ABC’s of Occupational Fraud | Plante Moran
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ABC’s of Occupational Fraud: Protecting Our Schools

Schools today are faced with the threat of potential fraud on many fronts. Fraud can occur through asset misappropriation (e.g., embezzlement), expense reimbursement irregularities, procurement fraud (e.g., kickbacks), payroll manipulation, and many other means. Because schools deal with cash in their fundraising and day-to-day student account activities, the risk of loss is elevated.

Occupational fraud, or the deliberate misuse or misapplication of employer resources by staff/managers/owners, continues to be one of the largest problems facing today’s business world. The Association of Certified Fraud Examiners (ACFE) reported in its 2008 Report to the Nation on Occupational Fraud and Abuse that U.S. organizations lose an estimated 7 percent of their annual revenues to fraud, up from the 5 percent estimate in their 2006 survey.

Research on the personal characteristics and patterns of behavior of typical “fraudsters” has emerged. This article presents a summary of the anatomy or make-up of the typical fraud perpetrator. 

Fraud in the Education Industry

The education industry is not immune from the growing plague of occupational fraud. According to the ACFE 2008 Fraud Report, the education industry ranked sixth in terms of frequency, accounting for almost 7 percent of all reported frauds in the survey. However, in terms of median loss per incident of fraud, the education industry ranked at the bottom of the survey with a median loss per incident of $58,000. So it appears that while statistically the losses incurred by educational organizations as a result of fraud may be small, they more than make up for that on volume. Frequency of Fraud Incidents x Median Loss per Incident = Fraud Problem

The current economic downturn has created additional pressures (financial and non-financial) that impact many individuals, including school teachers, staff, and administrators. As a result, the importance of internal controls (requiring two signatures on all disbursement checks, segregation of duties, safeguarding of cash and assets, etc.) has taken center stage. Now more than ever, school administrators must be diligent in their efforts to protect schools and the students they serve from occupational fraud and the fraudsters who perpetrate it. 

Behavioral Red Flags

Fraud perpetrators often display certain behaviors that may serve as warning signs to administrators and co-workers. The two most common red flags identified in the ACFE’s 2008 Fraud Report include living beyond one’s means (almost 39 percent of the reported frauds) and experiencing financial difficulties (34 percent of the reported frauds). However, it is important not to ignore the other warning signs identified, from a “wheeler-dealer” attitude, control issues, and family problems, to defensiveness, addictions, and getting too close to vendors or customers. All can play a role in influencing their behavior.

These red flags should not be considered in isolation. As with most things in life, it is the total package that must be analyzed. However, if your organization has someone that exhibits several traits on this list, extra vigilance may be warranted – but it must be emphasized that displaying one or more behavioral red flags is in and of itself not proof that an individual is committing fraud. 

Statistical Profile of a Fraudster

In addition to observed behavioral red flags, the ACFE’s 2008 Fraud Report also analyzed the traits of individuals that commit fraud. Those traits include: 

Gender: Almost 60 percent of reported fraud cases were committed by males. The median loss of frauds perpetrated by males is more than twice that of frauds committed by females. 

Education Level: While nearly 34 percent of the reported frauds were committed by people with no college education, more than half of the reported frauds were committed by individuals who had attended or graduated from college. Only 11 percent of reported frauds were committed by individuals who had obtained an advanced degree. However, the survey also showed that as the perpetrator’s education level rose, so did the median loss caused by the fraud. 

Age: The survey concluded that more than 50 percent of the reported fraud analyzed involved a perpetrator over the age of 40, with more than one-third of those involving a person between the ages of 41 and 50. Of equal importance, the correlation between age and the amount of the loss appears to be strong; median losses involving fraudsters in their 50s more than doubled those of any younger age group. 

Tenure: The survey showed no strong correlation between the length of time an individual worked for an organization and when that individual was likely to begin stealing from it. However, the survey did conclude that longer-term employees tended to commit the larger frauds in terms of median loss per incident. 

Position: More than 75 percent of frauds are committed by staff and managers. While administrative executives commit a smaller fraction of fraud (just over 23 percent), the median loss from these reported incidents was more than five times greater than that of frauds committed by staff and managers. 

Prior Record: The survey found that a large majority of the reported frauds involved first-time offenders. Some 87 percent of the cases in the survey involved perpetrators who had no prior criminal record for fraudulent activities, and 83 percent had never previously been punished or terminated by an employer for such activities. 

Collusion: In most cases, occupational fraud is committed by an individual acting alone. The survey found that nearly two-thirds of all reported fraud schemes involve only one perpetrator. However, for those frauds involving multiple perpetrators, the median loss was four times higher than the amount lost in schemes committed by a single person. 

Watch Out for Crocodiles

All organizations, both large and small, face increasing threats of loss related to occupational fraud. Schools are not immune from this threat. School administrators should increase their awareness of the behavioral red flags and demographic composition of those prone to committing fraud. Remember – the most effective fraud prevention programs incorporate knowing who and what to look for, always being on the lookout for tell-tale behavioral red flags, and taking swift action when fraud is detected. In other words, it is always advisable to be alert for “crocodiles” in your seemingly still waters.

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