Your company may be vulnerable to fraud

The old saying goes, “You can’t judge a book by its cover.” But in the world of fraud, this may not be the case.

In the Association of Certified Fraud Examiners’ 2010 Report to the Nations on Occupational Fraud & Abuse, 1,843 cases of occupational fraud were studied that had been reported by certified fraud examiners who investigated the cases.

Although the report provides a tremendous amount of information on the attributes and statistics of fraud and of those who commit fraud, it also provides a hidden profile of a perpetrator if you look deeply at the data and between the lines.

Company FraudAlthough an employee may possess one or more of the following traits or characteristics, that is not the only reason to suspect them of committing fraud. All other considerations must be taken into account, along with the evidence implicating the employee.

The report revealed these common traits or characteristics of average fraudsters:

They are likely to be male, age 31-45. Males are 33 percent more likely to commit fraud than their female colleagues. This can be broken down even further in level of authority in the organization. At the employee level, the amount of fraud committed is pretty much 50/50 between males and females. However, as you move up the level of authority in an organization, men start pulling away.

At the manager/senior executive level, men are approximately 25 percent more likely to commit fraud and approximately 40 percent more likely than females at the owner/top-end executive level. Although it may sound chauvinistic, the report data indicated that these higher level positions were dominated by males.

The median loss associated with males – $232,000 – was more than double the median loss associated with females at $100,000.

In two-thirds of the fraud schemes, the perpetrator acted alone.

A majority – 55 percent – attended college or graduated from college. Approximately 14 percent obtained a postgraduate degree. The median loss increases from $100,000 for employees with a high school diploma to $300,000 for employees who obtained a postgraduate degree.

More than half of the employees who committed fraud had more than five years’ experience with their organizations. The median loss increases as the number of years with an employer increases. The median loss for employees with less than one year of tenure was $47,000 and rose to $289,000 for employees with 10 or more years of tenure.

The typical fraudster is an employee living beyond his or her means, struggling financially or known to have an addictive personality. Fraud perpetrators were living beyond their means in 43 percent of the cases and experiencing financial difficulties in 36 percent.

An employee who commits fraud usually works in the following departments: accounting, operations, sales, customer service, upper management or purchasing. Those six departments accounted for 80 percent of the cases examined in the report. Most, 22 percent, were employed in the accounting department where they have easier access to records and documents to conceal or perpetrate a fraud.

Many are “wheeler-dealers” or can be seen as “control freaks.” They typically will have a high confidence level, bordering on the narcissistic.

An overwhelming number of the employees who commit fraud – 93 percent – have no prior criminal record or history of a fraud-related offense. This is because many employers are too embarrassed to prosecute employees or don’t want the publicity of the arrest of an employee who handled money or had access to someone’s personal information.

Secrecy is especially true in the nonprofit sector, in which organizations are dependent on pledges or contributions from the public. Think of the impact on contributions if the public discovered that a portion of their contribution was stolen. Many employers believe that the personal and business costs of prosecution are not worth the benefits received or money recovered. In many incidences, the employer recovers only a small portion of the amounts stolen.

Look for the following characteristics or problems in employees:

  • Divorce or family problems
  • Drug or gambling addictions
  • Legal problems
  • Defensiveness
  • Irritability and suspiciousness
  • Refusal to take vacations or sick days
  • Constant complaining about inadequate pay
  • Unusually close relationship with a vendor or customer
  • Constant complaining about supervisors or being passed over for promotions

Employees who commit fraud usually work for small companies with limited resources to hire an accounting department. So owners put all their trust in one employee. Under the right social pressures or circumstances, those employees have taken advantage of the trust instilled in them.

The presence of these characteristics does not, in and of itself, signify that an employee is committing fraud or will in the future. These are just the common traits and characteristics of the average fraudster identified in the Association of Certified Fraud Examiners annual report.

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