When it comes to occupational fraud (i.e., employee theft), there are generally three primary categories: asset misappropriation (i.e. theft of company money or property), corruption, and financial statement fraud.[i] Asset misappropriation is the most common form of fraud, occurring in about 85% of the cases analyzed. Corruption and financial statement fraud follow second and third, occurring in approximately 33% and 5% of cases respectively. Though the typical damages of financial statement fraud far outweigh the damages done by other types of fraud, this article will focus mostly on asset misappropriation. In 2014, the median loss associated with asset misappropriation was $130,000 per theft—an amount no organization should take lightly.
How do organizations usually find out about fraud? Most people may believe the answer lies in external audits, internal reviews, or a close examination of documents. The reality is that the primary way employers find out about fraud is through employee tips. Colleagues are crucial to stopping theft.
Surprising Facts About Employee Theft
- Private companies suffer the highest median loss per incident ($160,000) while government suffers the lowest ($90,000)
- Victim organizations with fewer than 100 employees experience the highest rates of fraud.
- The median loss for organizations with fewer than 100 employees and organizations encompassing more than 10,000 employees is almost equivalent: $154,000 for the smallest entities versus $160,000 for the largest
- The banking and financial services industries experience the highest rates of fraud (17.8%), with government (10.3%) and manufacturing (8.5%) following in second and third
- Most often, employees and managers are the ones perpetrating the fraud, and usually do so within 1–5 years of their hiring date
- The median loss rises for every year of the perpetrator’s tenure, indicating that the longer someone has been with a company, the more they are likely to steal overtime.
- Most perpetrators work in accounting, though many occupy the operations, sales, and executive departments
In one-third of cases, companies reported they lacked functional internal controls to prevent fraud. Even with controls in place, however, 19% of perpetrators overrode the system. Other vulnerabilities include lack of management review, poor communication, management, incompetence, and too few independent audits.
Behavioral Red Flags
In the majority of fraud cases, perpetrators displayed two or more behavioral red flags:
- Living beyond means
- Financial difficulties
- Divorce/family problems
- “Wheeler-dealer” attitude, i.e. always making deals and agreements
- Usually close association with vendor/customer
- Control issues, unwillingness to share duties
- Addiction problems
- Irritability, suspiciousness or defensiveness
- Past employment-related problems
- Social isolation
- Complaints about inadequate pay
- Refusal to take vacations
- Instability in life circumstance
- Excessive pressure from within organization
- Excessive family/peer pressure for success
- Past legal problems
- Complaints about lack of authority
Hence, why it’s important to know your employees well—without being invasive—to determine whether outside forces are influencing their negative behavior and impacting your workplace.
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