Fraud is a business risk for organizations of every size. The Association of Certified Fraud Examiners (ACFE) estimates organizations lose approximately 5% of annual revenue to occupational fraud each year. While fraud can take on different forms, there are often common characteristics and warning signs. Reviewing the data puts business leaders in a stronger position when developing an effective fraud prevention programs. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
Common Types of Fraud
Occupational fraud generally falls into three categories.
- Asset misappropriation is the most common occurring in 90% of reported cases with a median loss of $100,000. Broadly speaking, this involves the theft or misuse of company assets. More specifically, that means billing schemes, payroll fraud, expense reimbursement fraud, check tampering, and petty cash theft. This type of fraud can be difficult to uncover because it revolves around routine transactions, and it can continue for long periods of time, particularly if internal controls are weak.
- Corruption accounts for 45% of global fraud cases and results in a median loss of $150,000. It typically involves vendor and customer relationships in the form of conflicts of interest, bribery, and kickbacks. Organizations with limited oversight into purchasing or a single point-of-contact may be more susceptible here.
- Financial statement fraud is less common, accounting for just 6% of reported cases. However, it is also the costliest, with a median loss of $1 million. It involves overstating income or net worth, or understating liabilities and expenses. Someone may be compelled to commit fraud in the area if management has unrealistic or especially high expectations for financial goals.
A single fraud scheme may involve more than one of these categories. The ACFE also found that fraud committed by owners and executives resulted in median losses more than nine times greater than fraud committed by employees, reinforcing the importance of strong oversight at every level of the organization.
What to Watch For
Before fraud is detected, there are usually warning signs. The ACFE found that 84% of fraudsters displayed at least one behavioral red flag before the fraud was detected. While these behaviors do not prove misconduct, they may indicate a need for additional oversight or review.
Common warning signs include:
- Living beyond means
- Financial difficulties
- An unusually close relationship with a vendor or customer
- Control issues or an unwillingness to share job responsibilities
- Irritability or defensiveness
- Bullying or intimidation
- A “wheeler-dealer” attitude
- Divorce or family problems
Other warning signs include addiction, complaints about inadequate pay, excessive organizational pressure, and refusing to take vacations. That last one is particularly telling. Employees running a fraud scheme often avoid time away because a replacement might find what they’ve been doing. None of these indicators confirm fraud, but each identifies a situation that may need closer attention.
Fraud Prevention Strategies
Fraud prevention works best when organizations combine strong internal controls with active management oversight. Unfortunately, no single policy or procedure will prevent every instance of fraud. However, a strong comprehensive policy can help limit opportunities for bad actors to engage in illegal behavior.
- Leadership. As they say, it starts at the top. Employees pay attention to what leadership does, not just what it says. When management consistently reinforces ethical behavior and holds team members at all levels accountable, it becomes more difficult for someone to rationalize dishonest actions.
- Strengthen internal controls. More than half of occupational fraud cases occur because internal controls were missing or someone overrode existing controls. Common controls like segregation of duties, dual authorization for payments, and restricted access are all necessary parts of reducing the opportunities for fraud. Background checks are another important practice, but the ACFE found that most fraud perpetrators had no prior criminal history, meaning background checks alone would not have prevented most cases. Targeted controls have been found to be much more effective.
- Encourage reporting. Employee tips uncover more fraud than any other method. Annual fraud awareness training and anti-retaliation policies help employees feel more comfortable speaking up when they notice something that isn’t right. Anonymous reporting options are also effective. Employees seem to prefer web-based reporting methods, alongside hotlines and email.
- Monitor for unusual activity. Data analytics can identify unusual activity like duplicate payments or after-hours system access. Proactive monitoring tools are also becoming more widely available, and AI is further expanding the possibilities beyond manual review. This is important because earlier detection generally means smaller losses.
- Conduct fraud risk assessments. Businesses change, systems expand, and new vulnerabilities come up as organizations grow. Periodic reviews of controls can help identify gaps and give leadership that data needed to implement the most high-impact solutions.
Contact Us
Fraud prevention is not about eliminating every risk. It is about reducing opportunities for fraud and identifying problems earlier. Leaders who take the risks seriously are better positioned to reduce financial losses and protect the long-term value of the business. If you have questions about the information outlined above or need assistance with a forensic accounting issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.