Employee Fraud Basics–Part 1

Summer is here, and for many companies year-end financial reporting is complete, tax returns are filed, monthly reporting is down to a science (right?) and 2011 budgets are in place. So what should be on management’s minds?

How about focusing on fraud prevention and the development of a strong system of internal controls? Before another year passes and your business gets more complicated and volumes increase, now may be the time to assess your company’s exposure to fraud.

There are many types of fraud: financial statement fraud, corruption, and occupational fraud, to name a few.  For this post we’ll focus on the most common type of fraud for small to medium sized business:  occupational fraud.  Occupational fraud is committed when an employee uses his or her employment position for personal gain. In other words they are stealing.

Fraud examiner professionals use the Fraud triangle to convey the reasons why fraud is committed. The triangle involves three factors; 1) pressure, 2) perceived opportunity and 3) rationalization.

Surveys researching fraud have shown that when employees feel increased financial pressures, believe there is opportunity in their place of employment, and can rationalize their behavior, the likelihood that they commit fraud is significantly increased.

As hard economic times are still upon us and running a business has become more complex, employees may turn to fraud to meet their personal financial needs.  They see an opportunity and, with increasing life and financial pressures, they take it and then justify their actions.

Many companies believe it will not happen to them for a variety of reasons: they trust their employees (#1 reason given after fraud has been committed), they would notice if someone was stealing from them or they don’t think there is real opportunity in their own company. The truth is fraud can occur in any organization. Employees who commit fraud come from all walks of life and they are adept (at least initially) at hiding what they are doing.

The Association of Certified Fraud Examiners, the national organization which certifies fraud examiners, periodically performs fraud surveys and according to their 2010 Report to the Nations on Occupational Fraud and Abuse: “Asset misappropriation schemes were the most common form of fraud in our study by a wide margin, representing 90% of cases” and  “Small businesses are particularly vulnerable to fraud….. these organizations have far fewer controls in place to protect their resources from fraud and abuse.”

For employers one key to preventing fraud is to focus on the side of the triangle over which you have the most control: Perceived Opportunity.  Our next post will describe some ways in which an organization can reduce the perceived opportunity to commit fraud.

1 thought on “Employee Fraud Basics–Part 1”

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