Occupational Fraud
Don’t become a statistic
Jacque James, MBA, MAFM
President
Asset Recovery Associates, LLC
August 29, 2012
Overview of Presentation
• Discussion topics:
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Overview of Occupational Fraud
Red Flags
Payroll Fraud Schemes
Fraud Prevention Techniques
Hiring Ethical Candidates
Q&A
What is Occupational Fraud?
Occupational Fraud
The use of one’s occupation for personal enrichment
through the deliberate misuse or misapplication of the
employing organization’s resources or assets.
Classifications of Fraud
Asset
Misappropriation
Schemes
• 86.7% of all fraud schemes
• Smallest dollar loss ($120,000)
• Average time of detection is 12 – 24 months
Financial
Statement Fraud
• 7.6% of fraud cases in 2011
• Average dollar loss was $1,000,000
• Average time of detection is 27 months
Corruption
• 33.4% of fraud cases in 2011
• Median dollar loss was $250,000
• Average time of detection is 18
Fraud Statistics In Small Business
• Accounts for 31% of all fraud
• Small businesses are targets for fraud due to fewer anti-fraud
controls compared to that of larger organizations
• Fraud is more likely to be detected by a tip than by any other
method
• The most common types of fraud are:
• Payroll Fraud Schemes
• Asset Misappropriation Schemes
• Skimming Schemes
*Source: 2012 Report of the Nation - Association of Certified Fraud Examiners
The Cost of Fraud
• The average organization loses 5% of its revenues to
fraud annually
• The median loss caused by occupational fraud cases
is $147,000
• Most frauds last an average of 18 months before
being detected
*Source: 2012 Report of the Nation - Association of Certified Fraud Examiners
Why Fraud Occurs
Three Criteria Needed For Fraud To Occur:
Ability To
Rationalize Behavior
Motive
Opportunity
Why Fraud Occurs
• Opportunity
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Knowledge of weak internal controls
Accounting anomalies are not monitored
Lack of supervision
Unethical tone at the top
Employees believe they will not get caught
• Motive
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Pressure to perform
High personal debt
Family or peer pressure
Alcohol or drug problems
Gambling habits
Why Fraud Occurs
• Ability to Rationalize Behavior
 Employee believes he/she is not being adequately
compensated
 Employee believes the organization OWES him/her
 Feeling of insufficient recognition for job performance
 Personal need for money
 Have the intent to repay the money
Profile of a Fraudster
Position of Fraudster
Position
Percent
Median Loss
Time To
Detection
Empl oyee
43.0%
$60,000
12
Ma na ger
34.3%
$182,000
24
Owner / Executi ve
18.5%
$573,000
24
Other
4.2%
$100,000
10
• 65% of men commit acts of fraud compared to 35% of women.
• Average median loss caused by males is $200,000 vs $91,000
caused by females.
Top 10 Behavioral Red Flags
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Employees living beyond their means
Financial difficulties
Control issues, unwillingness to share duties
Unusually close vendor/customer relationship
Wheeler dealer attitude
Divorce, family pressures
Irritability, suspiciousness or defensiveness
Addiction problems
Refusal to take vacations
Past employment related issues
How Fraud Occurs
Payroll Fraud
What is Payroll Fraud?
• Occupational fraud in which a person who works
for an organization causes that organization to
issue a payment by making false claims for
compensation
 Ghost Employee Schemes
 Falsified Hours and Salary Schemes
 Commission Schemes
Ghost Employee Schemes
• A Ghost employee is someone on the payroll who
does not actually work for the victim company
 Fictitious person
 Friend or relative
 Accomplice
Ghost Employee Schemes
• Adding the ghost to the payroll
 Using names similar to real employees
 Failing to take terminated employees off the payroll
• Collecting timekeeping information
 Fake timecards
 Approval of timecards
• Issuing the ghost’s paycheck
• Delivery of the paycheck
 Mailed to the employees address
 Direct deposited
Preventing and Detecting Ghost
Employee Schemes
• Separate the hiring function from the payroll function
• Personnel records maintained separate from payroll &
timekeeping
• Owners / Manager should verify all payroll changes
• Conducting background and reference checks
• Check payroll records against personnel records
Preventing and Detecting Ghost
Employee Schemes
• Periodically run computer reports for employees
• Without SSNs
• With no deductions - withholding taxes or insurance
• With no physical address or telephone number
• Compare payroll to schedules
• Keep signed checks in a secure location
• OFAC checks
Tests for Fraudulent Payroll Activity
Review employees who have significantly more
overtime than similar employees
Trend analysis of budgeted vs. actual expenses
Run exception reports for employees who have had
disproportionately large increases in wages
Verify payroll taxes equal federal return tax forms
Compare net payroll-to-payroll checks issued
Creating a Fraud Free Culture
Fraud Prevention - 4 Step Process
1. Hire ethical candidates
 Perform assessments and/or conduct integrity interviews
 Conduct Background Screenings on key personnel
2. Create a positive company culture
 People won’t steal when they have a sense of ownership
3. Implement and asses internal controls
 Implement and enforce anti fraud policies and procedures
 Instill a system of checks and balances
 Conduct Fraud Risk Assessments
4. Instill mechanism for reporting fraud
 Implement a hotline and reward system
Fraud Prevention Best Practices
• Create a “Perception of Control”
• Educate employees on fraud
• Have a Conflict of Interest & Code of Conduct Policy
• Conduct surprise audits
• Reconcile bank statements on a monthly basis
• Separation of duties
• “Inspect what you expect”
• Protect your investment and insure for loss
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Crime Policy” or Fidelity Bond
 “Cybercrime Insurance”
Fraud Prevention Best Practices
• Set the “tone at the top”
• Proper check signing authorizations
• Review payroll records & vendor lists
• Spot check expense reimbursements
• Open the mail periodically
• Remove computer and building access for terminated
employees
Why Are Controls Important?
Why Are Controls Important?
“Trust But Verify”
Please leave your business card if interested in receiving:
• Elements of Fraud
• Fraud Prevention Checklist
Contact Information:
Jacque James - President
Asset Recovery Associates, LLC
2464 Taylor Rd, #115
Wildwood, MO 63011
Ph: 636-346-9273
Email: jjames@assetrecoverystl.com
Website: www.assetrecoverystl.com
Services Offered:
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Fraud Risk Assessment
Fraud & HR Investigations
Fraud Training & Awareness Programs
Asset Investigations
Pre-employment Integrity interviews
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Loss Prevention Consulting
Judgment Enforcement
Due Diligence Investigations
Background Screenings