One of the costliest financial crimes is occurring in workplaces right now. In fact, it could be happening in the office next to you.
According to the Association of Certified Fraud Examiners (ACFE), occupational fraud — committed by employees against their employers — causes billions in annual losses globally. Financial fraud experts estimate that organizations lose five percent of their revenue to internal scams every year.
This is a shocking number that applies to business owners and executives in every sector, from large multinationals to small nonprofits. No employer is exempt. But the more you know about who commits these crimes — and how they are committed — the more likely you are to stop employee fraud before it damages your company’s reputation and bottom line.
Employees who commit fraud come from specific demographics.
The ACFE has studied organizational fraud for many years. Over time they've noticed a distinct demographic profile.
Most perpetrators are men.
More than 70% of perpetrators in the ACFE study were men, and men caused significantly larger median losses ($150,000) than women ($85,000).
Losses increase with age and education level.
Most fraudsters (53%) are between the ages of 31 and 45, but the older the perpetrator, the greater the loss. For example, less than 10% of fraudsters are older than 56, but they caused median losses far higher ($400,000 to $575,000) than any other age group.
Almost 50% of perpetrators have a college degree, and while only 15% have a postgraduate degree, it’s this highly educated group that causes the highest losses ($200,000). This could be because people with more education usually hold higher positions of authority and might have greater technical agility in committing fraud.
Owners and executives cause the largest losses.
Owners and executives are responsible for only 20% of fraud, but they cause the largest losses ($600,000). People with higher levels of authority can often override anti-fraud controls and have easier access to company assets.
Tenured employees do the most damage.
The longer a perpetrator works at a company, the more damage he can cause. Those who have worked at the victim organization for at least 10 years stole a median of $200,000, which is four times greater than employees who have worked for a company less than a year. This may be due to familiarity with gaps in internal controls and an increased level of trust in longer-term employees.
Perpetrators usually work in operations, accounting, and upper management.
More perpetrators work in these three areas than any other department in the company.
In operations, 44% of fraud involves corruption, including extortion, bribery, and conflicts of interest. In accounting, fraud is usually split among billing and check/payment tampering, followed by fraudulent expense reimbursements and payroll schemes. Executives and upper-level managers most often commit corruption schemes (62%). Financial statement fraud, expense reimbursements and billing schemes round out the top four most common types of fraud among this group.
Most are first-time fraudsters – or are they?
You would think most perpetrators are first-time offenders as only four percent have a fraud-related criminal history. However, 41% of the fraud incidents in this study weren’t reported to law enforcement, which could indicate that the percentage of repeat offenders is higher.
Lifestyle and personality changes can indicate a fraud problem.
Employees who commit fraud tend to also exhibit some common behavioral patterns. According to the ACFE, 85% of perpetrators display one of these behaviors, and 49% exhibited more than one of these red flags.
Living beyond their means: Are employees buying very expensive new cars or second homes? Taking extravagant vacations? Living beyond their means is the most common red flag and is shared by 42% of fraudsters.
Financial difficulties: Twenty-six percent of employees are having financial problems. It’s no surprise they would steal to fix them.
Unusually close association with a vendor or customer: Employees with overly friendly vendor and customer relationships account for 19% of fraud, especially billing schemes.
Control issues, including unwillingness to share duties: Hiding criminal behavior requires concealment. Tightly controlling job duties is a hallmark of 15% of occupational fraudsters.
Irritability, suspicion, or defensiveness: Dishonest employees are under a lot of pressure from financial problems and attempting to hide their behavior from colleagues and families. Irritability, being suspicious or defensive is common in 13% of office fraudsters.
Several other red flags stand out. For example, from nine to 12% of occupational fraudsters are experiencing addiction, marriage, and family problems. Six percent are socially isolated.
Another highly suspicious characteristic is that seven percent refuse to take vacations. They are likely afraid their schemes will be uncovered if they are away from the workplace for any length of time.
In addition, the ACFE points out a correlation between fraud and other forms of workplace violations, with 45% of fraud perpetrators engaging in misconduct unrelated to fraud. This commonly includes bullying and intimidation, followed by excessive absenteeism, tardiness, and internet browsing.
About 13% of fraudsters also have poor performance evaluations.
Adopting tight controls will help to reduce employee fraud.
How can your organization stop occupational fraud? The ACFE identifies several anti-fraud measures that are effective in preventing and detecting losses. Four are highly cited in cutting both fraud duration and median losses in half.
Code of conduct: When everyone — including owners and executives — follows a strict code of conduct, fraudsters have a harder time keeping their schemes going.
Internal audit: If others are looking into the financial state of the company and checking for anomalies, fraudsters are more likely to be caught.
Management certification of financial statements: In publicly traded companies, CEOs and CFOs must confirm that financial statements are accurate and true. The stakes are high. No business wants to be associated with financial statements that reflect fraudulent numbers or activities.
Regular management review of internal controls, processes, accounts, or transactions: When management is engaged and accountable, they are more likely to uncover occupational fraud. A consistent schedule in which to review access points, data and processes is critical to mitigating fraud.
You and your colleagues work hard to ensure that your organization is financially sound and its reputation strong. Don’t let criminals destroy what you’ve worked so hard to build. If you suspect that your company is at risk of fraud, act quickly to restrict the perpetrator’s access and stop any potential damage. Talk to your insurance company and don’t hesitate to involve law enforcement.
Synovus is committed to helping protect your company’s assets. Contact our Treasury &
Payment Solutions team or your Relationship Manager for more details on our fraud
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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