D EFENSIVENESS
“W HEELER - DEALER ”
T OO
COZY WITH VENDORS / CUSTOMERS
L IVING
C ONTROL
F AMILY
F INANCIAL
ATTITUDE
BEYOND ONE ’ S MEANS
ISSUES
PROBLEMS
DIFFICULTIES
OCCUPATIONAL FRAUD, or the deliberate
misuse or misapplication of employer
resources or assets by staff/owners, continues
to be one of the largest problems facing today’s
businesses. The Association of Certified Fraud
Examiners (ACFE) reported in its 2008 Report
to the Nation on Occupational Fraud and
Abuse (“ACFE 2008 Fraud Report”) that
U.S. organizations lose an estimated 7 percent
of their annual revenues to fraud, up from
the 5 percent estimate in the ACFE’s similar
2006 survey. Further, the 2008 study also found
that nearly two-thirds of the fraud schemes
identified involved only one perpetrator.
As this research has come to light, certain
personal characteristics and patterns of
behavior have emerged as well. Organizations
would do well to be mindful of these attributes.
As the old Malaysian proverb says, “Do not be
tricked into thinking there are no crocodiles
just because the water is still.”
A N AT O M Y O F A F R A U D S T E R
Behavioral Red Flags
Fraud perpetrators (often known as “fraudsters”)
often display certain behaviors that may serve as
warning signs to management and co-workers.
The two most common red flags identified in the
ACFE’s 2008 Fraud Report include living beyond
one’s means and financial difficulties. However,
it’s important not to ignore the other warning signs
identified, from a “wheeler-dealer” attitude, control
issues, and family problems to defensiveness, addictions, and getting too close to vendors/customers.
All can play a role in influencing behavior.
It’s important to note that none of these red
flags should be considered in isolation. As with
most things in life, it’s the total package that must
be analyzed. However, if your organization has
someone that exhibits several traits on this list,
extra vigilance may be warranted — but it must
be emphasized that displaying one or more
behavioral red flags is in and of itself not proof
that an individual is committing fraud.
s
Age. The survey concluded that more than 50 percent of
the reported fraud studies involved a perpetrator over the
age of 40, with more than one-third of those involving a
person between the ages of 41 and 50. Of equal importance,
the correlation between age and the amount of the loss
appears to be strong; median losses involving fraudsters in
their 50s more than doubled those of any younger age group.
s
Tenure. The study showed no strong correlation between the
length of time an individual worked for an organization and
when that individual was likely to begin stealing from it.
However, the study did conclude that longer-term employees
tended to commit the larger frauds in terms of median
losses per incident.
s
Position. More than 75 percent of frauds are committed
by staff and managers. While owners and executives
commit a smaller fraction of fraud (just over 23 percent),
the median loss from these reported incidents was more
than five times greater than that of frauds committed by
employees and managers.
s
Prior Record. The study found that a large majority of reported
frauds involved first-time offenders. Some 87 percent of
the cases in the survey involved perpetrators who had no
prior criminal record for fraudulent activities, and 83 percent
had never previously been punished or terminated by an
employer for such activities.
s
Collusion. In most cases, occupational fraud is committed
by an individual acting alone. The study reported that nearly
two-thirds of all reported fraud schemes involved only one
perpetrator. However, for those frauds involving multiple
perpetrators, the median loss was four times higher than
the amount lost in schemes committed by a single person.
Profile of a Typical Fraudster
In addition to observed behavioral red flags, the
ACFE’s 2008 Fraud Report also analyzed the traits
of fraudulent individuals. Those traits include:
s
Gender. Almost 60 percent of reported fraud cases were
committed by males. The median loss of frauds perpetrated
by males is more than twice that of frauds committed by
females. It’s theorized that this disparity is derived from males
holding more management and executive-level positions,
providing a greater opportunity to commit larger-dollar frauds.
s
Education Level. While nearly 34 percent of the reported
frauds were committed by people with no college education,
more than half of the reported frauds were committed by
individuals who had attended or graduated from college.
Only 11 percent of the reported frauds were committed
by individuals who had obtained an advanced degree.
However, the survey 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 $210,000, more than twice that of those
with no college education.
Watch out for Crocodiles
Organizations, both large and small, face increasing
threats of loss related to occupational fraud. All
companies should increase their awareness of the
behavioral red flags and demographic composition
of those prone to committing fraud. Remember —
the most effective fraud prevention programs incorporate knowing who and what to look for, always
being on the lookout for tell-tale behavioral red flags,
and taking swift action when fraud is detected.