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Occupational Fraud and the Fraud Triangle — Part 2

Every year, organizations are losing billions of dollars to fraud. Fraud can come in many guises, including occupational fraud, which strikes workplaces the hardest. Occupational fraud is also called workplace fraud, employee fraud or internal fraud. It generally refers to fraud committed by a company’s staff at any level of the company. 

 

This two-part blog series will look at how your company can identify and guard against occupational fraud in your organization.

 

In Part One, we looked at the different types of occupational fraud, how long these schemes typically last, and the concept of the Fraud Triangle. Now, in Part Two, we examine the types of organizations most affected by occupational fraud, who typically carries it out, and the role internal auditors can play in the fight against it. 

 

Victim organizations

 

Certain organizations appear to be more likely to fall victim to fraudsters than others — or lose more money. Recognizing these indicators can help you protect your company. 

 

What does the average victim look like?

 

The average occupational fraud victim likely belongs to one of the top five industries that suffered the greatest median losses:

 

  • Real Estate, $435,000 
  • Wholesale trade, $400,000
  • Transportation and warehousing, $250,000
  • Construction, $203,000
  • Utilities, $200,000

 

Another interesting fact is that the companies with the fewest staff suffered the most significant median losses, averaging $150,000.

 

Internal control weaknesses

 

A lack of internal controls is the most common recurring factor underlying occupational fraud. Variations of this weakness allowed fraud cases to occur across organizations. Of fraud victim organizations, roughly 29% failed to have adequate controls, while 20% experienced an override of existing controls.

 

These are the top internal control weaknesses that contribute to occupational fraud:

  • Lacking internal controls, 29%
  • Overriding existing controls, 20%
  • Lacking management review, 16%
  • Poor upper management tone, 10%
  • Lacking competent personnel in oversight roles, 8%
  • Lacking independent audits, %5
  • Lacking employee fraud education, 3%
  • Lacking clear authoritative lines, 2%
  • Lacking reporting mechanisms, <1%

 

Who are the perpetrators?

 

It is useful to understand who is most likely to commit occupational fraud. This information can help prevent your organization’s victimization now and in the future. The average perpetrators share the following characteristics:

 

Gender, the likelihood of perpetrating fraud and median loss:

 

  • Male, 73%, $125,000
  • Female, 27%, $100,000

 

Age, the likelihood of perpetrating fraud and median loss:

 

  • <26, 5%, $40,000
  • 26 to 30, 10%, $36,000
  • 31 to 35, 15%, $80,000
  • 36 to 40, 20%, $100,000
  • 41 to 45, 19%, $185,000
  • 46 to 50, 14%, $200,000
  • 51 to 55, 9%, $300,000
  • 56 to 60, 5%, $347,000
  • >60, 3%, $800,000

 

Perpetrators became more likely to commit fraud as they grew older, until the age of 40, then the likelihood begins to fall in accordance with their age. However, with the slight exception of staff aged 26 to 30, the older the perpetrator, the greater the organization’s median loss.

 

Company role, the likelihood of perpetrating fraud and median loss:

 

  • Manager, 39%, $50,000
  • Employee, 37%, $125,000
  • Owner/executive, 23%, $337,000
  • Other, 2%, $133,000

 

Those with greater authority tended to perpetrate the scheme for more prolonged durations:

 

  • Owner/executive, 18 months
  • Manager, 16 months
  • Employee, 8 months

 

Those who had been with an organization longer tended to inflict greater financial losses than those who had been hired more recently:

 

  • <1 year tenure, $50,000
  • 1 to 5 years tenure, $100,000
  • 6 to 10 years tenure, $137,000
  • >10 years tenure, $250,000

 

Perpetrators belonged to the following departments:

 

  • Operations, 15%
  • Accounting, 12%
  • Executive/upper management, 11%
  • Sales, 11%
  • Customer Service, 8%
  • Purchasing, 7%
  • Administrative support, 7%
  • Finance, 5%
  • Board of directors, 3%
  • Information technology, 3%
  • Warehousing and inventory, 3%
  • Manufacturing and production, 3%
  • Facilities and maintenance, 3%
  • Marketing and public relations, 2%
  • Human resources, 2%
  • Research and development, 1%

 

Behavioral red flags and warning signs

 

Several red flags can tip off an organization that fraud may be occurring or about to occur within a company. These warning signs are particularly common amongst long-tenured staff:

 

Red flag

Less tenured staff (<5 years)

More tenured staff (<10 years)

Staff are living beyond their means

43%

36%

Staff develop an unusually close relationship with a vendor or customer

25%

17%

Staff develop control issues; they may be unwilling to share duties

19%

11%

Staff begin bullying or intimidating colleagues

15%

11%

Staff become irritable, suspicious or defensive

15%

12%

Staff have recently divorced or experienced other family issues

15%

10%

 

Knowing and understanding these warning signs can help organizations recognize fraud during its early stages or even before it has begun.

 

Internal actions taken and punishments

 

When an organization learns of fraud and determines the responsible party or parties, a decision must be made on whether to punish the fraudster. The most common punishment is termination. 

 

The following are the most common internal actions and punishments taken against perpetrators of fraud:

 

  • Termination, 61%
  • The perpetrator had already left the organization, 12%
  • Probation/suspension, 12%
  • Permitted or requisite resignation, 11%
  • Negotiating a settlement agreement, 10%
  • No punishment, 7%
  • Other, 5%

 

Surprisingly, in seven percent of fraud cases, the victim organizations chose not to punish the perpetrators for their fraudulent actions.

 

Fraud preparedness and the internal auditor’s role

 

Fraud can strike when your organization least expects it. However, internal auditors play an integral role in preventing fraud and leading risk management efforts. Caseware’s recent 2022 State of Internal Audit Trends Report found that the majority of internal auditors considered themselves to be very involved in their organization’s fraud risk management plan. At the same time, only 3.9 percent felt they lacked involvement in these processes.

 

As more organizations become aware of the risks associated with occupational fraud, internal auditors have experienced an increase in their involvement with fraud prevention strategies over the past two years.

 

Often, when fraudulent activities are suspected, senior management requests the assistance of their auditors to investigate the case via internal audit and fraud identification investigations. In many organizations, internal auditors are handling more responsibility for fraud investigations today than in the past. This is especially true with regard to high-profile scandals. 

 

Caseware report findings

 

Caseware’s report found that more than 60% of internal auditors were using analytics software as a critical part of their organization’s strategy to combat fraud and another 31% planned to implement analytics software.

 

Most of the internal auditors who were using analytics software to combat fraud were utilizing advanced versions of the software. Additionally, nearly 85% found that their software had been helpful in their fight against fraud.

 

How can Caseware IDEA help?

 

Caseware IDEA is a powerful tool for auditors, financial analysts and auditors. It is a data analysis software solution capable of analyzing 100% of auditors’ data. In the hands of internal auditors, it can make a massive difference in combating the risk of occupational fraud in your organization. It contains over 100 audit functions to help your team clarify the data and eradicate the discrepancies in your data. Contact us today for more information about how Caseware IDEA can help your organization fight fraud.