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Occupational Fraud: Red Flags For Your Company To Watch

Occupational fraud is an attack from within, perpetrated by a company’s own officers, directors, or employees and is believed to be the most common form of fraud. The Association of Certified Fraud Examiners (ACFE) recently issued its Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse. The study analyzed approximately 2,700 occupational fraud cases from 125 countries and 24 industries.

Of the ACFE’s investigated cases, 90 related to the construction industry, making it the 9th highest industry out of the 24 investigated. The construction industry cases’ median loss of $227,000 ranked 5th among the 24 industries. ACFE also noted that organizations with less than 100 employees had a $96,000 higher median loss than those with 100 or more employees, which equates to nearly twice as much per scheme.

Why is this happening more often in smaller organizations? Simply put, smaller organizations typically have fewer resources, therefore placing a higher reliance on the honesty and integrity of employees and lower ability to implement robust anti-fraud controls.

Internal control weaknesses were responsible for nearly half of the fraud cases investigated in the ACFE’s report. Internal control weaknesses also allow for a fraud to be perpetrated over a longer duration, and that duration maintains a direct relationship with the loss incurred. Consider the following suggestions to detect fraud faster and limit risk:

  • Review the company’s transaction cycles for weaknesses, including lack of segregation of duties or monitoring, and implement procedures that address those weaknesses
  • Perform  surprise audits periodically over the different transaction cycles, not only to identify a possible fraud, but also deter someone from committing the act
  • Monitor data, which can be performed internally or outsourced to provide a detection mechanism
  • Provide an outlet for employees, vendors, or customers to report possible fraud (40% of cases in the ACFE report were initially identified by a tip)

Beyond internal controls, the investigated cases also highlighted that over 85% of the individuals perpetrating fraud exhibited at least 1 of the common “Red Flags.” The most common Red Flags to watch out for include:

  • Living beyond means
  • Financial difficulties
  • Unusually close association with a vendor or customer
  • Control issues, unwillingness to share duties
  • Divorce/family problems
  • “Wheeler-dealer” attitude

Take action now and consider the results of this study to help prevent your company from becoming the next victim of fraud. If you would like more information on this study or guidance when analyzing your company’s risk, please do not hesitate to contact your local Blue & Co. advisor.

 

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