Occupational Fraud

This refers to “fraud committed by individuals against the organizations that employ them” (from “Occupational Fraud 2024: A Report to the Nations” published by the Association of Certified Fraud Examiners). Occupational fraud cases include multiple fraud schemes ranging from simple to highly complex, include the areas of asset misappropriation, corruption and financial statement fraud and perpetrators include owners/executives, managers and employees.

Fraud can be perpetrated by employees (including at various levels of management), including trusted employees of many years who would ordinarily be beyond suspicion. This is because some business owners and others do not think it is possible that a trusted employee of many years can commit fraud. It may be embarrassing for an owner to find out that their trust was misplaced. Trust is not an internal control. A business may not have strong internal controls, which has allowed a fraudster the opportunity to commit fraud. There may be a lack of segregation of duties which has allowed a person to control the asset/money and also the recordkeeping regarding that asset/money. There may be segregation of duties but it has been overcome through collusion between two or more individuals. There are multiple fraud schemes that an employee could potentially perpetrate upon its employer and the frauds are not necessarily limited to only one area of the business. At times, an attempt by the fraudster to repay part or all of the money misappropriated may actually lead to the discovery of the fraud.

It may be a current or a former employee that is suspected of misappropriating money. It could be an accounts payable clerk making disbursements to fictitious vendors, a payroll clerk creating a ghost employee, a bookkeeper skimming customer cash receipts before deposit, etc. It could be the main sales-generator who is somehow stealing money. Circumstances may be such that it is not wise to fire the sales-generator but instead stop their access to the money because, without the sales they generate, the business would shut down. These are the kinds of difficult decisions that owners and managers may have to make.

After a fraud is discovered, a business owner/manager will generally want to know the extent of the fraud in order to decide how to address it. This may be via a settlement, termination of employment, filing a civil lawsuit, reporting to various organizations that the fraudster is a member of, criminal prosecution, etc.  More than one type of resolution may be sought. Despite a fraudster’s best efforts to conceal a fraud (or the extent of a fraud – sometimes even after confessing to it), cause confusion and manipulate accounting books and records, a forensic accountant can often recreate a trail to determine what has really taken place. It is important for an owner/manager not to be complacent even if they think they have found the fraud as it may just be a part of the fraud (i.e. the tip of the iceberg), as fraudsters may perpetrate multiple types of fraud upon a business which may extend to multiple areas of the business. In addition, even if there is a confession, fraudsters may not confess to the full extent of the fraud. In situations where the fraudster is still employed by the business, the longer the employer waits to take proper remedial action, the greater the amount that can be lost as fraud losses tend to escalate over time, but may follow other patterns, e.g., if the target business’s money dries up for whatever reason (including as a result of the fraud itself).

Read more about Occupational Fraud and its impact in this publication from the Association of Certified Fraud Examiners: https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2024/2024-report-to-the-nations.pdf. Excerpts from the publication can be found here: https://sgiforensic.com/occupational-fraud-updates/