The statistics do not lie. The 2006 Report to the Nation on Occupational Fraud and Abuse, conducted by the Association of Certified Fraud Examiners (ACFE), makes the following points:

• The top ten industries with the highest frequency of fraudulent incidents are:

1. Banking/Financial Services
2. Government and Public Administration
3. Manufacturing
4. Health Care
5. Insurance
6. Retail
7. Education
8. General Services
9. Professional, Scientific or Technical Services
10. Construction

• The majority of frauds were committed in-house by employees. Fraudulent acts committed by those in management positions are far more costly than those perpetrated by warehouse employees. Reason: Employees in high-ranking positions generally have greater access to company funds.
  
• Losses resulting from fraud by males were about three times greater than the losses caused by fraudulent acts of females, even though the difference between the frequencies of incidents was minor. This may be attributed to the fact that male employees generally occupy high-ranking positions in companies in traditional industries.
  
• Similarly, older perpetrators caused significantly greater losses than younger ones. This can also be traced to the level of position held by the most senior employees.
  
• Fewer than one out of every ten fraud perpetrators had been convicted of a previous crime. This finding is consistent with other studies that indicated that corporate fraud is usually linked to first-time offenders.
  
• More than one-third of the frauds reported in the ACFE study involved more than one individual. In such cases, the median loss suffered was almost five times greater than the median loss for single-person crimes, indicating the need for better control mechanisms that involve the separation of duties.
  
• Fraudulent billing is frequently the most common type of fraud, regardless of industry. Other recurring schemes include:
• Skimming
• Non-cash theft
• Cash larceny
• Check tampering
• Wire transfers
• Expense reimbursements
• Payroll
• Register disbursements

Preventing fraud is easier than detecting it after the fact. How can you protect your company? According to the ACFE, the most effective way to identify fraud is to have an anonymous reporting mechanism in place. Additionally, you should provide fraud awareness and ethics training to your entire organization, schedule the training at least annually, and make it mandatory for all staff to attend.

The study points out the need for internal controls. In particular, the report pinpointed the benefits of having an annual audit performed. Companies that conducted audits showed a smaller median loss than companies that did not perform audits. The study indicates that the losses were reduced for two primary reasons.

The audit process itself can detect fraud through standard procedures such as examining documents, analyzing data trends and verifying assets. The knowledge that auditors would be present in an organization discouraged employees from committing fraud in the first place.  Based on the study, increased oversight appears to be one of the best deterrents to fraud for businesses. This reflects the ongoing efforts of the business managers, auditors, employees and other members of the business advisory team.

Occupational fraud has become a menace for all companies. Because it is easier to prevent fraud within a company than it is to detect it, try to head off potential problems through internal controls, audits and proper oversight. If you would like to determine the extent to which occupational fraud is affecting yoru business, need help setting up the proper internal controls, or would like to schedule an audit, please contact us.

Brett E. Burgan, CPA*/CIRA is a Supervisor in the Litigation Services Department. He provides forensic accounting assistance to attorneys and their clients in civil matters involving fraud, embezzlement, stockholder disputes, breach of fiduciary duty, and other business-related matters. Brett focuses on uncovering the essential facts of a case by completing a thorough analysis of the financial records, including computerized files.