Believe it or not, occupational fraud is happening in your company—and odds are, it’s happening now. 

After the 2008 recession, 55% of certified fraud examiners (CFEs) said that occupational fraud increased—both in frequency and dollar amount. Fraudsters have always tried to capitalize on disasters, and the current crisis is no different. The Federal Trade Commission, Better Business Bureau, and others have issued notices urging businesses to be extra vigilant.

What is occupational fraud?

Occupational fraud is committed any time an employee inappropriately—or illegally—uses an organization’s property, assets, or other resources. According to the 2018 annual report by the Association of Certified Fraud Examiners (ACFE), internal fraud “is likely the largest and most prevalent threat” to organizational resources. Theft by employees and other insiders costs companies an estimated 5% of their annual revenues—or $4 trillion in total global fraud loss.

Auditors and other fraud professionals often use the fraud triangle as a way of understanding why employees commit fraud. Its three points include

  • Incentive: Fraud driven by personal stressors like debt or job performance
  • Rationalization: When a wronged employee tries to even the score
  • Opportunity: Weak anti-fraud controls or dishonest, toxic, company culture
Fraud triangle: Incentive, Rationalization, and Opportunity

What are the types of fraud?

The three most common types of fraud affecting employers are asset misappropriation, corruption, and financial statement fraud. ACFE refers to these three categories and their subcategories as the “fraud tree” (which is used to classify occupational fraud and abuse).

Asset misappropriation

Asset misappropriation is the most common type of occupational fraud—making up approximately 89% of fraud cases. This type of fraud refers to any theft or misuse of company property, ranging from something as small as stealing office supplies to something as serious as pocketing cash. Per incident, median losses from asset misappropriation are around $114,000.

Corruption

The next most common type of fraud is corruption, making up 38% of incidents. Corruption includes kickbacks, bribes, and other exchanges. In 70% of cases, corruption was carried out by someone in leadership such as a manager or executive—around $250,000 lost per incident.

Financial Statement Fraud

While only 10% of occupational fraud is classified as financial statement fraud, it is the most financially damaging to companies. On average, $800,000 is lost per incident. Financial statement fraud requires deep accounting expertise and access to a company’s books; schemes include over and understatement of income or net worth, concealed liabilities, T&E, and improper disclosures.

Who is impacted by fraud?

In the words of former Federal Reserve Chairman Alan Greenspan, “Corruption, embezzlement, fraud … are all characteristics which exist everywhere.”

While fraud can impact every organization, ACFE measured the most incidents of occupational fraud in these five industries:

  • Banking and financial services
  • Manufacturing
  • Government and public administration
  • Healthcare
  • Retail

Note: The banking and financial services industry had nearly three times more fraud than retail.

Occupational fraud also varies by size and type of company. Private companies were the most frequent victims—42% of businesses had experienced fraud of some type. Not only did private companies experience the most instances of fraud, they also had the greatest median losses at $164,000.

42%

Private companies

29%

Public companies

16%

Government agencies

9%

Nonprofit organizations

4%

Other organizations

Small businesses were also frequent victims. The ACFE found that 42% of businesses with fewer than 100 employees were victims of fraud simply because they lacked internal controls.

How your employees are getting away with fraud

Employees most often get away with fraud by altering or fabricating evidence. The ACFE found that 55% of fraudsters concealed their crimes by creating fraudulent physical documents. 

According to their research, manager-level employees are more likely to alter evidence—by changing physical or electronic documents or editing transactions in accounting systems. Executives, on the other hand, were more likely to create or delete evidence. 

It’s not uncommon for fraud schemes to last for 2 years or more. Common long-form fraud schemes include check and payment tampering, expense reimbursements, billing, cash larceny, and payroll fraud—which can last up to 30 months.

Occupational fraud stats

  • 85% – Manager level or above
  • 79% – More than 1 perpetrator
  • 33% – Worked in accounting or finance
Occupational Fraud: Who started it?

Best practices for fraud detection

The best way to catch fraud is to be on the look-out for it. Don’t assume that it could never happen in your company. Fraud can and does happen everywhere. 

Instead, you can avoid occupational fraud just by implementing more anti-fraud controls. The ACFE concluded that among the 18 organization-level anti-fraud controls studied, “the presence of every control we analyzed was correlated with lower fraud losses.” So, the good news is that every anti-fraud measure your business takes has a positive effect.

The two controls that are most likely to detect and decrease fraud in your company are data monitoring and surprise audits.

1. Data monitoring

By regularly monitoring and analyzing the financial data in your business, you can reduce losses by 52%. 

Electronic payments and accounting software can streamline your business processes, but can also present an increasing risk of fraud for businesses, especially from finance managers. If you have the right controls in place, as well as a system of checks and balances, you can detect fraud 58% faster.

2. Surprise audits

The fear of surprise audits alone may be enough to deter most people from committing fraud in the first place. ACFE says that surprise audits reduce losses by 51% and increase the speed of detection by 54%. 

Especially for fraudsters in the thick of their schemes, the element of surprise will leave no time to alter, create, or destroy evidence.

Bonus: Divvy

Every control you put in place will decrease the risk of fraud in your company. Expense management platforms like Divvy can help you track spending in real-time, so fraudulent employees can’t cover their tracks.

William Duffy, the Finance Manager at Alivation Health, discovered an instance of fraud only 30 days after starting his position. Switching to Divvy, made it easy for him to set spending limits for his employees. Now, William is more “comfortable” in his ability to detect fraud because he doesn’t have to wait 30 days after a purchase to get statements and reconcile receipts.

Divvy - Fraud Infographic

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