the risk management blog

Portraying the Perpetrators of Occupational Fraud

byMichael Gaul | November 01, 2012
fraud perpetrators

\In movies and television it’s easy to spot the criminals.  In real life, and particularly when it comes to fraud, this is not the case.  In occupational fraud, it’s especially difficult because the crimes are committed by people you have entrusted to represent your organization.  These are people you know and trust; not masked characters lurking in the shadows.

Despite this, there are a number of commonalities among fraudsters, and specific trends in their crimes.  Awareness of demographic information and the behavioral trends surrounding fraud perpetrators is a crucial component of uncovering occupational fraud, which has grown into a potential $3.5 trillion a year global crime. 

In our last post we focused on the victims of occupational fraud as reported in the Association of Certified Fraud Examiner’s (ACFE) Report to the Nations on Occupational Fraud and Abuse.  Today we focus on the perpetrators, whose crimes negatively impact the profit, productivity, and security of an organization.

Who Are the Perpetrators of Occupational Fraud?

Employees and managers commit the most number of cases. But greater losses are attributable to those with greater authority.

AFCE divided the perpetrators into three distinctions related to authority: employees, managers and owner/executives.

Not surprisingly, they found that 80% of all fraudulent activity (in sheer numbers) is near-equally distributed between employees and managers.  Yet, fraud by managers goes twice as long (two years on average) before being detected and causes approximately three times higher losses than that of employees. Owners and executives, in turn cause losses that are three times higher than managers.  According to the ACFE report, this is likely because perpetrators with greater authority have greater access to an organization’s assets and are better positioned to override anti-fraud controls and cover up fraudulent activity.

Collusion is common, but not absolute.

Fraudulent crimes where two or more individuals worked together comprised 42% of the cases reported worldwide, resulting in significantly higher losses.  In the United States these numbers drop a bit, with only one third of all fraudulent schemes involving multiple perpetrators.  Within the U.S., fraud involving collusion was also less costly to the employer than in other regions cited in the report.

More men than women commit fraud.

Males account for roughly two-thirds of all fraud cases reported in the ACFE study, yet this ratio varies by region. In the cases from Europe, Asia, Latin America, and Africa, 75% of the fraud was committed by men compared to the U.S. in which 55% of the fraud was attributed to men.

A more remarkable finding is that fraud committed by men had a financial impact more than twice as high as that generated by women. And despite what you may think, this disparity did not correlate with men holding more positions of authority. Regardless their role in the organization male fraudsters elicited considerably higher losses than their female counterparts.

Some roles are worse than others.

Accounting, operations, sales, customer service, purchasing, and executive/upper management were the most common departments where fraud occurred, accounting for 77% of all cases in the U.S. section of the study.

Fraudsters are first-time offenders.*

Fraud is most likely to be committed by someone who has never been charged or convicted of a crime.  In fact, only 6% of the cases in this year’s report had been perpetrated by someone with a fraud-related past.

*Of course it could (and should) be argued that an individual with a history of occupational fraud would likely not be hired in the first place if proper screening criteria are in place to protect against occupational fraud. It is likely that many reported cases are from first-timers for this reason.

Occupational fraudsters exhibit “red flag” behaviors.

In spite of the fact that perpetrators of fraud seem like the average co-worker, the ACFE does report that there are strong behavioral indicators that workplace fraud is being committed.  Red flag behaviors were reported in 81% of the cases studied, indicating that a perpetrator will often display certain traits related to the stress of the crime or fear of being caught.

The behavioral red flags indicated by the ACFE are listed below, in order of their overall frequency cited by investigators.

  • Living Beyond Means
  • Financial Difficulties
  • Unusually Close with Vendor/Customer
  • Control Issues, Unwillingness to Share Duties
  • Divorce/Family Problems
  • “Wheeler-Dealer” Attitude
  • Irritability, Suspiciousness or Defensiveness
  • Addiction Problems
  • Past Employment-Related Problems
  • Complained About Inadequate Pay
  • Refusal to Take Vacations
  • Excessive Pressure from Within Organization
  • Past Legal Problems
  • Complained About Lack of Authority
  • Excessive Family/Peer Pressure for Success
  • Instability in Life Circumstances

Occupational fraud is damaging, both financially and in terms of reputation. And since nearly half of victim organizations will never recover their losses, proactive fraud prevention is critical. Organizations must understand and measure their unique fraud risk exposure and build targeted programs to reduce the likelihood of damage.

At Lowers Risk Group, we work to protect the people, brands, and profits of organizations around the globe. Our human capital risk mitigation and loss prevention specialists can help you craft a strategy and provide the necessary resources to deter occupational fraud and other risks facing your organization. Contact us today to create a blueprint for responding to occupational fraud.