharing
When all the company’s stakeholders work together as a team, this “we’re all in it together” approach fosters open communication and information sharing amongst one another, which, in turn, will identify potential vulnerabilities and possible improvements.
Collaborating with industry peers and professional associations can be even more beneficial as this encourages information sharing, such as new industry thinking and trends.
Ongoing monitoring, evaluation, and improvement
Regularly assessing the effectiveness of a fraud risk management system will ensure that the process is still efficient and working as it should.
Conducting periodic reviews and audits will help the company always think ahead regarding new threats and emerging risks and avoid stagnating thinking.
Incorporating feedback and lessons learned from investigations and incidents and adapting preventive fraud measures will always keep the company one step ahead.
Prevent Insider Fraud with Teramind
Teramind is a leading insider risk and user behavior analytics platform. Here’s how you can use Teramind to prevent occupational fraud.
- Comprehensive Monitoring & Analytics: Teramind offers real-time monitoring and detailed analytics to track employee activities and detect suspicious behavior before it escalates, safeguarding your organization from insider fraud.
- Advanced Behavioral Insights: Leverage Teramind’s advanced behavioral analytics to identify anomalies and patterns indicative of potential fraud, enabling you to proactively address risks and strengthen your internal controls.
- Customizable Alerts & Reports: Tailor alerts and generate detailed reports with Teramind to stay informed of any unusual activities or policy violations, ensuring timely intervention and maintaining the integrity of your business operations.
- Seamless Integration & Scalability: Easily integrate Teramind with your existing systems and scale its capabilities as your business grows, providing a robust and adaptable solution for continuous protection against insider threats.
FAQs
What is internal fraud vs occupational fraud?
Internal fraud refers specifically to dishonest actions committed by employees within an organization, often involving the misappropriation of assets or information. Occupational fraud, on the other hand, encompasses a broader range of fraudulent activities occurring in the workplace, including corruption and financial statement fraud, committed by employees or management for personal gain. Understanding these distinctions is crucial for developing effective prevention strategies.
What is the most common way occupational fraud is detected?
Occupational fraud is most commonly detected through tips from employees or whistleblowers, which account for around 40% of cases. Additionally, routine internal audits and data analysis play a significant role in uncovering fraudulent activities before they escalate. Implementing proactive monitoring systems can enhance detection rates and safeguard against potential risks.
How common is occupational fraud?
Occupational fraud is surprisingly common, with organizations experiencing an average loss of 5% of their revenue due to fraudulent activities each year. According to the Association of Certified Fraud Examiners (ACFE), businesses worldwide lose billions collectively to various forms of occupational fraud, making it a critical concern for companies of all sizes. Implementing robust detection and prevention strategies is essential to mitigate these risks effectively.
What is the most common type of fraud in the workplace?
The most common type of fraud in the workplace is asset misappropriation, which accounts for approximately 86% of occupational fraud cases. This includes activities such as theft of cash, inventory, or fixed assets by employees, highlighting the importance of effective monitoring and internal controls to prevent these fraudulent actions.
Conclusion
Corporate fraud is a big risk for a company if the perpetrators of fraud realize that the company culture is right for them to commit fraud and get away with it.
A corruption scheme or any form of personal enrichment – financial or otherwise – can only succeed if bad actors are encouraged by business owners and/or business partners showing a lack of ethical standards themselves.
What is the lesson to take away from all of this? If upper management leads by example, with good ethics and honesty, then most employees will follow suit. Everything starts at the top after all.
