You Need to Work at Preventing Occupational Fraud

March 08, 2019

By Hubert Klein and Amy Fitzgerald

For many organizations, learning that a trusted employee is stealing from the company can be shocking, disappointing, maddening and a lot more. Many times a business may feel like looking the other away, hoping the theft (aka occupational fraud) is an isolated incident. Other times, the owners or management may react emotionally, resorting to anger or even violence. Neither is a good response. Ignoring the issues encourages further transgressions, not just with the thief but with other employees. Conversely, an aggressive or violent reaction could get you into legal hot water.

Understanding why and how employees decide to steal is important in order to deter bad actors. Developing and implementing protection against theft before it ever happens is the best way to mitigate occupational fraud.

Why Do Employees Steal?

Why? That’s the million dollar question. The reasons are as varied as the perpetrators themselves. Some of the most common are addiction, “keeping up with the Joneses,” justifying their hard work, revenge for being passed over for a raise or promotion, the thrill of the crime—you name it. Most employees who embezzle start by pocketing small office supplies. As they get away with these petty thefts, they become emboldened, turning to stealing money in increasing amounts.
However, like all crime, employee theft does require two things: motive and opportunity.

Opportunity generally appears when a business owner delegates daily financial responsibilities to one or more (often longtime) employees who are considered trustworthy and loyal. These individuals often work in a company’s financial department and are responsible for bookkeeping, banking, A/R or A/P, and custody or supervision of assets.

Once an owner or superior has delegated a financial task, they no longer worry about it, believing everything is under control. They are onto the next task, too busy to pay attention to the details and relying solely on the supposedly trustworthy and loyal employee. The stage is set for financial wrongdoing due to a lack of supervision where basic accounting and bookkeeping controls are not properly implemented in the businesses. And, for a long period of time, perhaps years, everything is okay until the financial wrongdoing is discovered and all hell breaks loose.

How Do Employees Steal?

Employees commit various types of occupational fraud. The most common type is stealing cash directly from the office. Commonly called embezzlement, it is defined as “theft or bad actions by employees or other trusted individuals within a business or organization,” generally for the employee’s own benefit.

Contrary to what most believe, money is not the only goal. Other physical assets—including computers, general office supplies, personal belongings, and so forth—can disappear. Another significant issue is employees falsifying expense reports through the exaggeration or even fabrication of various expenses. Due to ever-evolving technology, an increasingly common crime is the unauthorized use and misappropriation of intellectual property through stealing and then selling internal data and trade secrets to third parties.

An employee’s modus operandi can include a variety of the both simple and complicated when it comes to occupational fraud:

  • Stealing cash.
  • Using company credit cards for personal purchases.
  • Stealing company checks and forging a signature, or writing checks for personal use.
  • Falsifying or exaggerating expense reports and/or time sheets.
  • Creating fictitious vendors or employees.
  • Requiring kickbacks from clients or vendors in exchange for favors.
  • Coercing subordinates into performing theft-related services.
  • Filing fraudulent financial statements.
  • Falsifying inventory.

According to the Association of Certified Fraud Examiners (“ACFE”), the most common occupational fraud schemes are highlighted by industry:
Figure 16, What are the most common occupational fraud schemes in various industries? View PDF page 25.

Cost to the Company

This ACFE chart demonstrates how expensive it can be to have fraud occur for long periods of time:
Figure 7, How does the duration of a fraud relate to median loss? View PDF page 14

Detecting Employee Theft

Nearly all employees who commit occupation theft cannot maintain the charade forever. They often provide telltale warning signs that something is amiss, including but not limited to: 

  • Excessive personal spending beyond what their income would support.
  • Employee refuses to take a vacation, lest they be discovered.
  • Employee wants to take work home or continually works overtime.
  • Petty cash disappears too quickly.
  • Employee has an unusually close relationship with one or more vendors or are related to independent contributors.
  • Employee has financial difficulties.
  • Employee has excessive control issues.

While it is certainly not impossible for a $40,000/year bookkeeper to drive a Bentley, it should make an employer take notice. 

This other chart from the ACFE shows how fraud is detected, the average cost in relation to the median months to detection, and that strong controls can minimize damages by quickly catch fraud.
Figure 11, How does detection method relate to fraud duration and loss? View PDF page 18 

How Do You Handle an Incident of Theft?

Tread lightly. Falsely accusing someone of a crime can carry its own set of consequences. However, if you as an owner or manager are certain, you have several options. Termination is usually the preferred step. In order to build the case for termination you must:

  • Gather evidence (video, digital, eyewitness are strongest).
  • Audit computer files and financial records.
  • Preserve documents, computer files, and emails.
  • Maintain an evidence chain of custody to preclude possible tampering.
  • Create back-up copies of all evidence.

After employee termination, the employer then should determine if they want to press criminal charges and/or take legal action to attempt the theft recovery.

Occupational fraud is a serious issue that impacts every type of business. In addition to lost profits and cash flow, employee theft can negatively impact a company’s reputation, morale and ability to conduct business. Thus, it is critical that organizations preemptively establish controls to prevent and deter any potential thieves.  This can be performed with an in-house IT staff or an outsourced specialist. With the appropriate controls and testing—updated regularly—companies can mitigate fraud and continue their path toward growth.

About Hubert Klein

Hubert Klein is a Partner and Practice Leader in the Financial Advisory Services Group with technical resources in various litigation actions. He has consulted in complex damages, business valuations and due diligence analysis.

About Amy Fitzgerald

Amy Fitzgerald is a Manager in the Financial Advisory Services providing commercial litigation, financial investigations, intellectual property disputes, martial dissolutions, and business interruptions services.

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