FRAUD – A Layman’s Definition
Fraud is everywhere…in every business, organization, non-profit entity, or governmental agency. The simplest definition of fraud is the “use of deception to take or attempt to take the property of another”. The property does not actually have to be taken for a fraud to have taken place; just the act of deceiving to try to take another’s property is enough. Not all fraud rises to the level of being a criminal act, but all fraud is immoral, at least as long as lying and stealing are violations of a standard of behavior.
Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. Simply put, taking from or your employer or misusing your position for some sort of personal gain. This can include time, property, money, customers, designs, market value, reputation; anything of value. The cost of occupational fraud has been estimated by the ACFE – Association of Certified Fraud Examiners to be 5% of every sales dollar.
There are three types of occupational fraud, 1) Asset Misappropriation, 2) Corruption, and 3) Financial Statement Fraud. Of these, Asset Misappropriation is the most frequently-occurring at 85% of cases, but the least of the three in terms of overall cost to the business. Stealing office supplies, absconding with inventory, claiming pay for hours not worked, relieving the company of furniture or equipment, and many more are all acts of Asset Misappropriation. Corruption and Financial Statement Fraud are committed less often, but with much greater consequences to the organization.
According to the 2014 Report to the Nations on Occupational Fraud and Abuse,some statistics pertinent to occupational fraud are:
The vast majority of occupational fraudsters are first-time offenders.
Small businesses are both disproportionately victimized by fraud and notably under-protected by anti-fraud controls.
The higher the perpetrator’s level of authority, the greater fraud losses tend to be.
The fact that fraud can happen anywhere is not to say that it cannot be prevented and its effects mitigated. Several things must happen in order to create an environment where fraud can be prevented or caught quickly.
1)A well-defined and managed Anti-Fraud policy
2)Formal management review procedures
3)Anti-Fraud training for employees
Sometimes managers can examine cases of mismanaged fraud in order to know “How Not To”(manage fraud):
Case of the Missing Diamond Plate
A manufacturing plant whose employees figured out how to abscond with extremely expensive diamond plate metal finally figured out where their inventory was going. The theft went on for years, with even supervisors backing their pickup trucks into the bay and loading the company’s property into the vehicle. Hundreds of thousands of dollars disappeared out of inventory, yet when the theft was discovered, senior management decided not to prosecute or discipline in any way. The behavior continued.
Case of the Hooker Reimbursement
A marketing firm sent its employees to Las Vegas for a trade show. A product manager retained the services of a prostitute (legal in parts of NV) who proceeded to take all of his money. He submitted an expense report for reimbursement of both the fee and the loss from theft by said prostitute. His boss approved, the Controller said “No way”, and the CFO forced the reimbursement at threat of job loss. Everyone in the company knew. Bad behavior and personal enrichment at the company’s expense increased dramatically.
Case of Body Static and Timeclocks
A manufacturing firm had timeclocks posted at the guard entrance and at each machine for employee use. One employee decided that her body static kept preventing the timeclock from recording her punches, so had another employee (always there ahead of her) use her card to clock in and out for her. When confronted by Payroll, the employee went to HR who said that Body Static was a valid reason for her not to punch her own timecard. Body Static instances increased and multiple people began punching in for others.
Some examples of fraud are more egregious than others, but all fraud costs the organization time, money, and resources.
Your local Certified Fraud Examiner can provide resources to help implement preventative measures and detection mechanisms to protect your organization.
Laura Wagoner Downing, CFE
Carpe Veritas