Occupational fraud continues to plague businesses, as it has for decades. The Association of Certified Fraud Examiners (ACFE) reported in its 2016 Report to the Nations on Occupational Fraud and Abuse that U.S. organizations lose an estimated 5 percent of their annual revenues to fraud, from misuse of an organization’s assets to fraudulent financial reporting and beyond. This percentage has remained constant for the last several surveys. The report also outlined that the median loss per case was $150,000, with billing schemes and check tampering the most common frauds carried out. In most cases — 92 percent, according to the survey — the perpetrators share certain personal characteristics and patterns of behavior.
Behavioral red flags
Since "fraudsters" often display certain behaviors, management and co-workers may see warning signs. According to the ACFE reports, the two most common red flags continue to include living beyond one’s means and financial difficulties. Other warning signs include:
- Having a “wheeler-dealer” attitude
- Control issues
- Family problems
- Getting too close to vendors or customers
While all of these behavioral red flags can be clues to help detect fraud, none should be considered in isolation. If your organization has someone who exhibits several behaviors on this list, extra attention may be warranted — but keep in mind, simply displaying one or more behavioral red flags is not absolute proof the employee is committing fraud.
Traits of a typical fraudster
In addition to observed behavioral red flags, the ACFE 2016 Report also analyzed the traits of fraudsters. Those traits include:
- Gender. Almost 56 percent of U.S.-reported fraud cases were committed by males. And the median loss of frauds perpetrated by males is nearly twice that of frauds committed by females. The difference may stem from males holding more management and executive-level positions, providing a greater opportunity to commit larger-dollar frauds.
- Age. The survey concluded that 55 percent of the reported frauds involved a perpetrator between the ages of 31 and 45. On the other hand, the correlation between age and the amount of the loss appears to be strong; median losses involving fraudsters over the age of 60 was at least two times higher than for other age groups.
- Education level. Seventy-eight percent of the reported frauds were committed by individuals who attended or graduated from college. The report also showed that as the perpetrator’s education level rose, so did the median loss caused by the fraud. Employees with a college degree absconded with a median amount of $200,000, more than twice that of fraudsters with no college education.
- Tenure. While the study showed no strong correlation between the length of time an individual worked for an organization and when that employee was likely to begin stealing from it, the study did conclude that longer-term employees tended to commit larger frauds in terms of median losses per incident.
- Position. More than 75 percent of frauds are committed by staff and managers. While owners and executives commit a smaller fraction of fraud (just 20 percent), the median loss from these reported incidents was up to five times greater than that of frauds committed by staff and managers.
- Prior record. The study found that a large majority of reported frauds involved offenders with no prior criminal record. However, keep in mind this doesn’t mean it's the fraudster’s first time committing this type of scheme. It's possible they weren’t caught the first time, that their previous employer chose not to take the matter to the authorities, or the prosecutor decided to not bring charges against the individual.
- Collusion. More than half of the cases reported involved only one perpetrator. However, when collusion occurred, the median loss increased with each additional perpetrator. That seems logical given that internal controls go by the wayside when employees are working together to perpetrate a scheme.
Other warning signs include a “wheeler-dealer” attitude, control issues, family problems, defensiveness, addictions, and getting too close to vendors or customers.
Organizations, both large and small, face threats of loss related to occupational fraud; it’s been going on for decades, and there's little reason to think it will go away. All companies should remain aware of the behavioral red flags. Remember — the most effective fraud prevention programs incorporate knowing who and what to look for, always being on the lookout for telltale signs, digging deeper to gather the facts when fraudulent activity is suspected, and taking swift action when fraud is detected.
Have questions about these red flags and how to prevent fraud at your organization? Give us a call.