Occupational Fraud: An Overview

1. Occupational Fraud: An Overview Lydia Pinson

2. Fraud Facts • Long time issue • Fraud Triangle dates back to 1950s • Average Company will lose 5% income yearly • $3.5 trillion based on the 2011 GWP • Significant impact on the bottom line • More than 20% of fraud cases created a loss of $1million or more • Occupational Fraud is the most common type • Almost half of companies who suffer a loss due to fraud will not make any recovery

3. A Closer Look • What is fraud? • What are some common occupational fraud schemes? • Who commits occupational fraud? • How can occupational fraud be prevented?

4. What is Fraud? Definitions and Components

5. Definition of Fraud • Webster’s Dictionary – an act of deceiving or misrepresenting • Legal Definition – the intentional use of deceit, a trick or some dishonest means to deprive another of his/her/its money, property or a legal right. A party who has lost something due to fraud is entitled to file a lawsuit for damages against the party acting fraudulently, and the damages may include punitive damages as a punishment or public example due to the malicious nature of the fraud.  • Occupational Fraud • Occurs within an organization • Perpetrated by employees

6. Components of Fraud • Fraud Triangle • Developed by Donald Cressey • 3 necessary elements • Opportunity • Motivation • Rationalization

7. Fraud Components • Fraud Diamond • Introduced in 2004 by David Wolfe and Dana Hermanson • 4 elements • Added capability to the triangle • “Opportunity opens the doorway to fraud, and incentive and rationalization can draw the person toward it. But the person must have the capability to recognize the open doorway as an opportunity and to take advantage of it by walking through, not just once, but time and time again. ”

8. Six Essential Traits Related to Capability • Positioning • Intelligence and creativity • Ego • Coercion • Deceit • Stress

9. What Are Some Common Occupational Fraud Schemes?

10. Association of Certified Fraud Examiners Defines 3 Categories of Occupational Fraud: • Asset Misappropriation – skimming, billing, payroll, cash register disbursements, check tampering • Corruption – bribery, conflicts of interest • Financial Statement Fraud – 5 classifications • Timing differences • Improper disclosures • Fictitious revenues • Improper asset valuation • Concealed liabilities and expenses

11. Occupational Fraud Frequency by Category

12. Occupational Fraud Median Loss by Category

13. Who Commits Occupational Fraud?

14. Common Characteristics • Position – Level of Authority • Age • Gender • Education Level – high school or less, some college, college degree, post graduate degree

15. Position – Frequency and Median Loss

16. Gender of Perpetrator Frequency Median Loss

17. Age of Perpetrator Frequency Median Loss

18. Education Level of Perpetrator Frequency Median Loss

19. How Can Occupational Fraud Be Prevented?

20. Tips for Fraud Prevention • Know the warning signs • Look for red flags • Living beyond means • Financial difficulties • Unwillingness to share duties • Divorce • Addictions • 81% of fraud cases displayed at least one red flag • Most common – living beyond means – 35%

21. Tips for Fraud Prevention 2. Have a policy of prevention • Controls in place • Segregation of duties • Mandatory vacations • Stringent hiring procedures 3. Use technology • Easy monitoring • Limit Access • Increase Security

22. Tips for Fraud Prevention 4. Take swift action • Sets a tone of zero tolerance • More likely to see recoup of assets 5. Trust employees cautiously • Know who works for you • Background checks • Personality tests • Limit access to only what is necessary

23. Tips for Fraud Prevention • Many resources available online (ACFE, AICPA, IIA) • Education • Diagnostic Tools • Certification

24. Questions or Comments?