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February112014

How to Guard Against Occupational Fraud

occupational fraud

This is the first in a three-part series of articles examining fraud.

Among the different types of risk faced by business owners and executives, the risk of occupational fraud may be the most dangerous. It's disturbing to think that their own employees could be stealing from them. Many owners just tell themselves that, no, this couldn't happen in their organizations.

But this is wishful thinking. In a survey conducted in 2014 by the Association for Financial Professionals (AFP), two-thirds of businesses that responded said that payments fraud had been attempted in their organization. Among businesses in the survey that experienced attempted or actual payments fraud, 20 percent did so as a result of fraud originating from inside the organization. 

Data published by the Association of Certified Fraud Examiners (ACFE) in its 2014 "Report to the Nations" is even more alarming. According to the ACFE, the median business loss due to occupational fraud is $145,000, and more than half of businesses that are fraud victims are not able to recover any losses. The majority (95 percent) of occupational fraudsters are first-time offenders with no prior conviction of a fraud-related offense, notes the report.

Slow Economy Partly to Blame

Some experts believe that the high rates of occupational fraud and embezzlement occurring today are due at least in part to the ongoing sluggish economy. During tough economic times, some otherwise honest employees might consider committing fraud against their employer if they are facing extreme financial pressures. In fact, it's not uncommon for an embezzler to turn out to be a long-term employee in whom the owner had implicit trust.

Sophisticated database technology, online information exchange and mobile access devices are another factor in rising incidences of occupational fraud, notes Debbie Innes, executive vice president, Treasury Management, for Cadence Bank. "And checks continue to be a leading target for both paper and electronic fraud, despite the fact that their use is declining. Thieves like checks because they contain relevant financial information, such as bank account and routing numbers, they can use to commit fraud."

Different Occupational Fraud Schemes

There is a wide range of different kinds of occupational fraud schemes business owners and executives should be on the lookout for. The most common include:

• Skimming — Money is stolen before a sale is recorded in the books. Most commonly, the employee simply pockets a customer's payment and doesn't record the sale.

• Cash larceny — Money is stolen after a sale is recorded, but before daily receipts are deposited at the bank.

• Check tampering — An employee either alters company checks in order to make them out to himself or herself, steals and forges checks and makes them out to himself or herself, or steals checks made out to legitimate payees and tries to cash them.

• Payroll schemes — Adding "ghost" employees to the payroll is the most common example.

• Billing schemes — This may involve creating a shell company and billing the employer for nonexistent services provided by the fake company, or submitting invoices to the employer for fictitious goods or services and/or inflated invoices that are higher than the actual amounts.

Management Oversight is Key

According to Innes, the best defense against occupational fraud is diligent oversight by management of the company's accounting and finances. She recommends paying especially close attention to the following three areas:

1. Payables: All payables should be compared to an approved vendor list, and any changes to this list should be noted in an exception report. Create dual control processes for vendor acceptance and financial transactions.

2. Receivables: Cash receipts should be compared to AR records at least monthly, and the posting and depositing of checks should be segregated among two or more employees. 

3. Disbursements: Sign checks personally instead of using a check stamp, and review monthly bank statements yourself to look for any suspicious activity. Also use your bank's Positive Pay service to reduce the possibility of check fraud. 

Please contact your Cadence Bank Treasury Management representative if you would like to discuss fraud prevention steps in more detail. 

You might also like:

Occupational Fraud: Five Internal Controls That Can Reduce Your Risk

Internal Fraud: Six Ways Your Bank Can Help Reduce Risk