Occupational Fraud: A look at detection and prevention

Talk about an easy target. Every day, seemingly everywhere, criminals are robbing their victims in broad daylight, and using tools and resources furnished by their victims to perpetrate the crime and cover it up. And they’re also being paid by their victims to do it.

From little league treasurers to C-suite executives, theft on the job occurs at an alarming rate. Biennially, the Association of Certified Fraud Examiners (an 80,000-member professional organization dedicated to anti-fraud efforts) surveys its members and publishes a comprehensive study of occupational fraud (defined by the ACFE as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources”).

According to a study, small businesses suffer disproportionately when it comes to occupational fraud. Of the 2,410 cases studied by the ACFE, median losses suffered by organizations employing fewer than 100 people amounted to $150,000.

As a member of the ACFE and a forensic accountant frequently tasked with investigating and reporting on instances of occupational fraud, my experience has been that $150,000 is on the low end of the loss range. More commonly, I’m investigating instances of fraud in small businesses with losses documented in the range of $300,000 – $500,000 (and in one instance, in excess of $5,000,000). In all instances, the emotional and institutional damage done is arguably just as costly.

The common thread I often notice as I investigate instances of occupational fraud is the inverse relationship between adequate oversight and risk of loss. Specifically, as the accounting and finance activities of small businesses involve higher dollar amounts and become more complicated, business owners, by necessity, hire and delegate to employees the responsibility of accounting for the cash. While undoubtedly a necessary step along the path of organizational growth, successful delegation must involve a deliberate and visible level of oversight.

Fundamentally, this oversight is a matter of two basic questions: who has access to your cash, and are you paying attention to them? Elements of adequate oversight are not complicated and generally can be accomplished using existing staff. A common and effective practice is to restrict an employee’s access to the record keeping aspect of the function for which they handle the cash.

For example, in the case of cash receipts, have the receptionist open the mail and collect the customer remittances. Copies of the checks can then be forwarded to the accounting department to be processed. The receptionist then prepares the deposit slip and makes the deposit. You have just segregated duties, prevented the accounts receivable clerk from having access to a live customer check, and added a layer of protection.

In the case of cash disbursements, have the accounts payable clerk prepare the checks for signature. Once reviewed and signed, have the payroll clerk stuff the envelopes and mail the checks. Again, you have segregated duties, prevented the accounts payable clerk from having access to a live (signed) company check, and added a layer of protection.

Much like the locks on the doors, adequate oversight is often an effective tool for keeping honest people honest. Understanding and embracing these basic concepts can prove to be one of the most valuable safeguards available.

It is difficult to find professionals with experience in responding to disputes and managing the risk of fraud. We combine the skills of a private investigator and an accountant with a proven business background. Our engagement teams combine industry experience with fraud and forensic accounting expertise to deliver customized solutions that meet your specific needs. We can help you mitigate the risks, costs, and effects of fraud, corruption, and other forensic matters. To learn more about our forensics and litigation support service offerings, visit our website or contact Matt Gutzwiller.

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