Preventing Occupational Fraud

Patrick Ross03.18.19

Occupational fraud is much more common than most CEOs think.

According to the Association of Certified Fraud Examiners Inc.’s “2018 Report to the Nation on Occupational Fraud and Abuse,” businesses worldwide lost over $7 billion to fraud in 2018.  Moreover, small- and medium-sized organizations seem to be at higher risk. The median loss of identified cases is $200,000 per case for organizations with less than 100 employees – twice the size in which larger organizations experience.

Why is occupational fraud so pervasive? In my experience with providing business advisory services, occupational fraud can be difficult to detect because of the effort taken by individuals to conceal it.  Fraud often continues undetected until losses become overtly conspicuous. The average length of time that occupational fraud continues before detection is 16 months.

Occupational fraud is the deliberate misuse or misappropriation of an employer’s resources for personal enrichment. Specific types of misconduct are wide-ranging from sophisticated embezzlement schemes, to tending to private business on company time, to taking home inventory samples. Knowing when it occurs is not always black-and-white, so setting clear expectations can help employees determine the correct behavior. Moreover, even when management identifies occupational fraud, it is still often unreported to prevent bad publicity or to avoid the effort involved in prosecuting the crime.

In my role as business advisor, I offer CEO’s the following advice on how to implement proper anti-fraud controls to prevent, detect and deter fraud.

1. Practical Steps to Help Prevent Fraud

  • Conduct risk analysis and look for potential vulnerabilities. For example, cash businesses must look for ways in which funds can be siphoned off undetected. Job responsibilities can be properly segregated to create organic checks and balances.
  • Design, review and test controls. Design practices and procedures with fraud prevention in mind. It is important to regularly review fraud prevention controls and test them in the workplace to be confident they are effective.
  • Educate employees. Education and training for all employees prove useful in deterring fraud. Employees are often at the front line of fraud detection, so giving them the tools to help the company is empowering and powerful.
  • Conduct random audits. The surprise element embedded in the process can help deter potential fraud.

2. Establish and Follow a Code of Ethics

  • Establish and communicate a defined code of ethics. A code of ethics sets the tone for employees and management that CEOs and other top leaders in the organization have a deep commitment to high standards in their business practices.
  • CEOs set the tone and lead by example. CEOs and senior management must understand that employees may think, “What’s good for the goose is good for the gander.” Employees take their cues from senior management in terms of what is appropriate.

3. Plan, Investigate, and Follow Through

  • Establish an investigation plan before needing it. A process for keeping abreast of potential occupational fraud vulnerabilities usually involves the organization’s corporate counsel, internal auditors or hiring an external certified fraud examiner. Make use of experts offering business advisory services and develop a set plan before the fraud is suspected.
  • Follow the investigation plan if fraud is suspected. Failing to follow procedures set in the plan or not taking proper legal steps could lead to a defrauder not being held accountable. When an employee knows that he or she will face inevitable legal consequences for perpetrating fraud, it is a strong deterrent.
  • Allow professionals to handle the investigation. Fraud sometimes involves a trusted employee or other circumstances that bring emotions into the mix. CEOs should be supportive of the investigation process, including taking necessary disciplinary action such as employment termination and pursuing criminal and/or civil legal action.

4. Be Proactive

  • Create and implement prevention policies. Work with a business advisory expert that can help develop the most effective, tailored, and relevant fraud prevention practices and procedures for your organization.

Do you have the right plan in place to identify and address occupational fraud? Contact us today to learn how our business advisory services can help you prevent fraud in your organization.