Surprising Ways to Prevent Occupational Fraud

Different types of occupational fraud continue to cause financial losses, legal costs, and damage to reputation in organizations of all sizes. While the common estimate is that approximately 5% of a business’ annual revenues are lost to occupational fraud, experts say that many cases are never detected so the cost may be much higher.

In the 2016 Report to the Nations on Occupational Fraud and Abuse, the median loss for all cases in the study was $150,000 but 23.2% of cases caused losses of $1 million or more. Global losses in total are projected at more than $3.7 trillion.

Experts now recommend a clear understanding of different types of occupational fraud and fraud risk, so that safeguarding strategies become clear.

Asset misappropriation, the most common type of workplace fraud, is when an employee steals or misuses the employer’s resources. Examples include theft of company cash, false billing, and inflated expense reports. This type occurred in 83.5% of cases in the study, and the median loss for a company was $125,000. Important to know: Research has shown that this type of fraud often occurs because someone sees an opportunity to commit the fraud. Therefore, good internal controls are critical, including separation of bookkeeping functions, access controls, and a strong accounting system.

Corruption fraud is when perpetrators use their position to personally benefit from a business transaction. Bribery schemes and conflicts of interest are examples. Corruption accounted for 35% of fraud cases in the study, and caused a median loss of $200,000. Important to know: Most corruption fraud schemes occur outside of the accounting system so there’s no paper trail. Fraud detection is more about the awareness of relationships between employees and outside parties.

Financial or fraudulent statement fraud is when the insider fraudster falsifies financial statements to divert assets for personal gain. While this type of fraud occurred just 9.6% of the time, the median loss was highest at $975,000. Important to know: Schemes to manipulate revenue are carefully crafted and covered up so fraud reporting is critical for detection.

Here are important strategies to protect against fraud.

• Develop a culture of security that sets an ethical tone, and sends the message that dishonest behavior will not be tolerated.
• Set up a reporting system (tips hotline) that allows employees to anonymously disclose fraudulent behaviors. This was the most common detection method in the study (detecting 39.1% of cases).  
• Schedule different types of security audits. Include internal audits, management review and external audits. Use surprise audits to create a perception of detection in the workplace.
• Provide anti-fraud training. Employees should recognize behavioral red flags of fraudulent behavior such as living beyond your means, financial difficulties, control issues, and unusually close relationships with vendors/customers.
• Implement other internal controls including reference checks in hiring, mandatory vacations, segregation of duties, vendor bidding process, and a comprehensive documentation management process.  
• Partner with a trustworthy document destruction company for the secure destruction of confidential paper and digital documents.

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